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Written By: Dr Leesi Gborogbosi, ,
How Tech and Oil Firms can learn from poor due diligence lessons is the focus of this discourse by Gabriel Domale Consulting.
Investors, such as venture capital and private firms conduct extensive due diligence before investing in start-ups, tech firms and oil and gas companies. It is critical for these companies to embed due diligence processes at decision points.
Due diligence usually consists of three core elements namely, legal, commercial and financial due diligence. The overarching strategy of due diligence is to promote comfort to the intending that the transaction under consideration that be been reviewed for risks, compliance and value to enable the parties to make a sound judgement.
In Nigeria, we have witnessed several avoidable poor due diligence lessons. This has occurred within the public and the private sectors. The general expectation is that companies ought to have faired better with due diligence processes.
Unfortunately, we have seen many high profile companies incur huge losses from poor due diligence. They did not design and operate effective due diligence processes and systems. Examples of these due diligence lessons have occurred in the oil and gas industry and government agencies among others.
Highlighted below are some examples of how government and companies took actions that led to the avoidable due diligence lessons.
Source: Guardian Newspaper of Nigeria (September 5, 2020) and Financial Times of London (September 26, 2019)
There was said to be a contractual agreement between the Nigeria government and Process and Industrial Developments Ltd for a 20-year Gas and Supply Processing Agreement (GSPA). The company, P&ID is a small gas company founded by two Irish businessmen registered in the British Virgin Islands to build a gas refinery.
The Ministry of Petroleum Resources was thought to have entered into a contractual agreement with P&ID for the building of a refinery to convert natural gas into “lean gas” in the Cross Rivers State of Nigeria.
Impact on Nigeria
In 2020, Nigeria’s government was represented in a UK court as it sought to overturn what it alleges is a $9.6bn “scam” perpetrated against the country. It has obtained a stay of execution order in the arbitrary award. This followed the review of written submission by the Federal Government which contained new evidence.
The UK court had given judgement that Process and Industrial Developments Ltd (P&ID) is entitled to take $9.6bn in assets from the Nigerian state, based on computed loss of $1mln plus interest per day for 20 years on an aborted gas project.
It is being speculated that the Nigerian government and P&ID may take the option of settling this unfortunate incident out of court. This wasteful disagreement is currently draining the resources of the people of Nigeria through the huge legal costs being incurred by the Nigerian government.
Nigeria – suggested due diligence process
The Nigerian government should publish a table of contract size and the relevant approving authorities. This can be in a form of manual of authorities. The size of the contract involving P&ID should be reviewed by the amounts attorney general's office, authorised by the Federal Executive Council and approved by the Department of Petroleum Resources.
Government contracts should be properly awarded by public tender boards and not by the executive councils. The bidding and approval processes of all contracts should be transparently reported and should be in the public domain.
Agencies of government should engage the services of consultants to conduct due diligence. The should be completed contracts are awarded. To ensure that there are process compliance and value-for-money. All the contracts that fail due diligence should not be signed or allowed to commence.
Poor due diligence outcomes could damage the credit rating of Nigeria. The government must build effective due diligence mechanisms that will instil confidence in investors that Nigeria is safe for investment and they should not disinvest in the country.
Due Process Policy should be implemented to ensure an open, transparent and competitive tendering process. This will require the adoption of process and system mechanisms to drive compliance, fair competition, cost accuracy alignment with contracting guidelines.
Sources: Financial Times of London (January 14, 2020)
Lekoil 's African activities are centralised through a group holding company structure based in the Cayman Islands. The company operates from Lagos, Nigeria.
The company had paid $600,000 to Seawave Invest, a Bahamas-based consultancy firm, for brokering the loan from Qatar Investment Authority (QIA). The consultancy firm was to undertake due diligence and provide a third party report.
Impact on Lekoil Ltd
Trading on Lekoil shares was suspended. Lekoil shares crashed by more than 70 per cent as investors responded to news that the company had suffered loss from poor due diligence.
Lekoil paid $600,000 in fees for a $184m loan that did not exist. Yet, the company needs to meet its near-term obligations to its local operating partner Optimum.
The oil company has to find alternative financing from shareholders to fund the development of its key asset, the Ogo field in Nigeria. If it wants to maintain its interest.
Lekoil company – suggested due diligence process
The chief financial officer of Lekoil should have initiated a compliance check on the report from the consultant. As the report was based on open-source information, predominantly.
Lekoil should have asked QIA to confirm the validity of the loan agreement. This fraud was uncovered as QIA approached Lekoil to verify the news.
The company should have contacted the several companies listed as partners of Seawave Invest. A simple check would have shown that the consultant's partners had no knowledge of the services claimed to be offered by the consultancy firm.
The corporate governance at Lekoil was poor. Apart from the board of directors’ meetings, a separate decision review board should be set up.
Nigeria intends to pursue all legal remedies against the judgement even it means going all the way to the UK supreme court. This due diligence case was clearly avoidable by the Nigerian government.
The government should have conducted due diligence at the technical and commercial evaluation stages of the contracting process. This will prevent costly errors.
External advisors are well-positioned to give a fair and unbiased due diligence report. They should be engaged for independent reviews.
Poor due diligence usually leads to a damaged reputation, loss of investors’ confidence and higher cost of raising capital.
It is important that Lekoil recruits an interim CFO who has extensive hands-on experience working in the oil and gas industry. The company made the mistake like some local oil and gas companies do, recruiting CFOs who do not have working experience of the oil and gas industry.
We can work with your company to brainstorm and implement a due diligence strategy that will drive growth and mitigate risks. Our expertise includes developing and implementing due diligence plans, processes and best practices.
Gabriel Domale Consulting leverages our deep hands-on industry experience to provide consulting services including strategy, corporate governance, transformation, due diligence, cost optimisation, training, financial modelling, valuation, fundraising and business model innovation.
The growth of our firm is hinged on the strategic perspective of growing a strong relationship with our clients and working with them to achieve competitive advantage and viable market growth.
We are committed to continuously engage with clients to develop innovative solutions and to collaboratively implement business decisions to achieve sustainable outcomes.
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Dr Leesi Gborogbosi
Dr Leesi Gborogbosi is the CEO of Gabriel Domale Consulting, a management consulting firm based in Nigeria, that helps companies in Africa to grow, provides insights to leaders and transforms institutions.
He has about three decades of leadership experience in the oil and gas industry (Shell Nigeria). He is an expert in finance, strategy, corporate governance, transformation, cost management, leadership development and due diligence.
Dr Leesi Gborogbosi was Project Finance Manager of Upstream Oil & Gas Projects (7 projects - Headline size: $8 bln) - Southern Swamp Associated Gas System, Forcados Yokri Integrated Project, Otumara, Adibawa, Agbada and Assa North/Ohaji South Projects.
He provided advisory services namely, strategic planning, budget management, funding strategy, risk management, governance, due diligence and investment plan covering the full life cycle of the seven major upstream oil/gas projects, power facilities and export pipelines.
He collaboratively works with business leaders and their organizations to identify growth opportunities and create value through operational excellence in strategy implementation and capital efficiency by delivering projects within costs, building strategy and planning frameworks and crafting of innovative funding solutions.
Dr Leesi Gborogbosi provides support to finance leaders to make crucial decisions and optimize performance through financial excellence in finance systems and accounting operations, budgeting, finance transformation, cost reduction, governance, risk, and compliance.
He has doctoral degrees in strategy and business studies and MSc (Research Methodology in Management) from IE Business School, Madrid and an MBA (Finance and Banking) from the University of Port Harcourt, Nigeria; and BSc (Accountancy) from the University of Nigeria, Nsukka. He had his secondary education at Federal Government College, Jos, Nigeria.
His doctoral dissertation focuses on strategy implementation, collaboration, the role of middle managers, and the dynamics of social movements (host communities).
Dr Leesi Gborogbosi leverages his professional experience as a Certified Management Consultant (CMC); Fellow, Institute of Chartered Accountants of Nigeria; and The Institute of Management Consultants. He is member of the Chartered Institute of Procurement & Supply, London; Nigerian Institute of Management (Chartered); and Strategic Management Society, Chicago, United States.
He was nominated by the Strategic Management Society, Chicago for "Best International Conference Paper Prize Awards" in 2017 and 2015. He was appointed the Chair for the Session on “Leading change implementation processes” at the Strategic Management Society conference in Denver, United States in 2015.
Dr Leesi was a member of the Strategic Management Society “Special Committee on Diversity and Inclusion”, Chicago, USA, with the responsibility of providing the Strategic Management Society Board of Directors with a good audit of where the Strategic Management Society stands with respect to inclusiveness in its activities.
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Published origninally on 25th Nov 2020 18:14:25
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