Lessons from NITEL - Rethinking the Privatization Scheme

In the storied history of privatization, hardly has there been a more difficult privatization process than the attempted divestment of NITEL- the telecom-sleeping giant, since left in the dust by private competitors. The latest story of woe is predictable. The storied inefficiency of NITEL is well documented. Ineptitude is to NITEL as it is to its cousins:  NEPA, Nigerian Railways, Nigerian Airways, Nigerian Police, NNPC and other national monopolies nurtured and looted after independence. However, the case of NITEL is unique, because of the long-winded road to privatization it has taken. This, if well considered can however provide key clues to the privatization puzzle for a nation so bereft of institutional memory, it is equally as amusing as it is sickening.

Background

NITEL's tortuous road to privatization began first with the liberalization of the communication sector. This empowered more nimble, and efficient private competitors to eat NITEL's lunch while the political managers operating it, busied themselves with stripping the national asset of the last breath of life remaining in it. Furthermore, the government took formal steps to outsource management – or as they put, carved out a management contract with a third party entity.  Pentascope stepped in as the main actor in this regard.

The scandal generated by these white men with black suitcases coming to "mismanage" this national asset for ridiculous fees, with no clue (experience or technical expertise) on how to bailout a telecom firm, not to talk of a moribund Nigerian one,  had hardly settled down when the first attempt at privatization begun. Pentascope was said to have incurred several billions of debt within the two years, thereby creating doubts about its ability or competence in managing the first national carrier. Meanwhile, the same company Pentascope was said to have inherited several billions of naira upon taking over the company.

Needless to say, that the first attempt to privatize was also a failure – it was a wash at best. However, this was not to happen until after NITEL competitive edge (which does not come from efficiency, but its existence as a pure monopoly) was further eroded by licensing GLOBACOM as the second national carrier. The first attempt at privatization in late 2005, when BPE came close to selling NITEL to Egypt's Orascom Telecom, which analysts said had experience of countries with infrastructure problems and would have been well-placed to revive NITEL's fortunes also ran into trouble. Obviously, the $256.5 million offered by Orascom was considered too low – well after Periscope have devalued the company by its own activity under the directorship of Obasanjo and El Rufai.

Now fast forward to the current dilemma of NITEL's current owner. This is indeed a bad dream. After failing to secure a competent operator for NITEL, the government sold majority shares in the national jewel to its incompetent cronies at Transcorp, whose nightmare was further worsened by a selfish labor union, and a management cadre that worked feverishly to undermine its activities. NITEL's problem is as much internal, as it is external. A combination of visionless/inexperienced majority owners, inept management, poor financial profile, demoralized employee and a lack of customer service acumen (NITEL brand is damaged goods) not in any way helped by the meddlesome of its minority shareholder i.e. the Nigerian government, have put the company in the situation it finds itself today. Nevertheless, if one looks back with the benefit of hindsight, it is apparent that the process that led up to its privatization had set NITEL up to fail and eventually go bankrupt.

Lessons Learned

  1. Privatize before Liberalization: When one compares the chaos of NITEL's divestment with the relative serenity of liberalization of the banking sector in the IBB era, one recognizes the importance of securing the value of monopolies before divesting them. The greater chunk of a monopoly's value is in its control of the market. Most of them are inefficient, and as such can hardly hold their own in free market. In recognition of this, it is prudent to divest monopolies first (extracting the most monetary value in the process), while preserving its exclusive market for stabilization reasons. This allows the new private owners put in place measures that will allow them compete effectively in a liberalized market that should follow the black out period. In fact, it encourages private investors recapitalize these firms during this quasi-monopolist interregnum, before more nimble competitors swing into action. The big banks back in the IBB era had the benefit of private ownership before the liberalization of the banking sector, which in turn bred the experimentation, competition and vibrancy we witness today in that sector without necessarily destroying the legacy institutions like First Bank, Union Bank, UBA and AfriBank. Something similar paradoxically was done for private GSM operators in Nigeria, which is set to expire this year.

  2. Co-Opt Management & Staff: There is always a natural fear of job and entitlement loss when spoon-fed government corporations are taken over by private investors. This fear should never be underestimated or dismissed- but should be managed to ensure the success of the process. This is best done by turning management and staff to stakeholders and shareholders in the transformed corporation. For example, a quarter of the corporation shareholding can be held by members of staff (represented by the union) ensuring their long term interest is aligned with the corporation, while possibly freeing the new owners of unfunded obligations like pensions and retirement benefit costs. This brings us to the next point…

  3. Balance Sheet: It is very important that the debt burden of any company being taken off government hands be light. Pensions and medical benefits crippled NITEL, and the most effective method of shedding this load was to transform these obligations to equity in order to shore up the balance sheet. Killing two birds with one stone, everybody benefits. Cleaning up the balance sheet will also empower the management/owner to seek capital infusion from banks, without being forced into marriage with big name investors- foreign or local.

  4. New Owners: There is a basic distrust of investors in government enterprises prevailing in the Nigerian media and within the public at large. Rumors fly, and these in turn cripples the goodwill of management and owners. It is important that we consider alternative ways to divest government stake in public enterprises to minimize this phenomenon, some of which are not unfounded. While some favor core investors, I prefer the initial public offer route after staff equity concession. This method is transparent and allows every Nigerian to have an opportunity to take a stake in these companies. It eliminates the allegations of favoritism and corruption, and empowers management (who are now part owners with their staff) to act in the best interest of their corporation and shareholders.   The fallacy that technical know how is required to run NITEL (or any failing government enterprise) is nothing but just that- a misleading notion. Rather, most of these corporations- NITEL, NEPA or NRC – can be sustained by local expertise which are not lacking, much the same way the banking sector have been able to sustain itself. The deduction that a lack of technical knowledge led to their failure shows the lack of understanding of the reasons behind their inefficiency. In fact, it has greater correlation to the nature of monopolies, government interference in otherwise business decisions, and the attitude of staff/management to public property in Nigeria. In reality, the Nigerian economy is so unique that I doubt any experience (which invariably will have to be foreign) can counter balance the Nigerian factor, which an experienced management team, is better positioned to tackle than any core investor from outside.


1
Re: Lessons from NITEL - Rethinking the Privatization Scheme
Ajis15 posted on 02-13-2008, 15:26:25 PM
Yes, I agree with the first point under lessons learned: Privatize before Liberalization This is the dilema now faced by the new owners of Nitel: Transcorp. Nitel is facing a very stiff competition from the new operators in the liberalized telecom industry. I doubt if the company will ever recover.

Don't you think that there is an opportunity for new Nitel iwners in the land phone market? Don't they have the advantage of infrastructure? The land phone line market has been neglected. If Nitel can revamp this market and make it cheaper and affordable as an alternative to GSM, this could given the company opportunity to capture a neglected market and survive.

Just my 2 cents.
1
Please register before you can make new comment