-Gbenga Biobaku
The Centre for Petroleum Information (CPI) held its webinar edition of Oil & Gas Law Forum with the Theme: Proposed PIA 2021 Amendments: Arising Legal and Related Issues.
The Forum was to dissect laws regarding establishment of Nigeria’s state owned oil company, Nigerian National Petroleum Company Limited (NNPCL) and other related issues with Petroleum Industry Act (PIA).
Speakers emphasised the roles of PIA with other countries and how the oil industry is being managed with extant relevant laws.
What is the Current Status?
Section 53 of PIA 2021 provides that ownership of all shares in NNPCL shall be vested in the government as a corporation and held by the Ministry of Finance incorporated and the Ministry of Petroleum incorporated in equal proportion, on behalf of the Federation, and the Ministry of Petroleum incorporated will be incorporated under the provisions of the aid schedule.
The first point is that these shares are actually vested by law in the government. Ministry of Finance Incorporated (MOFI) and Ministry of Petroleum Incorporated (MOPI) are essentially vehicles. There are vehicles that the government is using to hold the shares why Ministry of Finance incorporated are the legal and registered owners of the entity, the ultimate and beneficial owner itself is the government.
This is important to understand whether there is actually a significant change in what government is proposing or not.
What were the original policy objectives for having two government shareholders?
The primary objective was to ensure independence of the board from undue intermeddling from the shareholders. This is the first key point and the other point was to ensure that there is a balanced oversight of MOFI in terms of having some level of physical oversight and understanding MOPI coming up with having a technical oversight and bringing its industry knowledge as a shareholder of the company.
Before MOPI was one of the innovations in the PIA and government corporations were owned by MOFI exclusively and that cut across different industry sectors. But at the time that the bill was being put up, it was decided that NNPC is unique. This is a unique organization that generates substantial portion of the revenue of the Federation with over 50% of revenue comes from oil and gas and NNPCL is the dominant player.
Hence, leaving that kind of entity in the hands of MOPI like other organizations may not be appropriate, it is important to set up another institution that will be a co-shareholder and also help in terms of protecting the Board from undue intermeddling ensuring transparency and accountability with good governance in the petroleum sector.
The proposed PIA amendment bill seeks to transfer all the shares of MOPI to MOFI in terms of government stated objectives although the bill itself has not been presented but at least based on information both in the bill and public domain. Part of the goals and objectives of the transfer is to centralize the fiscal oversight and enable a streamlined control over dividends, revenue, remittances and NNPCL financial performance.
Part of the objective is also to address persistent fiscal leakages and revenue losses affecting the Federation. Another objective is to simplify the ownership structure to improve strategic decision making and accountability to strengthen Nigeria’s broader economic reform agenda by consolidating government holdings order a single financial entity. The reason adduced is to position NNPCL effectively for privatization in future.
What is changing?
The proposed bill states clearly that MOFI is going to act as the sole bear agent for the government of the Federation. It will hold those shares and follow Federation’s instructions. The way this is designed as earlier mentioned is for MOFI to be used as a vehicle. It is just a vehicle for the government to hold shares but the functions of ownership in the proposed bill will still be vested in government while MOFI remains an agent to pass through.
In terms of evaluating these proposed ownership changes, the guidelines on corporate governance for state owned enterprises by the Organization for Economic Cooperation and Development (OECD). OECD guidelines are widely regarded as international standard for policy masters to design effective ownership and corporate governance frameworks for state owned enterprises.
Key Relevant Principles
One of the key principles in the OECD guidelines is separation of state ownership and policy. It is important that the ownership of state enterprises is separate from the entities that are responsible for either regulatory functions or for determining policy for those sectors. The state is also required to act as an informed and active owner, but also establish a centralized entity for the exercise of its ownership rights. The recommendation by OECD is that these companies, even though the independence of the board and shareholder also have to be active. There is need to find a balance between an active shareholder and an independent board.
Another prescription by the OECD guidelines is clear mandates for the ownership entities. Ownership entities should operate under an explicit state ownership policy that sets out the state objectives and expectations for the governance and also for performance review.
A point of emphasis is strong and independent boards. The guidelines prescribe that the boards must be appointed through transparent and merit based processes and they must operate independently from political influence. The other key point from the guidelines is that the ownership structure, whether it is a single or multi entities, must operate in an efficient manner.
Where it is a multiple entity model, one of the entities must be designated as the coordinating entity for the government. There has to be someone who is speaking for the government. The government cannot have multiple voices in the corporation. There could be multiple entities owning it, but there should be one of those parties speaking to the government in terms of relationship with the state owned entity.
Experiences from other Jurisdictions
In the case of Equinox, it is a single entity ownership. The Norwegian state through the Ministry of Trade holds shares in Equinox. China also operates a single entity ownership, SASAC which is the agency of the government that owns and controls state owned enterprises. It is the sole shareholder of major corporations which include China National Petroleum Corporation and Sinopec. The model in Finland is based on single entity ownerships.
The government through the ownership steering department owns directly shares in state enterprises. In the case of Malaysia which is PETRONAS. PETRONAS is owned similar to what we used to have in Nigeria, it is owned by one single entity, which is the Ministry of Finance Incorporated of Malaysia. They own the entire shares of PETRONAS and operate a single entity ownership.
Brazil operates multiple entity ownership where shares are held directly by the federal government and Brazilian Development Bank and its investment arm. They also own minority interest and operate a multiple entity.
Saudi Arabia was originally a single entity ownership while minority part of the shares is held by Sovereign Wealth Fund. The country has a multiple entity ownership.
Basically, there are varied models, but the prevailing model globally is the single entity ownership structure.
Potential Pros of Proposed Ownership Changes
In terms of pros, the proposed centralization of shares in one entity is in line with global best practices, as shown globally, except for a few countries, most countries have one single entity representing the government and holding the shares. This will also centralize control in terms of having one party who is the party that is responsible for setting strategic direction and setting performance targets and mechanisms to improve accountability.
Ultimately, what the amendment is proposing is that MOFI really is a pass through agent. But decisions will be taken by the government who is actually the ultimate and beneficial owner of those shares.
Part of the possible potential pros is streamlined representation. MOFI will be the party that will deal with NNPCL both in terms of interactions with third parties. There is clarity given also the challenges we have in Nigeria when it comes to government agencies collaborating.
Government agencies collaborating could be problematic. It could hinder decision making, slow things down and lead to bureaucratic delays. It will also simplify process of privatization in future investors dealing with one entity of the government rather than multiple entities.
The Cons
In terms of the contrary side, the potential cons for proposed ownership change, key issue is independence of the board. Part of the objectives of the PIA when it was being crafted was to ensure independence for the board of directors, such that they are able to run the business free of excessive political influence, especially given the history of NNPCL where government in its mindset see the company as its extension.
This has been a struggle from the day that PIA was promulgated into law in terms of government allowing NNPCL to operate independently. The fear is that in a situation where the board is not independent, major decisions concerning how the organization is run will be made outside NNPCL which will not augur well for the organization.
Another disadvantage is limited perspective on the operations of the company. The original thinking at that time is that MOFI as a shareholder will be looking at these issues more from a fiscal perspective, and for a company like NNPCL, it needs another shareholder that understands the industry, the dos and don’ts that can bring that sector expertise into decision making at shareholder level.
Legal Owner, Board and Management
Whether it is multiple or single entity, both models can work and have worked effectively.
What is important is that there is a clear distinction in term of the rules of the office such as the legal owner, board and management; shareholders are responsible for defining policy objectives and strategic directions.
In terms of strategic direction, while the board remains responsible for corporate strategy. Strategic direction in defining and determination while corporate strategy is determining the path to get to desired destination. The legal owner can define the destination, vision and achievement of the company.
Shareholders of the entity are appropriately placed to set long term vision and destination for the entity while the board creates strategy of how to achieve it. They will also set the financial and non-financial target and public service obligations. The shareholders will be responsible for evaluating and appointing board members through transparent bid processes and they will be responsible to approve major structural changes such as privatizations, capital projections or other major decisions for shareholders.
There has to be independent board which is part of ownership that will address relationship between the company and shareholders. They will be responsible for monitoring performance but not intervene in day-to-day operations.
The board will be responsible for corporate strategy, plans and appointing senior management ensuring internal control while the management is responsible for implementation of business plan, day-to-day strategy and maintaining internal control and are accountable to the board.
Since NNPCL is seen as state company achieving some of these objectives is likely going to be a struggle until privatization occurs through institutional investors and government ceases to be an extension of the company. The board must be independent. CAMA defined role of the board and the company which is major asset of federation, powers must be stated clearly to protect independence of the board.
Recommendations
The proposed transfer of shares held by MOPI is in line with international best practices. Experience from other jurisdiction shows that the single and multiple models can be effective if properly managed and implemented. But most jurisdictions stick to single model. It is important that ownership document is developed which defines state and shareholder while NNPCL will be managed to avoid duplication of roles.
The role of the board of NNPCL should be clearly defined in legislature to preserve independence of the board. Ownership policy document should also provide for establishment of an ownership steering committee which will comprise of representatives of MOFI, MOPI and Nigeria Sovereign Wealth Fund Authority which is involved in investment.
The steering ownership committee will be responsible to advise government in the development of policy objective and strategic directions of NNPCL. This will take care of having an industry set of experience to be involved in shareholders decisions concerning the entity. Some countries have an inter-ministerial committee that advises the government in terms of exercising authorities.
The MOFI Act is a 1959 legislation that needs to be amended to reflect current role of institution and make it align with modern realities. The Act was established in 1959, it was holding government security regarding loans.
Presently, the role of MOFI is expanded and should be robust so that it will be effective.
This paper was presented by Gbenga Biobaku, at the Centre for Petroleum Information webinar edition of Oil & Gas Law Forum held recently in Lagos.
He is the Senior Partner at Gbenga Biobaku and Co with over 33 years of experience in corporate and commercial law practice specializing primarily in oil and gas.
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