The common understanding of privatization is that it fosters price efficiency, creates market equilibrium, and rids the system of excess bureaucracies and bottlenecks. What this means is that a public organization that is subsequently privatized is expected to perform better; in most cases, albeit. There are several instances of privatization globally, some of which went north and others, south. In Nigeria, the telecommunication and the aviation sector portend good examples of partial privatization. However, the historical performance of the partly privatized electricity industry appears to have fallen short of expectation.
By the close of last week, the Nigerian petroleum industry was jubilant with news of the presidency submitting the Petroleum Industry Bill (PIB) to the national assembly. The hallmark of the PIB is the creation of Nigeria National Petroleum Company Limited, which is a ‘limited by shares’ re-creation of the NNPC. The much-awaited announcement was welcomed with some euphoria as the Nigeria-owned assets in the petroleum industry have tremendously floundered.
Despite the fantastic expectations from the PIB, there are some biases that may impair the success of the act, when passed. First, the PIB simply projects the re-creation of a new entity and not ‘privatization’ as it were. To privatize the NNPC would mean monetizing the NNPC net assets and executing an initial public offer on the value of these assets. This model, which obtains in the corporate world, is best suited for privatizing the NNPC. The proposed model of privatizing the NNPC will still leave the government owning most of the assets, except that, a new entity takes hold of the asset.
The privatization of 5% of the Saudi Aramco offers great lessons Nigeria could learn from if there is a genuine intention to privatize the NNPC. The 5% was offered to private investors and the shares traded on the Saudi stock exchange. The Saudi Arabia economy will gain the cash proceeds from the part sale of Aramco’s ownership, which will be used to develop other critical areas of the economy, particularly technology and infrastructures. This will also foster diversification of the economy and preclude policy overhang in the petroleum sector. Besides, the privatization also increased market activity and deepens the Saudi Arabia capital market. Consolidating these benefits, Nigeria is missing wholesome gains with the proposed model of privatizing the NNPC.
Although an Initial Public Offer (IPO) for the NNPC will attract a lot of domestic and international investors, there are other peculiar challenges that could militate against its success. For one, the onboarding of the Dangote Refinery in Lagos and the proposed BUA refinery in Akwa Ibom has already threatened investments into Nigeria’s decrepit infrastructures. Another reason is related to the first – the assets of the NNPC, especially the refineries, are dilapidated and investors would have to consider the extra cost of refurbishing after praying the cost of the shares. Furthermore, it is almost certain that the government will not give the private investor enough liberty to improve the sectors
In submission, Nigeria’s NNPC needs to be privatized, no doubt; however, the disposition of the government suggests that they would not let go of the assets of the NNPC. This is one of the current setbacks to the DISCOs in Nigeria’s electricity space. With the utmost need for diversification, exposed by the COVID-19 pandemic, this is a good time to sell some stake in the NNPC, especially the refineries. The federal government can also explore the public-private-partnership route in which the technical operations, funding, and infrastructural development of the sold stake in NNPC are handled by private investors. Apart from the cash paid to the government for this stake by the private investor, the government will agree to a percentage of the profit.
The process of selling the stake should be open and transparent and left within the floors of the Nigerian Stock Exchange to allow room for sale to competent hands. It is equally important that the federal government does not stifle the private investors who would eventually own the stakes in the NNPC.
Written and edited by Michael Ogunremi