Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited
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- Financial Market
- Fiscal Policy
Expropriation of 20 per cent of Dangote’s refinery 06 Aug 2021
It is projected that Dangote Refinery will help Nigeria, the world’s 8th largest exporter of crude oil, end decades-old dependence on importation of petroleum products to meet domestic demand. The country spends over $8 billion annually on petroleum importation. Often unbudgeted for, the subsidy programme that protects Nigerians from the brunt of paying the commercial price for petrol, costs the government over N1 trillion annually, thereby leaving much of the fiscal deficit unfunded.
To make the projection of the national benefit of Dangote Refinery a reality, the Central Bank of Nigeria (CBN) has been providing financial help for the project in the form of preferential allocation of foreign exchange. But the project, which was announced in 2013 and initially slated for completion in 2016, is still more than one year before operational launch at the end of H1 2021. The refinery appears to need more financial aid each passing day, and the latest financing could prove more scandalous.
Last month, the Group Managing Director of Nigerian National Petroleum Corporation (NNPC), Mele Kyari, announced on television that the national oil company would be acquiring a 20 per cent equity stake in Dangote Refinery, speculatively valued at $3.8 billion. According to him, the world’s biggest single-train refinery, with the capacity to refine 650,000 barrels of crude oil per day, is too critical to the country’s energy and fiscal security to be left entirely to private ownership.
Kyari said that the owner of the refinery did not want to sell his shares. The government is buying the substantial stake in the company anyway, in the interest of the public.
This is expropriation of private property, even if not a classical type. Expropriation is more common with landed properties, usually to enable the construction of road and rail infrastructures. The legitimate power of the government to take over private properties in this circumstance, and for the purpose of safeguarding against environmental hazards, is well recognised. In international law, expropriation is deemed legitimate, if it is for a public purpose, non-discriminatory, and appropriate or fair compensation is paid to the property owner in a timely manner. In the United States, the bastion of market capitalism, the doctrine of “eminent domain” enshrined in the Fifth Amendment, provides the legal basis for expropriation.
However, there are specific reasons the expropriation of Dangote Refinery is quite questionable. First, it is far less usual, and more controversial, to take over industrial assets like a refinery – more so when the reason is not environmental. Rather, the use of regulation to limit private enterprise development because of a public consideration is more appropriate and technically deemed as expropriation.
Second, the circumstances and the financial framework for the proposed acquisition by NNPC are both unclear and suspicious. It is being speculated that the intent and purpose of the acquisition is to financially bailout Aliko Dangote, the billionaire owner of several eponymous businesses that dominate the consumer goods sector. His refinery project has a huge debt service obligation as an albatross, while the principals of the loans estimated to be several billions of dollars are about to fall due. Perhaps to further help the billionaire address his liquidity constraints, the government announced later last month the award of a road construction contract worth N309.9 billion to Dangote Industries, with the amount serving as a tax credit. In simpler terms, Dangote would not have to pay corporate tax in cash to the tune of the contract.
Third, the current valuation of Dangote Refinery at around $16 billion is raising eyebrows. This is $4 billion more than the upper estimate of $12 billion as the market value of the asset by independent, industry expert analysts. If the NNPC acquisition is above fair market value, it would be against public interest. It is fair for the price of an asset to be expropriated to be set at the highest level obtainable in a voluntary sale but not beyond it.
Fourth, the glowing assurance given by Kyari on the profitability of the refinery would ordinarily help inflate the asset price. It is, indeed, curious for a prospective asset buyer to be the one doing this. Such lack of professional rectitude, and malfeasance, are well accustomed to the NNPC, which has four state-owned refineries collapsed under its mismanagement and its combined operations perennially making losses.
Fifth, even as it is reasonably expected that Dangote Refinery would, indeed, be profitable, acquiring the NNPC stake by debt as said by Kyari would dampen the financial returns to Nigerians.
On Dangote’s part, his investment strategy of creating monopolies may boomerang with his refinery. Dangote Refinery may be too big for its own good, given the scale of debt financing involved so far in building it. Given the ongoing decarbonisation of industries, Dangote may have over-invested in an industry of the past, juxtaposed to industries that would continue to expand in the future.
In a recent article, we alluded to the reputational risk Dangote is running by his business antics. He is seen to be using his mega businesses as instruments for state capture. Investors and financiers are going to be wary of the risk. Investor apathy for Nigeria may grow or linger in this scenario. The government needs to urgently revert to its role as an unbiased market umpire, one that protects property rights, instead of generating unbeneficial debate on it.