Transitioning AMCON – the choice between winding down and privatization

Due to the global financial crisis and domestic events, the federal government of Nigeria, through the Central Bank of Nigeria, conceptualized the idea for the establishment of a body to prevent a looming financial crisis. Hence, the birth of the Asset Management Corporation of Nigeria (AMCON), was established by the Act of the National Assembly of Nigeria in July 2010, with an intended 10-year lifespan. The objective was to detoxify the banking system through the purchase of bad assets, non-performing loans, and liquidity injection into troubled banks.

Its mandate includes: (i) assisting Eligible Financial Institutions (EFIs) in efficiently disposing of Eligible Bank Assets (EBAs); (ii) efficiently managing and disposing of EBAs or other acquired assets; and (iii) obtaining the best achievable financial returns on EBAs. To achieve these mandates, AMCON is empowered with a wide range of functions, including issuing bonds and other debt instruments, maintaining a portfolio of diverse assets, providing equity capital, borrowing money in domestic or foreign currencies, and entering into financial derivative contracts.

Current status and challenges

Some argue that AMCON was not designed to last 10 years, but the funding model was projected to last 10 years depending on the economic situation. Unfortunately, AMCON has reached a stage in its operations where its future successes and achievements depend on the strategy of the law and its application. It is disheartening that, besides the efforts of AMCON officials, progress depends substantially on third parties like the judiciary and other government agencies. On that basis, AMCON sought an amendment to its Act, hoping that the amendments would curtail frivolous tactics employed by recalcitrant obligors under our judicial system and improve debt recovery efforts.

Rationale for transition

AMCON was established amidst a dire economic situation in Nigeria marked by foreign portfolio withdrawals, a collapsed stock market, and a deepening banking industry crisis. Initially mandated to purchase Non-Performing Loans (NPLs) and provide liquidity to commercial banks, AMCON successfully achieved this objective by acquiring over 12,000 NPLs worth N3.7 trillion and injecting N2.2 trillion as financial accommodation to prevent systemic failure. Despite notable successes in supporting businesses, particularly in the aviation and manufacturing sectors, challenges have arisen, including underperformance within the stipulated timeframe, legal obstacles during debt recovery, and political interference. The International Monetary Fund recommended discontinuing AMCON’s operations three years into its existence, citing concerns about future financial challenges, and the organization has faced criticism for lack of transparency in the sale of acquired banks.

In light of these issues, the debate over AMCON’s future has intensified, with calls for its sunset. Two major options are being considered to address the challenges: one involves restructuring and addressing the identified issues to enhance effectiveness, while the other proposes discontinuing AMCON altogether. These options emerge as critical considerations in navigating the complexities surrounding AMCON’s mandate and performance.

Winding down AMCON

Winding down AMCON involves a gradual process of liquidating its assets and closing its operations. It typically involves selling off the assets, liquidating holdings, and eventually dissolving the corporation. This option may be considered the natural conclusion of AMCON’s mission, as it signifies the resolution of the non-performing loans that initially prompted its establishment.

Advantages of Winding Down:
1. Cost Reduction: Operational costs constitute a substantial portion of running a corporation of AMCON’s magnitude. The proposition to wind down AMCON stands as a prudent financial strategy to alleviate the strain on public resources. By eliminating ongoing expenses tied to its operations, funds can be redirected towards more pressing national priorities. This strategic reallocation of resources ensures a leaner financial structure, thereby fostering fiscal responsibility and efficiency.

2. Focus on Core Functions: Closing AMCON heralds a shift towards a more streamlined governmental agenda. Freed from the intricate management responsibilities of a financial institution, the government can redirect its attention and resources towards core functions. Emphasizing economic development, infrastructure, and social services becomes more feasible without the intricate burden of overseeing a financial entity. This refocusing aligns with the government’s commitment to delivering tangible and impactful outcomes for its citizens.

3. Market Discipline: Opting for the winding-down route introduces a pivotal element of market discipline. Financial institutions, operating in an environment where the consequences of their lending decisions are realized, are prompted towards more judicious and responsible practices. This dynamic contributes to the cultivation of a robust and healthier banking sector. By allowing market forces to play a decisive role, the government encourages financial institutions to make prudent decisions, fostering a more resilient and sustainable economic landscape.

Read also: Winding down AMCON- Matters Arising

Disadvantages
1. Legal Complexities: Winding down a business involves navigating a complex legal landscape. From fulfilling contractual obligations to settling outstanding debts and addressing potential lawsuits, not forgetting that AMCON has about 5000 cases in court, the legal complexities associated with closing a business can be daunting. Failure to adhere to legal requirements can result in legal disputes, financial penalties, and damage to the business owner’s reputation. This proactive approach can help mitigate the risk of legal challenges and streamline the winding-down process.

2. Market Implications: The decision to wind down a business can have far-reaching implications for the market and industry in which the business operates. The sudden exit of a significant player such as AMCON can disrupt supply chains, create market uncertainties, and impact the confidence of investors and stakeholders. Additionally, the void left by the departing organization may create opportunities for competitors, leading to shifts in market dynamics. Potential market implications should be carefully assessed before a decision to wind down and consideration of the broader industry impact.

Privatization of AMCON:
On the other hand, privatization involves the sale of AMCON’s assets and operations to private investors. This approach shifts the responsibility of managing distressed assets to the private sector, involving transferring ownership and control of the corporation to private investors or entities. This can either be to a private entity or a government-private entity.

Advantages of Privatization
1. Efficiency and Innovation: One of the compelling arguments for privatization lies in the potential infusion of more efficient and innovative management practices. Private entities, inherently driven by profit motives, often exhibit remarkable agility in responding to the dynamic nature of the market. This agility can translate into streamlined operations, improved decision-making processes, and the implementation of cutting-edge strategies. By harnessing the profit-driven mindset of private entities, AMCON’s privatization could pave the way for a more responsive and forward-thinking approach to distressed asset resolution.

Read also: The Trusted Advisors Legal Digest: Winding down AMCON- Matters Arising (Part II)

2. Market Competition: Privatizing AMCON introduces healthy competition into the distressed asset resolution market. The injection of multiple private players can foster an environment where entities vie for supremacy through superior strategies and innovative solutions. This competition has the potential to yield not only better outcomes for investors but also stimulate economic growth at a broader level. The heightened competition can drive efficiency improvements, encourage the adoption of best practices, and ultimately contribute to a more robust and resilient financial ecosystem.

Disadvantages:
1. Asset Sales at a Discount: One of the primary concerns associated with privatization is the possibility of government assets being sold at a discounted rate. Critics argue that this could lead to a loss of public funds and assets being undervalued, benefiting private entities at the expense of taxpayers. The process of valuing and selling public assets can be complex, and if not conducted transparently and competitively, it may result in financial losses for the government. Governments often face pressure to complete privatization quickly, potentially leading to rushed decisions and inadequate valuation processes. Additionally, political considerations may influence the pricing of assets, favouring private buyers over fair market value.

2. Potential for Job Cuts: Another significant drawback of privatization is the potential for job cuts within the transferred entities. Private companies, driven by profit motives, may seek to streamline operations and reduce costs, often resulting in workforce reductions. Job cuts can lead to increased unemployment rates, negatively impacting affected individuals and the broader economy. While privatization advocates argue that increased efficiency and innovation can create new job opportunities, the transition period can be challenging for workers, especially if the private sector is unable to absorb the displaced workforce.

3. Regulatory Challenges: The shift from public to private ownership introduces regulatory challenges that can have wide-ranging consequences. Governments must establish and enforce regulations to ensure that private entities operate in the public interest, maintain safety standards, and prevent monopolistic behaviour. In the absence of robust regulatory frameworks, privatization may result in market distortions, reduced consumer protection, and compromised public welfare.

Considerations for decision-making
The primary government objective is to enable AMCON to recover loans without relying on taxpayers’ money, given the current debt exceeds N5 trillion. Passing this burden to an overstretched government, already funding critical national development areas, is deemed unfavourable. If AMCON fails to recover the debt, it transforms into a federal government obligation, requiring taxpayers’ money for settlement. This scenario would compel the public to bear the consequences of a few individuals exploiting legal loopholes to evade their debt obligations. The decision to wind down or privatize AMCON should stem from a comprehensive analysis of its status, market conditions, and government goals. A balanced approach, involving multiple strategies, and engagement with stakeholders, is crucial for maximizing value recovery while mitigating risks. Some of the areas for consideration are further expatiated below:

1. Economic and Financial Stability: The primary concern should be ensuring the stability of the financial sector and the broader economy. The chosen option should contribute to long-term economic health.
2. Social Impact: The transition should consider the potential social impact, including the welfare of employees and the communities where AMCON operates.
3. Investor Confidence: The chosen path should inspire confidence in domestic and international investors, assuring them of the government’s commitment to a stable and transparent financial system.
4. Political, economic, and legal factors will play a significant role in determining the feasibility of privatization. Regulatory changes may be required to facilitate the sale of assets and ensure transparency in the process.

Conclusion

The decision between winding down and privatization should be made with a careful assessment of the current financial health and performance of AMCON. It’s essential to evaluate whether AMCON’s original objectives have been met and whether it still serves a necessary purpose.

The decision-makers need to think about what’s best for our money and people. The final call on AMCON’s future needs to be smart, getting back as much money as possible with lesser risk exposure.

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Taye Awofiranye is a Managing Partner at the Trusted Advisors and heads the Fiscal and Finance Practice Group

Ajibola Olaosebikan is a Senior Associate in the Conflict and Dispute Management Practice Group at the Trusted Advisors