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Privatization: Nigeria

Vincent Nwanma

Privatization of an Oil Marketing Company: Hidden Debt Resurrects after sale of Firm

One of the lessons that officials of the Bureau of Public Enterprises, Nigeria’s privatization agency, have learnt is that, no matter how probing they are, the management of companies being privatized can succeed in hiding material facts from them. This was the case in one of the state-owned enterprises privatized in 2001, where a large debt concealed by the past management of the company surfaced after it was fully privatized.

African Petroleum (AP), an oil products marketing company, was one of the government-owned enterprises selected by the Nigerian government in 1999 for privatization, under the first phase of the program. Other enterprises selected for privatization under the same plan included other oil marketing companies, cement companies and banks.

All of them already had part of their shares quoted on the Nigerian Stock Exchange so the government decided that this full privatization would be done by selling these shares to the investing public.

The government’s decision to divest state-owned enterprises was due largely to their poor performance, in spite of huge investments in them by the state. In 1996, a study by a committee appointed by the military government entitled Vision 2010 noted that: "Aggregate Federal Government investment in public enterprises was about 100 billion naira (about $1.2 billion, at the time), with an average annual rate of return of only about 2 percent." Yet at that time, interest rates were as high as 22 percent per annum. Private ownership, and management, it was argued, would eliminate the need for the costly government subsidies while ensuring that financial resources are efficiently utilized.

Besides their performances, these enterprises were also saddled with enormous debts that were becoming difficult to finance. Such debts grew as a result of the companies’ past losses, which had necessitated state subsidies or guarantee of loans. Figures given by the BPE show, for instance, that the SOEs in Nigeria owe 300 billion naira in local debts or approximately $2.60 billion. Some 15 billion naira, about $129.20 million, was owed to foreign suppliers and offshore banks. BPE says the organizations also carry unpaid pensions of about 900 billion naira, about $7.75 million. (All calculations have been done at the current exchange rate of 116.1 naira to the US dollar)

The government also decided that a certain percentage of the shares to be sold in each case should be reserved for strategic/core Investors—both foreigners and Nigerians. Apart from bringing in money into the enterprises, the strategic/core Investors were expected to bring in relevant technology and technical expertise to improve the company’s operations and competitiveness.
They would also be required to show they had enough funds to not only buy the government's shares but to make further investments in the company.

The Company’s Background

African Petroleum was incorporated in Nigeria in 1964 as an associate of the British Petroleum UK PLC. Its purpose was the marketing of petroleum products. In 1978, it became a public limited company. Its name and shareholding structure changed with the Nigerian government’s acquisition of part of the company’s shares.

In 1979, the Nigerian government subsequently acquired ownership from the British Petroleum Corporation. Since 1964, it has been in operation in the downstream sector of the Nigerian oil industry. It markets refined petroleum products throughout Nigeria, with retail outlets in major cities and towns.

Within this sector AP is a dominant player, being regarded as one of the Big Seven (now Six, with a recent merger in the industry) petroleum products marketing companies. Between them, the Majors control about 60% of the total refined petroleum products marketed in Nigeria, with AP accounting for about 18.7% of the market share by 1996.

AP, as other marketers, does not own a refinery. (Before the privatization, it had diversified into chemicals, real estate and the manufacture of insecticides.)

The government has recently given approval for the establishment of private refineries. This came as part of the measures to deregulate Nigeria’s downstream sector of the oil industry. The government has also given approval for interested parties to import refined products, provided they meet specified requirements.

Sale of the Shares

Based on the government directive, 75 percent of its shares in the company were reserved for a core/strategic investor "who meets the laid down competitive bidding criteria of the National Council on Privatization," according to the offering prospectus.

Sadiq Petroleum Nigeria Limited, a local company, finally emerged as the core/strategic investor for AP. Bidders for the position of core investor were evaluated not only on the basis of the amount they offered for the shares, but also on the basis of their plans for improving the performance of the company, and their technical competence in the business. BPE, the secretariat of the NCP, undertook the evaluation. It chose the bidder whose overall offer, in its view, was the best.

Until then, Sadiq was relatively unknown as a petroleum products marketing company. It had been engaged solely in petroleum products marketing. Its first bid of 30 naira (or 26 cents) per share failed. BPE initially rejected this bid, citing Sadiq’s lack of technical competence in the business. To overcome this disadvantage, Sadiq subsequently entered into partnership with BP and Castrol International of UK and its local partner, Eterna Oil and Gas Limited. This enhanced its status and subsequently helped it win the bid.

AP’s spokesperson says BP did not pay for the acquisition, nor did the deal amount to AP being sold to BP. She added also that the partnership was not a way of getting round foreign ownership of AP.

Before this alliance was formed, BP had also bid for the shares, as it tried to regain the shares it lost about 23 years earlier. However, after the parties struck the new partnership, BP withdrew from the bid, making Sadiq the sole bidder as the core/strategic investor during the second round of the bidding. One newspaper had reported that the second bidder, BP, withdrew in "unclear circumstances." Sadiq also raised its offer price for the shares to about 33 naira per share (approximately $0.28). Allotment to investors of the remaining 25 percent of the shares put up for sale has since been completed. The shares were sold through a pubic offer on the Nigerian Stock Exchange, at a price of 28.50 naira ($0.24) per share. The offer was automatic and did not wait for any value-raising restructuring by Sadiq, the core/ atrategic investor.

The new capital structure of the company shows that Sadiq effectively holds 30% of the authorized share capital of AP, with the remaining 70 percent held by the Nigerian public. Sadiq has since settled down at AP as the core/strategic investor. Since its arrival at the company, a number of changes have taken place, including the voluntary departure of many of the pre-privatization members of staff. However, shortly after the conclusion of the privatization exercise, it was revealed that the previous management had succeeded in concealing from everyone a large amount of debt, the recognition of which would have had a material impact on the valuation of the company.

The AP official says the debts came from commercial papers obtained from banks, which amounted to eight billion naira (about $69 million) and five billion naira (about $43 million owed to NNPC, both of which, according to her, were concealed.

“The above debts were not disclosed in the audited accounts of the company. Top management was involved, while other staff members definitely had knowledge of this also,” she says.

AP’s published financial reports show that the company has been profitable. The reports show, for instance, that for the five years between 1995 and 1999, it made profit and declared dividends for four years, the only exception being in 1997. The reports were audited by a local firm of chartered accountants Osindero Oni and Lasebikan.

"Investigations in AP PLC revealed that the past management of the company concealed from their external auditors, BPE and the core investor during the diligence, debt owed its banks and to NNPC for product lifting to the tune of about 15 billion naira, (about $129.2 million " Mallam Nasir el-Rufai, Director General of BPE, said to the press recently.

This is at variance with the information contained in the public share offer prospectus. It says that AP as at June 1999 had a total debt of 10.2 billion naira ($87.85 million) , made up as follows: 4.6 billion naira ($39.6 million ) in bank overdraft, and 5.6 billion naira ($48.23 million ) owed to other creditors as well as back taxes and dividend payments.

Indeed, a senior staff says the new management discovered that "there was a lot of concealment" by the previous management. Audited reports, says the staff, were made to "give a rosy picture, but things were not so." Soon after the privatization, AP began to receive notices from various parties, including banks, with valid claims of the company’s indebtedness to them. Some of these included commercial papers that the previous management had issued for raising funds on short- or medium-term basis.

After the Core Investor discovered the deluge of hidden debts, it reported the case to the BPE, which in turn appointed an audit firm. The auditors confirmed the discovery.

Downsizing: 40 percent of Staff Sent Home

AP’s new management subsequently appointed another audit firm, PriceWaterHouseCoopers, to undertake an audit of the company---human resources, finances, and management. They have just completed a human resource audit of the firm, which ended in February 2002. The audit finding, says a source at the company, was that AP needed to downsize--- to let go of some staff, and at the same time bring in competent hands to staff some positions, as part of its post- privatization restructuring exercise.

Consequently, 40% of the staff, from the top management down, had to leave the company. The affected staff left February 28, 2002. The total workforce before the layoff was 476, according to AP.

The rationalization exercise was done quite peacefully, despite the presence of strong unions in the company. The oil industry has two strong unions—the National Union of Petroleum and Natural Gas workers (NUPENG), for junior workers, and the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN).

The rationalization exercise succeeded because it was based on merit and also satisfied even the yardsticks given by the unions. There was mutual agreement on it between the management and the two unions. It was also attractive to the affected members because of the generous severance package that AP gave to the affected employees.

The official did not disclose the amount of the severance package, but rather described its components. It included, besides gratuity, such items as six-month free medical service, waiver on outstanding loans owed by the staff, housing and other allowances given to everyone that was qualified.

AP would probably have done the downsizing earlier. But a requirement by the BPE bars incoming management or core investors from sacking staff of privatized companies before six months after the change in ownership. Besides protecting the workers from being thrown out of their jobs soon after the privatization, this requirement also aims to help the new management through the period of transition after the takeover.

The law barring sacking of workers is part of guidelines on privatization issued by the BPE. Privatized companies are not required by the government to offer training or find alternative jobs for staff laid off.

But in this case, that period proved to be "another six months of more concealment," says the AP source. Retention of some of the former staff within this period offered them an opportunity to further conceal some materials from the new management and the auditors who were brought in.
The period offered them an opportunity to hide documentary evidence of the debts. “Most of the documents cannot be found,” says the AP spokesperson.

Most of the debts were treated as off balance sheet items; so without documentary evidence, it may be difficult to establish their authenticity.

Worried by this, the BPE had to complain to the police, who arrested a number of former key officials of the company.

Those arrested were the former Managing Director, the finance and accounts manager, as well as the treasury manager. They are all currently standing trial, although all three are on bail. “Although the case has not come up for hearing recently, Sadiq hopes it will be compensated,” says AP’s spokesperson.

Also in July 2002, the Nigerian government set up an eight-member committee to investigate the management of AP since its nationalization in 1976. A statement issued by the Ministry of Justice announcing the setting up of the committee said the decision to investigate the company was “in the light of disturbing revelations of corruption in the conduct of the affairs of the company.”

  • Among other things, the committee is mandated to:
    probe the affairs of AP from 1976 up to its privatization, when Sadiq Petroleum entered as the core investor
  • recover any funds or property found to have been corruptly taken from the company.

Similarly, the Institute of Chartered Accountants of Nigerian (ICAN), says it has begun a probe into the role played by Osindero, Oni and Lasbibekan &Co in the audit of AP's accounts. Kola Bajomo, ICAN's President, disclosed this to journalists in Abuja, Nigeria's inland capital, on September 8, 2002. "We are in fact leaving no stones unturned to ensure that the public can rely on audited accounts. The outcome of our investigations will be made known to the public," Bajomo said.

A day after Bajomo spoke, the Nigerian Securities and Exchange Commission (SEC)said preliminary investigations it had undertaken had revealed there a lapse in the auditor's handling of AP's accounts. "There was obvious lack of depth in the auditing of the company's books and affairs by the audit firm Osindero, Oni and Lasebikan &Co," the SEC said, adding it has begun the next stage of its investigations into the matter. It explained this would involve full scale enquiries into the previous management's financial transactions, and the auditor's activities.

Looking Forward

Sadiq Petroleum’s arrival at AP has marked a new phase for the company. Through Sadiq’s international connections, AP been able to secure technical partners with whom it plans to go into the upstream sector. Already, it has set up a subsidiary called AP Upstream. The new management believes there are opportunities in the upstream sector—oil exploration and production—that need to be exploited. It has put some staff in charge of this unit, but the company is not giving details on these, for now. AP has also set up an oil service company to provide services to companies involved in oil exploration and production.

The divestiture also succeeded in strengthening the relationship that existed between AP and BP. At the time of Sadiq’s entry into the company, the relationship was said to be faltering. Now, BP is AP’s main technical partner for downstream operations, with the latter dealing mostly with BP South Africa.

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