There is no fair play in monopoly
The Managing Director of Lagos Deep Offshore Logistics Base (LADOL), Dr. Amy Jadesimi, has long held herself out as being a longstanding advocate for fair trade and the break of monopoly in Nigeria. She was quoted by Forbes in September 2015 on the break-up of monopoly within the Nigerian telecoms sector, as saying that, “…when facing a monopoly, huge barriers to entry have to be overcome financially and politically – however in every case success brings significant rewards for the national economy, the local people (through job creation), the global economy and ultimately the investors themselves.”
This is a very important point – for many years the logistics services sector of the Nigerian oil and gas sector remained closed to competition and this led to underperformance in comparison to many of its African competitors. A concessionaire of the Nigerian Ports Authority (NPA), Intels, had de facto monopoly in the oil and gas logistics sector.
However, the liberalisation or break-up of the monopoly promised to improve efficiency and reduce costs in oil and gas logistics and services.
This would not only attract local business to participate on a level playing field but also encourage foreign business to invest in a new, open market.
The mass privatisation of the sector allowed Nigerian- funded businesses to participate in the market. Similarly, the introduction of local content requirements under the Nigerian Oil and Gas Industry Content Development (NOGICD) Act allowed local companies to enter the market and play a significant role sometimes with international partners and co-ventures.
LADOL is one of such companies that has benefited from the introduction of local content in the oil and gas sector and the break-up of the erstwhile monopoly in the oil and gas logistics sector.
The arrival at the free-zone of Total’s US$3-billion Egina Floating Storage Production and Offloading (FPSO) vessel from Samsung Heavy Industries’ (SHI) ship-building yard in South Korea is an example of how liberalisation of the sector has attracted foreign businesses like Samsung to the region for the benefit of the Nigerian economy.
Samsung and LADOL entered into a partnership to develop a world-class fabrication and integration yard within the LADOL free-zone.
For this purpose, the parties set up SHI-MCI Free Zone Enterprise as a subcontractor to Samsung in its execution of the Egina FPSO project.
The colossal green units at SHI-MCI, built with investment from Samsung and housing education and training facilities, stand as proud monuments to progress and foreign investment.
Speaking after the Egina FPSO berthed at SHI-MCI quayside in the LADOL Free Zone in Lagos, NPA Managing Director Ms. Hadiza Bala Usman said it was a feat achieved by the government, NPA, other terminal operators and importers of oil and gas equipment. The choice of Lagos for the Egina project, was confirmation of the reason behind the government’s policy to liberalise oil and gas logistics operations to ensure competitiveness, efficiency and boost revenue.
However, a legal claim has now been brought against LADOL by Samsung. This claim reveals a problem in the administration of oil and gas logistics at the LADOL free-zone. They also test Dr Jadesimi’s arguments on fair-trade and the break-up of monopoly.
LADOL’s role and activities in the LADOL free zone are as follows:
1. Co-venturer – LADOL and Samsung are joint shareholders in SHI-MCI, one of the major subcontractors to Samsung in its execution of in-country fabrication and integration works including the Egina FPSO project. This was a crucial local content component of the Egina Project. From the outset, LADOL had a commercial and pecuniary interest in one of the major subcontractors in the project.
2. Sublessor – Secondly, it also holds the lease over the free-zone granted by the Nigerian Ports Authority through its affiliate Global Resources Management Ltd (GRML). This LADOL affiliate is the sublessor to SHI-MCI in respect of the land on which SHI-MCI’s fabrication yard and quay wall is situated within the LADOL Free Zone area.
3. Service Provider -Thirdly, LADOL also has an exclusive monopoly on provision of all services to SHI-MCI and all free zone enterprises within the LADOL Free Zone Area.
4. Agent of Regulator – Finally, LADOL through another affiliate (Global Resources Management Free-Zone Company (GRMFZC)) exercises governmental and regulatory powers over SHI-MCI and all free zone enterprises within the LADOL Free Zone. This affiliate is a delegate of regulatory powers by the Nigerian Export Processing Zones Export Authority (NEPZA) and agency of the Nigerian Government.
In summary, LADOL through its various affiliates operates as the Zone Manager/Agent of Regulator, Sub-lessor and exclusive Service Provider.
Through the multiple hats worn by LADOL Group, it exercises absolute and total control over every entity within the LADOL free-zone without restraint or answerability to any constituted authority.
Naturally, as a result of multiple regulatory and proprietary roles that the LADOL Group holds, and its commercial interest in some of the free zone enterprises, this has led to a clear and apparent conflict of interest. This ostensibly has led to abuse of power by LADOL Group in a quest to utilise delegated government and regulatory powers to further its commercial interest as a participant and co-venturer in entities such as SHI-MCI (Samsung).
In order to protect its interests, SHI-MCI has now sought protection from the legal system against the abuses of the LADOL Group.
The much-reported dispute between Samsung and LADOL Group stems from an unwarranted and illegal demand by LADOL’s affiliate GRMFZC in March 2018 to SHI-MCI for US$33 million on the pretext of one per centy ‘FOB charge’ on the entire FPSO value.
SHI-MCI objected to the payment, amongst others, on the basis that: (a) free zone enterprises are exempt from tax, charges, duties and levies under the NEPZA Act, (b) assuming it is applicable, the FOB charge, should only be assessed on the value of works carried out within the LADOL Free Zone, circa $2million and not $33 million, (c) assuming it is applicable, that the FOB charge being a form of taxation should be payable to the account of the Federal Government of Nigeria Treasury Single Account (TSA) in accordance with President Buhari’s direction and not into a private account of LADOL, with all its lack of transparency.
It is still unclear if payment of the FOB Charge, paid by Total Upstream Nigeria Limited, was remitted by LADOL to the Nigerian Government’s account.
In retaliation for the refusal by SHI-MCI to pay the FOB charge, GRMFZC subsequently refused to renew SHI-MCI’s operating licence. It sought to exclude SHI-MCI employees from the yard and gave notice to vacate the premises. Only intervention by the Federal High Court, ordering GRMFZC to provide services, ensured that SHI-MCI was able to complete work on the Egina FPSO in time for its hand-over to Total.
At the same time, LADOL’s affiliate, GRML, also alleged breach of the terms of the SHI-MCI’s sub-lease on the yard and terminated the SHI-MCI’s sub-lease. Once again, it sought to force SHI-MCI from SHI-MCI’s yard. Samsung and SHI-MCI vigorously contested LADOL’s actions, which it claimed were illegal and unfair, and sought redress from the courts.
The High Court of Lagos State on 31st January 2019 ruled that Samsung/SHI-MCI was entitled to the injunctions sought and granted injunctions preventing LADOL and its affiliates from denying Samsung access and use of its fabrication and integration yard and from withdrawing or suspending services until the conclusion of the arbitration proceedings in London.
As demonstrated above, LADOL has been able to use this monopoly over logistics and management of the fabrication and integration yard as leverage against Samsung in the legal dispute, and to seek to force it from the yard.
The Samsung claim raises very important questions for consideration by the Nigerian regulatory authorities – is it not obvious that there is a clear, visible and apparent conflict of interest of the LADOL Group as landlord, exclusive/monopoly service provider and regulatory authority within the LADOL Free Zone? Do the existing disputes involving both local and foreign investors within the LADOL Free Zone provide a clear indication of LADOL’s monopoly and undoubted and devastating consequences for attraction of foreign investors in Nigeria and the free zones? LADOL’s actions also threatened the delivery of the Egina FPSO, which would have had devastating consequences for the Nigerian economy. These are consequences Nigeria could ill-afford.
The difficulty is that there is no opportunity for investors at the LADOL free-zone to opt for other logistics or management services to the yard if they do not wish to engage with LADOL, if there is a conflict between LADOL’s commercial interests and service provision, or if LADOL abuses its position. LADOL holds all the varied interests and powers within the zone.
It is important to try and understand what Dr Jadesimi’s intentions may be. In an interview with THISDAY in July 2018, Dr Jadesimi stated, “..what we are looking at is having a situation where we work with our technical partner that, may be Samsung, and over an agreed period of time that technical partner transfer technology to us and the other Nigerian companies that they are working with so that … within a 10-year period Nigerian companies will have technology to do that EPC work by themselves.” LADOL’s actions demonstrate an intention to convert or appropriate investments by investors and partners within the free-zone.
After the Judgment delivered by the High Court of Lagos State in favour of Samsung, when LADOL were prevented from further interference with SHIN’s use of the yard, Frank Ejizu, the COO of SHIN stated, “This is part of a coordinated campaign by LADOL to unlawfully convert, appropriate and take control of the yard to the detriment of the Nigerian economy.”
Mr. Ejizu may not be far wrong.
Whether at state or local business level – there is no fair play in monopoly.
Abubakar, a maritime analyst, writes from Abuja