Failure Of The Ajaokuta Steel Rolling Mill Project Construction Essay

In the quest to develop its policy in the steel sector the Federal Government of Nigeria under General Gowan era promulgated Decree No.19 on April 14, 1971 setting up the Nigerian Steel Development Authority (NSDA) which was charged with the responsibility for the planning, construction and operation of steel plants in the country. It was in addition tasked with carrying out investigations related to geological surveys, market studies and metallurgical research. The NSDA also embarked on short and long-term training of staff in overseas countries such as India and the Soviet Union on the operation and management of an iron and steel plant. Hence, in 1973, Tiajpromexport (TPE) of the then USSR was commissioned to prepare a preliminary project Report (PPR) on the iron and steel industry in Nigeria. The Report submitted in 1974, studied alternative production schemes based on both local and imported raw materials and was accepted in 1975.

A contract for the preparation of the Detailed Project Report (DPR) signed in 1975 with the USSR was submitted to the Nigerian government in October of 1977. With the assistance of Sofresid of France as consultants, a variant of the steel plant was accepted in June 1978.

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The DPR specified broadly the general layout, composition and requirements as well as a tentative master schedule of the Ajaokuta Steel Plant. It was on the basis of this Detailed Project Report that the Global Contract was signed on the 13th of July 1979 between Nigeria and Tiajpromexport of the Soviet Union for the construction of the Ajaokuta Steel Plant. The signing of this contract signified major commitments on the part of the Nigerian government and the USSR to the development of an iron and steel industry in Nigeria.

The Nigerian government on 18th of September 1979 promulgated the National Steel Council Decree No.60 dissolving the NSDA. The new decree provided for the formation of the Ajaokuta Steel Plant as well as five other limited liability companies. These are the Delta Steel Company Ltd., Aladja; the Jos Steel Rolling Mill, the Oshogbo Steel Rolling Mill, the Katsina Steel Rolling Mill, and the then Associated Ores and Mining Company Ltd., now, National Iron Ore Mining Company (NIOMCO) at Itakpe. However, the very long gestation period of the Ajaokuta project meant that the rolling mills had problems of inadequate supply or lack of billets to operate optimally. This contributed significantly to the poor performance of the Nigerian steel sector. The steel companies, rolling mills and the mining company have all now been incorporated as limited liability companies and are expected to be self-funding (BPE, 2005).However, the government of Nigeria wishes to fully divest its equity holdings in the rolling mills. It seeks prospective core/strategic investors with an initial sale plan of acquisition of 80 per cent shares of the rolling mills, while the remaining shares will be offered to the staff of the company as well as the local community (Bureau of Public Enterprises, 2003).

1.1 THE AJAOKUTA PROJECT OVERVIEW

The Ajaokuta project was established on the 18th of September 1979, with formation of Ajaokuta Steel Co. Ltd. Which was charged with the responsibility of constructing and operating the Ajaokuta integrated iron and steel plant. The project at inception was envisaged to produce 1.3 million tonnes at its first stage, 2.6 million tonnes at its second stage, and 5.2 million tonnes per annum at the third phase of long and flat products. The principal units of the Ajaokuta Plant include the iron making plant, steel making plant, the rolling mills, repair facilities, auxiliary facilities and the electric power supply system. The envisaged features of the Plant include 150mm Wire Rod Mill, 320mm Light Section and Bar Mill, 700mm Medium Section and Structural Mill and 900/630 semi-continuous Billet Mill Cross Section of ASCL: Source: Julius Berger Plc; Construction period, 10/1980-06/1990

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ASCL, 1990). The Ajaokuta integrated plant, which is based on the blast furnace process of iron making, has a raw materials preparation unit that includes the Sintering plant, Coke-oven and By-product unit under the

iron-making unit. The rolling mills are four, two of which, namely, the light section and Wire Rod mills were supposed to be the priority rolling mills. In terms of product mix, the Preliminary Project Report (PPR), proposed equal amounts of flat and long products. However, during this period, the national economy was buoyant with the construction industry enjoying a boom, and this led to the decision that the first stage of the plant would be devoted to long products only, while the second stage – an expansion to 2.6 x 106 tones, would be for the production of flats. The first phase was therefore designed to produce long products like iron bars, wire rods, angles, squares, channels, beams, and structures. Most of the products were expected to be used in the civil engineering construction industry. However, hindsight shows that the change of the original concept of the plant was a serious error (Ogbu et.al, 1995).

1.2 COMPLETING EFFORTS OF THE AJAOKUTA PROJECT

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Several successive administration of the federal government had taken measures in the completion of the Ajaokuta project since its inception yet till date the project had not attained the first phase of its installed capacity. In line with the industrial policy of the civilian administration, a Joint Venture Agreement (JVA) between FGN and a Japanese firm, Kobe Steel Ltd, was entered into on May 31, 2002 – to provide a Fastmelt Technology for the completion of the plant-phase I. Six months later, another agreement (Financing Agreement – F.A) was reached with SOLGAS of USA to finance the project between the FGN and Kobe Steel Ltd on the 29th November, 2002. In a space of another seven months ON June 30, 2003 the Federal Government signed yet another agreement with the same SOLGAS: to extinguish earlier agreements reached and to move ahead to manage the project leaving in the wake too many loopholes, thereby putting into serious questions our techno-managerial ability. As this arrangement was in progress, there was on standby TPE to stage a come back. TPE actually submitted to the ministry to rehabilitate the plant at the cost of $300million. The recent effort of the government is the constitution of the 16-man Interim Management Committee after the concession of Ajaokuta steel company to an Indian based company, Global Infrastructure Nigeria Limited (GINL) failed in 2008 on the ground that the Indian firm was short-changing the interest of the country (Olaitan, 2010). The Ministry of Mines and Steel Development received the business plan of the Interim Management Committee for re-operationalising. With this, the seed fund of Six hundred and fifty (N650) million naira only was approved by the federal government to be released to the Interim Management Committee for re-operationalising the Light section mill, the Wire rod mill, the engineering workshops, the Thermal Power Plant at the Steel Plant. According to the Minister “the immediate phase is re-operationalising, the second is completion of the plants and the third phase is privatization”, (Mukhtar, 2010).

1.3 MAJOR CHALLENGES OF AJAOKUTA PROJECT

The major problems inhibiting the proper functionality of Ajaokuta Steel Company can be categorized under the following:

Funding.

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Raw material development.

Infrastructure.

High cost of energy and natural gas.

Inappropriate capital structure.

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1.3.1 FUNDING.

“Many ex-regimes save the Shagari Ekwueme era of the Second Republic had had but a smattering on the importance of the steel dream. Suffice it to say that in the Abacha regime the project was said to have been mortgaged much to the chagrin of compatriots in the industry and the country in general.”,(Omonihgo, 2004). It could be concluded that the government has spent a lot on the project, but poor funding has been the bane of completion schedules of the project

Second to it is the lack of working capital for the operation of the Rolling Mills and other units of the steel project led to the shot down of these plants resulted in idleness and deterioration of the completed units. There is no gain saying that for a reactivation of these units, substantial working capital is required.

1.3.2 RAW MATERIAL DEVELOPMENT:

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Mines development, access roads, procurementinstallation of plant and equipment are still outstanding for a number of raw materials input in steel production apart from iron ore. There also, lies the problem of identifying and determining sources of imported raw materials like bauxite and manganese, cooking coal etc.

1.3.3 INFRASTRUCTURE:

Apart from raw materials, external infrastructures to and from Ajaokuta steel are lacking. The completion of Warri-Ajaokuta rail line, dredging of, River Niger, and installation of bulk handling facilities at the ports are still outstanding.

1.3.4 INAPPROPRIATE CAPITAL STRUCTURE:

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Ajaokuta steel company being a public sector steel company has found it extremely difficult to source for funds in the financial market. Consequently, the government has been their source of funds. Sadly, the dwindling economic fortunes of the country via mal administration have made the government incapable of meeting the financial needs of these companies adequately.

However, in as much as the nation is over independent on oil and its non diversification of the economy, politics both local and international, corruption has been the bligh of the realization of the steel dream, it remains inevitable that the completion and commissioning of the Ajaokuta steel plant remains the bed rock to Nigerians quest towards industrialization.

2.0 THEORY

2.1 Per Capita Consumption of steel

The per capita consumption of steel is the index used to determine the level of industrialisation of a country. The per capita consumption of steel in Nigeria is woefully very small: 10kg, some say it is less than that; while the world average is 130kg. Statistics show that Nigeria is lagging behind even other African countries, with lesser endowments; like: Zimbabwe (25kg), Egypt (42kg), Algeria (38kg) and South Africa (112kg). But Nigeria is richly endowed with extensive deposits of metallic and nonmetallic materials across the country, which is why confronted by this gloomy economic outlook, the African Iron and Steel Association, AlSA, in May 2002 advised the Nigerian government that the nation can deploy her resources to raise up her level of per capita consumption of steel to 100kg, so as to jumpstart industrialisation within the next 10 years, Adding that Nigeria, with a population of over 150 million has “a very large room and huge domestic market that can sustain such rapid growth”. The country will also save for herself a lot of foreign exchange earnings if ASCL and DSC can come on stream, according to AISA.

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From the foregoing therefore, Nigeria’s demand for steel is estimated at about 12.0million tonnes per annum – to begin industrialisation proper. If ASCL and DSC are operating optimally, then, they would contribute annually 5.2 million and 1.0 million tonnes respectively or cumulatively 6.2 million tonnes per year to the domestic market. It behooves, therefore, that the remaining 50 percent will still need to be imported or, another Ajaokuta and Delta Steel Complexes are required to argument the short-fall in supply.

2.2 Build Own Transfer Solution

2.3 Corporate Governance

3.0 JUSTIFICATION FOR THE RESEARCH