This Day (Lagos) 1 August 2007

In the wake of the brouhaha which surrounded the sale and eventual revocation of the port harcourt and kaduna oil refineries NNAMDI DIMGBA warns that in the absence of a competition law government's liberalisation, via privatisation, of vital sectors of the economy will create new dangers. the absence of such a law does not however, he says, absolve the bpe of blame in the exercise

The controversy generated by the privatisation of the refineries has thrown up a lot of issues over the transparency of the privatisation programme of the government. This is particularly so, as reminiscent of the Russian privatisation programme, the Nigerian programme is believed to have, by design or accident, produced a new class of oligarchs, whose wealth (if not its genesis) has flowered tremendously in this dispensation.

On the refineries, a chronicle of events has the labour movement going on strike partly on account of the sale, the House of Representatives coming out with a damning impression, and lastly, the consortium led by Dangote and Otedola pulling out of the transaction and demanding a refund of the purchase price. By no means would this latest development settle the dust. Without intending to stir the hornet's nest even further, I would like to make a number of observations on the issue from a competition law point of view.

The first is that the entire transaction brings to the fore, the huge legal deficit created by the lack of a competition law or antitrust legal regime in Nigeria. It is a great anomaly that a government would embark on a macro-economic reform agenda which is not underpinned by an appropriate legal foundation for the promotion and protection of competition.

I have maintained consistently for the past five years in various fora that our economy is overripe for a competition law. Recently, Carol Ajie, amazon of NBA politics, in a newspaper interview bemoaned the absence of such a law in Nigeria. The central thesis behind our position is that the benefits of market-oriented reforms embarked upon by the Nigerian government are likely to be fully realised only if enterprises act under the spur of competition, so that consumer wishes and opinions are reflected in market performance. A country that has undertaken trade liberalisation measures has every interest in ensuring that the welfare and efficiency benefits arising from such measures are not lost due to anti-competitive practices by firms. Governments which have liberalized vital sectors of their economy through privatization unwittingly create new dangers in the absence of a competition law. They could usher in, in place of government monopolies, private players who are not constrained by social interests and whose overriding drive is profit, and end up exploiting those positions to the detriment of consumers, in the absence of any competition law checking them.

Therefore, the lingering controversy over the sale of our key refineries to the same set of individuals who have dominated our economy is a wake-up call for urgent steps to be taken by the new administration to ensure the enactment of a suitable competition law and policy for Nigeria. Beyond issues of process transparency, it is doubtful that had such a law existed in Nigeria against which the legality and the propriety of transactions by relevant agencies such as the Bureau of Public Enterprises (BPE) are tested, the BPE would have gone ahead to sell two key refineries to the same set of individuals, giving them an overwhelming control of a vital part of the petroleum industry. No credible agency would have gone ahead with the transaction in those circumstances.

This brings me to my second point. The absence of a competition law does not really absolve the BPE of blame. There is a system failure which one notices in our privatization process. Even in the absence of a competition law, there ought to have been, within the privatization framework adopted by the BPE, a Competition Impact Assessment (or CIA test) against which offers or bids for government assets would be assessed before they are accepted. Rather than the present arrangement in which sales are determined solely by reference to the question of who is the highest bidder, there should be a second, but very important and overriding test, by which bids or offers which meet a certain reserve price, are also assessed by reference to their impact on competition and market structure. Where they fail such a test, the offers must be rejected even if in fact they were the highest offers, and preference given to lower bids or offers which satisfy the CIA test.

To my mind, the neglect of the BPE itself or of those who designed the framework under which the agency operates, to consider the test of "the effect on competition" reflects very negatively on the agency and is therefore a great deficit. The observation of Michal Gal in her seminal book, Competition Policy for Small Market Economies, is apposite here. According to Gal, care should be taken that the wish to maximize immediate revenues from the sale of government assets during privatization does not over-shadow long-term concerns about the effects of the sale on future competition in the market. And that though such transactions often do not come under the merger review process of the competition authorities, the government should nonetheless consider the effects of a proposed acquisition in light of existing market conditions, as it might sometimes be wise to forgo a high offer made by a firm or a consortium of firms in order to enjoy the benefits of competition in the long run.

The third and final point I wish to make, though somewhat contradictorily, is that it is possible that the presence of a competition law in general, or in the absence of it, the presence of a CIA test in the privatization process (assuming it existed) would not necessarily have led to the conclusion that the sale of the refineries to Dangote and Otedola is anti-competitive. In the final analysis, it is a question of which antitrust philosophical school the country or its competition authorities chose to lean, whether ordo-liberal or neo-classical. It is a truism that a small developing economy cannot afford to protect competition rather than its outcomes. The concern to ensure that a sufficient number of competitors operate in each market and that wealth is not concentrated in a single or too few hands could be surbordinated to the more compelling necessity of serving the population efficiently. Put differently, it may make sense to ignore the harm to competition in the short term, if that harm is indispensable to promote competition or the competitiveness of the economy in the long run.

Reducing the above point to the basics, the ordinary Nigerian consumer is interested in the steady supply of gas and petroleum products, and this would be greatly assured if the refineries were working effectively and optimally. The effective and optimal operation of the refineries, beyond satisfying the domestic market, potentially opens the avenue for the export of finished petroleum products, creates employment opportunities and reinvigorate the local economies where the refineries are located. The real big picture created by all of these for Nigeria is that of an economy whose competitiveness has been enhanced.

My point therefore is that considered against the backdrop of the fact that for many years the refineries have been fully grounded and not producing, such vital national assets thus wasting, if Dangote and Otedola are the individuals who possess what it takes to turn things around and put such assets to full productive use, this in turn is a promotion of the competitiveness of the economy, and therefore should be encouraged. Thus, even employing a CIA test, it is very possible that the BPE would have come to the conclusion that it is in fact pro-competitive (and not anti-competitive) to sell the refineries to Dangote and Otedola. Evidence abounds of the great contribution which they have made to the Nigerian economy. They thus possess great credentials for the assumption that a CIA test could have come positive on their bid.

However, for a CIA test to come out really positive in their favour, it must be shown that only they possess what it takes to turn the refineries around, out of the lot who showed interest in acquiring the refineries. This much may be difficult to satisfy since some other bidders said to have presented lower bids e.g. the China National Petroleum Corporation (CNPC) possess at least the same level of technical competence to manage and restore the refineries. It is doubtful therefore if a CIA analysis would have come to the conclusion that the resultant and glaring short term restriction of competition which would have arisen as a result of concentrating two key refining assets (Kaduna and Port Harcourt Refineries) into the same set of hands was really indispensable to the attainment of the objective, the enhancement of the long term competitiveness of the Nigerian economy, through the restoration of the refinery sector of the economy.

In fact, given that a member of the consortium already possesses a virtual monopoly of the diesel market, the restriction of competition that would result or be aggravated by the transfer of such assets to the consortium, would far outweigh whatever benefits (increased economic competitiveness) that would enure to the economy through their control of such vital assets, and is not indispensable by any means. This is moreso as not only one, but two, vital refineries are being handed over to them.

In my view, handing over two key refineries is an over-kill and is not likely to pass muster in a credible CIA analysis, were it an element of our privatization programme. The logic of the situation, from a competition point of view, should have supported an assessment whereby the assets are sold to a different bidder (could be the 2nd, could be the 3rd or even 4th highest bidder) than Dangote/Otedola. The basis of transfer and acquisition should not simply, as the BPE has fitfully sought to defend, and as Dangote/Otedola have consistently maintained (even after their purported pulling out of the transaction) be that the assets must go to the highest bidder, but rather that they should go to a reasonable bidder and that the control of the assets by that bidder must not unduly hurt the process of competition, full account being taken of the positive impact such a control would have on the overall competitiveness of the Nigerian economy

Dr. Dimgba, a Competition Lawyer, is Head of Enterprise Practice at Olaniwun Ajayi, Lagos. He is also Visiting Lecturer in Competition Law and Liberalisation, Faculty of Law, University of the West of England, Bristol, UK