Recession and the option of selling public assets
Quite frankly, the whole idea of selling government stakes in strategic assets such as the Nigeria Liquefied Natural Gas (NLNG) Company, African Finance Corporation, Joint Venture Companies (JVCs) and the Refineries casts doubt on the credibility of the assurances from key members of the government economic team regarding efforts to steer the economy away from recession. Both Vice President Yemi Osinbajo who heads the economic team and the Minister of Finance Kemi Adeosun have, at various fora, expressed optimism that in view of the fiscal stimulus packages this administration has put in place, the country would be out of the recession before the fourth quarter of 2016 winds to a close. The same sentiment is shared by Godwin Emefiele, the Central Bank governor, who recently asserted that ‘‘the worst is over’’ in apparent reference to the downturn in economic activities.
Except the country’s economic condition is irretrievably headed for bankruptcy, there is no wisdom in selling strategic public assets in a bid to exit a recession. Evidence from countries facing similar external shocks occasioned by the slump in oil price support the fact that a sale of a performing asset is only justified when a country is in a debt trap or has identified viable and more profitable investment opportunities. Take the case of Saudi Arabia for instance, the country plans to sell less than 5 per cent of Saudi Aramco by listing the state-owned oil company on the Tadawul, the country’s domestic stock exchange, not later than 2018.
According to Bloomberg, the remaining stakes would still be owned by the government but controlled through a sovereign wealth fund which, following the sale, would join the likes of Norway and Abu Dhabi in the club of the world’s largest sovereign wealth funds. Like Saudi Arabia, Bloomberg also reports that neighbouring Kuwait has a four-year plan to sell ‘‘minority stakes in the international units and the shipping and chemical arms of Kuwait Petroleum Corporation’’ with a view to improving efficiency.
Another country severely hurt by the collapse in oil price is Brazil. A few months ago as reported by the Wall Street Journal, the Brazilian state-run energy company Petrobras sold a controlling stake in an offshore oil field for $2.5 billion to Norway’s Statoil to be able to pay pressing debts. In a similar vein, Venezuela’s state-owned oil company, PDVSA, ‘‘is looking to push off debt repayments’’ that are due in 2016 and 2017 hoping to buy two more years of breathing room through a bond swap offer. According to Reuters, ‘‘the country owes roughly $120 billion,’’ part of it by PDVSA, to foreign creditors and there are genuine fears that a default could trigger lawsuits from bondholders capable of disrupting PDVSA’s operations and resulting in seizures of the company’s overseas assets.
The takeaway from these countries’ experiences is that the sale of national assets is not motivated primarily by the desire to solve what is believed to be a temporary situation. Both in Saudi Arabia and Kuwait, the plan to sell off is part of efforts to achieve multiple streams of income by building up the Sovereign Wealth Fund. On the contrary, the option is being canvassed in Nigeria because of its potential to temporarily shore up reserves most likely to be frittered away in no time given the import dependent nature of the economy. Therefore, it does not address the real challenge which is sustainable increase in foreign reserves through diversification of the export base.
Furthermore, while postponing debt payments is part of Venezuela’s strategy to navigate the economic storm, Brazil is opting for sale of public assets as the only route out of a debt trap. No parallel can be drawn for Nigeria in view of a debt to GDP ratio which is many percentage points shy of the global average for peer countries notwithstanding the rising cost of debt service to government revenue. Consequently, unlike Brazil and Venezuela, Nigeria still has some borrowing room which can be leveraged upon by contracting project-tied loans from multilateral sources such as the World Bank and the African Development Bank including concessional bilateral windows such as the China EXIM bank and the French Development Agency.
Another point that calls to mind is the heightened risk attendant to selling government stakes in critical companies at this time. This danger is the likelihood of realising ‘‘forced sale values’’ from such assets chiefly because from a practical viewpoint, the recession puts the country at the mercy of the prospective buyers who would cash in on the situation and offer ‘‘pepper corn’’ values. Indeed, Nigeria’s record of negotiating transactions of this nature is anything but salutary.
It would be recalled that in January 2015, the Senate had directed its power sub-committee to investigate the sale of the 10 gas-fired power plants under the National Integrated Power Project (NIPP) because the upper chamber had reason to believe that the NIPP plants were under-valued during the sale process in 2014 realising about $5 billion while the plants had reportedly cost the government over $8 billion. If this was the case during the ‘good old days’ (discounting the corruption factor) about the time oil price was at its peak, there is a sure bet that any asset sale now will be grossly undervalued. By way of analogy, it is not for nothing that Issuing Houses often advise their clients not to be too enthusiastic about raising long term funds when the capital market is bearish.
In search of what to sell, government should look in the direction of assets that drill holes in the nation’s treasury such as some aircrafts in the Presidential fleet. That a critical national asset such as the Nigeria Liquefied Natural Gas (LNG) company came up for mention gives cause for worry- a company which according to the NEITI 2013 audit and financial report on Nigeria’s oil and gas industry paid the sum of $12.9 billion to the NNPC over an eight-year period. This much was emphasized by the Revenue Mobilization Allocation and Fiscal Commission (RMAFC) while making a strong case against the sale of public assets. Only recently, the Central Bank of Nigeria had suspended nine Deposit Money Banks from participating in the foreign exchange market over the non-remittance of the NNPC/NLNG dollar deposits of over $2 billion to the Treasury Single Account. The affected banks have since been readmitted but the point here is that the NLNG funds have had a benign if not positive influence on the country’s financial system.
Indeed, there is little to recommend the disposal of national assets at this time. It is not only bad for the economy in the long run; it is also not in the national interest. It goes without saying that the loss of annual revenue would be adversely felt by future generations long after the sales proceeds are gone. Instead of selling these prized assets to realize one-off income, the government should seek to optimize their contribution as sources of long-term revenue funding. In a desperate effort to stay afloat, Nigeria should be seen to be holding on to a life vest rather than catching at a straw.
Dr. Uwaleke is a Fellow of ICAN, an Associate Professor of Finance and Deputy Director of Research at the Nasarawa State University, Keffi.
No comments yet