THISDAYonline

In the last few weeks, the press in Nigeria has been following the moves of the Ministry of Communications to review the arrangement under which Pentascope International manages NITEL. They are having a field day reporting the news, with limited analysis of the issues but a lot of speculations on the motivation of the ministry and the minister.

The move to terminate or renegotiate a three-year contract less than a year into the contract is newsworthy. It raises once again the spectre of the unwillingness of the governments in Nigeria to respect the sanctity of contract and the absence of continuity in government. The Nigerian press owes the nation a duty to subject such a move to critical scrutiny.

Ministers have a duty to act in good faith at all times. Public scrutiny of government actions especially the exercise of administrative discretion is crucial for the development of a culture of responsible and accountable government. However, to attack the intentions behind executive and administrative actions to the exclusion of the merits of the actions is wrong. To ignore the merits of the minister's proposal and attack his motives is not only irresponsible, it is an abuse of the power of the press. The press may succeed in blackmailing people from following through on controversial decisions when their intentions are attacked, unfortunately it distracts from the much-needed vigorous public debate that major government decisions should be subjected to.

Let us turn to the merits of the issue in contention. Based on the newspaper reports, the main reason the ministry has adduced for the desire to change the contract arrangement is the alleged unsatisfactory performance of Pentascope International. If it can be proved, non-performance gives the injured party the right to rescind the contract and sue the other party for damages. Whether or not Pentascope International has failed to perform to the level called for under the contract is a matter of fact that the Ministry of Communications may have to prove. I do not have the facts to comment on this. While non-performance may give the Ministry of Communications an easy way to avoid any liability for breach of contract, even if the performance of Pentascope International is outstanding, the arrangement should nonetheless be reviewed because contracting out the management of an enterprise makes no sense at all.

The management contract between the Federal Government of Nigeria and Pentascope International, outsourced the management of NITEL to the consultancy firm. In the "new economy," outsourcing is key to the creation of sustainable competitive advantage. The economic rationale for outsourcing is to allow management to focus on the core business of the enterprise. Successful businesses are increasingly concentrating on their core business and "buying" services (data processing, technical support, engineering design, etc.) that they could buy more cheaply than if they were to produce them internally. Through outsourcing, the world benefits from the cost reduction arising out of the combined impact of specialisation and economies of scale. Outsourcing the accounting function, economic and financial research or technical support is one thing. Outsourcing the management of an enterprise is unbelievably absurd, since the most core of the core business of management is managing the enterprise.

The mandate of Pentascope International during the three-year contract is to "expand and improve NITEL's business operations in preparation of the sale for 51 percent of the shares of the company in 2006". From this mandate, one can conclude that the business operations of NITEL at the time of the contract was such that rational investors would be unwilling to buy the shares at what the vendor (the Federal Government) considered a reasonable price. The expansion and improvement of NITEL's business operations during the three-year period under Pentascope International's management would ensure a successful sale. Unfortunately, economic and financial theory and practice and the direct experience of the Federal Government of Nigeria all point to the exact opposite result.

I strongly believe that the Pentascope International's deal was bad for Nigeria and regardless of the level of performance of Pentascope International, NITEL would be the better for it, if the contract were reviewed. No rational investor would pay significantly more than the liquidation value of an enterprise that is managed by a contractor. The expectation of selling 51 per cent of the shares of NITEL (at better than today value) is misguided.

In the past, the Federal Government experimented with management contracts as a way of turning around ailing parastatals. Consultants have at different times been hired to manage the Nigerian Railways Corporation and the Nigeria Airways. The result is not mixed - it is overwhelmingly negative. Unfortunately, we are not a learning society. In some societies, post-mortems are always done to learn from every experience regardless of its outcome to determine what worked and what did not work and why. I am reasonably confident that a thorough review of the literature would reveal that some countries learnt valuable lessons from the Nigerian experimentation with management contracts. Although we paid the price for the experimentation, we did not learn the lessons from it. Otherwise, we would not have entered into the arrangement with Pentascope International.

Under certain situations, management contract is a win-win situation. The founding local shareholders of Nigerian International Bank (NIB) can attest to this. However, two conditions must be present before it can make sense. First, the contractor must have the competence to manage the enterprise, and secondly the contractor must have a vested interest in the long-term equity performance of the enterprise. If any of the two conditions is lacking, the arrangement is doomed to fail.

There are many uniquely Nigerian issues that compound the tasks facing a management contractor. For example, political interference, poorly motivated work force, corruption etc. Even if these "Nigerian factors" were missing, the result of The Nigerian Railways Corporation and Nigeria Airways would still have been the same.

The two conditions for a successful management contract are deeply rooted in economic and financial theories. A breach of any of them is a recipe for failure. At least the second condition was breached in each of the several Nigerian Railways Corporation and the Nigeria Airways arrangements. Sadly, the two conditions were breached in the Pentascope International arrangement. It would be a miracle if the outcome were different from that of the Nigerian Railways Corporation and the Nigeria Airways.

The first condition, that is, the contractor must have the competence to manage the enterprise, is so elementary and self-evident. Yet, it is often ignored or taken for granted. "You cannot give what you don't have", goes the saying. In the case of NIB, the business of Citibank was operating banks; a management contract with Citibank made sense since it has equity stake in the NIB. Pentascope International, on the other hand, is a consulting firm; it is not AT&T, Verizon, Bell Canada, British Telecom or Deutsche Telecom. It could be the best consulting firm in the world, but it would still be a consulting firm competent only to advise and guide but not competent to replace management and make executive decisions on behalf of its clients.

Outsourcing makes sense if it is predicated on the practical application of specialisation or economies of scale, or both and requires the outsourcing firm to have comparative advantage stemming from either or both. Consultants specialise in providing advice and guidance to management. It is not only inconsistent with specialisation for the line between consultants and management to become blurry; it is counter-intuitive for the adviser to be the same as the executor of the advice.

Managing an enterprise is not a natural territory of any consultant, it is doubtful if Pentascope International or any consulting firm for that matter has the competence to manage NITEL or any other enterprise for that matter (aside from their consulting firm). For the sake of argument, let's assume that Pentascope International is eminently qualified to manage NITEL (a point I am in no way conceding), should we expect them to be successful in turning the fortunes of NITEL around on a permanent and sustainable basis? Unfortunately, the answer is No.

Management is not an event or a project. It is a process, a continuous process. An enterprise with great management but without a management succession plan that ensures a continuous supply of adequately groomed individuals in every level of management, will wither away in no time. An enterprise that contracts out its management can hardly outgrow the need for the contractors. Consultants can hardly have the long-term stake required to develop adequate management capacity in the enterprise. It is also hardly in the interest of the contractor to make the long-term investments that could develop the management capability within the enterprise since the metrics on which they are rewarded are usually too short-term to generate such activities.

If we must use management contract to turn NITEL around, the contractor should be a successful operator. That contractor should have a vested interest in the long-term performance of NITEL. In this regard, either the contractor has bought a stake in NITEL or part of its compensation is tied to the medium-term equity performance of NITEL. Lastly, it should carry some of the financial risks of under-performance. Towards this end, the Federal Government may be granted an option to sell a given number of the shares of NITEL to the contractor over a period of say 10 years at a price that is indexed to the performance of companies in the telecommunications industry.

I do not question the credentials of Pentascope International in telecommunication consulting space. In fairness to Pentascope International, it did not claim expertise in the management of telecommunication operations on its website; it made a persuasive case for expertise working with management to make telecommunication companies better. That was what we should have contracted it to do for NITEL.

NITEL urgently needs a management charged with the responsibility of developing and implementing a strategy that would make it compete effectively in its competitive industry. It needs an independent but supportive Board of Directors to create a vision for the future, provide oversight to management and protect the interest of the shareholders and the public at large. NITEL's management should have the discretion to employ the services of consultants in helping it achieve its objectives.

It is unfortunate that we continue to experiment with a model that has failed us in the past. Luckily, there is another model that we have used successfully in the past. The Bureau of Public Enterprises should review the records of its predecessor, The Technical Committee on Privatisation and Commercialisation on the then Federal Savings Bank. That was a successful turnaround and privatisation of a troubled Federal parastatal. It might provide one alternative in dealing with NITEL.

Adejuyigbe is a Toronto-based management consultant