Why Do We Privatise? Part I By Olatunde Kabiru Afuwape INTRODUCTION This is
first part in the series. In
the coming weeks and months, we would attempt a closer scrutiny at
various aspects of privatisation. The
objective is to beam a search on privatisation, perhaps it may help
illuminate more clearly both the advantages and disadvantages of
privatisation as a tool for economic reform.
WHY DO WE PRIVATISE What
are the factors that determine which state-owned enterprise should be
privatised? Many factors. Just
like ill health in human being determines the need to see a doctor,
state of physical, financial and managerial decadence determine the
candidates for privatisation. Unfortunately, most if not all of our
public enterprises and institutions suffered from terminal form of the
above illness. If we were
to objectively consider candidates for privatisation, I am afraid none
of our public institutions would escape what is now erroneously termed
“the hammer of privatisation”. However, this piece will be
restricted to legal boundaries of privatisation as espoused in the
Public Enterprises (Privatisation & Commercialisation) Act 1999. WHAT IS PRIVATISATION Attempts
will be made here for a quick diagnosis of what privatisation entails as
background to the issue at hand. What is privatisation?
The term Privatisation can be defined simply as the transfer of
ownership of public enterprises to private hands. In reality,
Privatisation takes many different forms and the term is sometimes used,
broadly, to describe any policy changes that enlarge the scope for
private enterprise to compete with state-owned enterprises (SOEs), or
even ones that might cause SOEs to behave more like private firms. (Ramamurti,
R and R. Vernon et. al (1991), Privatisation and Control of State-Owned
Enterprises, Economic Development Institute of the World Bank). EVOLUTION OF PRIVATISATION AS A MEANS OF REFORM Essentially,
Privatisation is an economic strategy aimed at reducing the role of
government in otherwise economic activities and in favour of widening
the scope for the private sector to operate.
From an obscure and little known concept in the late 1970s,
Privatisation has become a worldwide phenomenon in both developed and
developing countries. This was as result of several developments that
forced a rethink of earlier held views on the role of state in fostering
economic development. In the 1980s, the role of state-owned enterprises
(SOEs) underwent close scrutiny in many countries, especially developing
countries. By
the late 1970s, the SOE sector had absorbed a large share of
governments’ budgets in the form of direct allocations, subsidies and
capital investments. As governments ran into severe fiscal problems in
the 1980s and loans became increasingly difficult to mobilise at home
and abroad, they were forced to consider relatively radical methods for
turning the SOE sector around. Thus, a programme of SOE reform emerged
in developing countries that in terms of scale and scope had no parallel
in the post-war period. The search for solutions resulted in several
reform measures. The two classes of reform commonly employed were
Privatisation and strengthening the methods by which governments
controlled SOEs. Privatisation
gained considerable momentum in the developing world in the 1980s, such
that, by the end of December 1987, some 571 SOEs had been privatised in
57 developing countries. These countries are spread in all the regions
of the world, in Africa, Asia, Latin America, Middle East and the
Caribbean. The countries in the forefront of these privatisation
transactions include: Cote d’Ivoire, Guinea, Niger, and Togo in
Sub-Saharan Africa; Singapore in Asia; Brazil, Chile, and Jamaica in
Latin America and the Caribbean. (See Ramanadham, V.V. et. al (1993),
Privatisation: A Global Perspective, Routledge, London) Privatisation
is not restricted to developing countries alone. It is being implemented
even in the developed market economies in Europe and Canada and in the
former communist countries in Eastern Europe. For example; in the UK, at
the end of the 1970s the nationalized industries accounted for nearly 10
per cent of GDP and employed nearly 10 per cent of all workers. And
Government-owned monopolies dominated transport (buses, rail and
aviation), communications (postal services and telecoms) and the energy
sector. The picture has changed drastically by the end of the 1980s
where telecoms, gas, electricity, aviation, steel production, water
supply and many more have all become largely- or wholly-private sector
activities. FACTORS THAT DETERMINE CANDIDATES FOR PRIVATISATION Various
studies conducted on the performance of PEs in Nigeria by public
Commissions, committees and Study Groups revealed the presence of the
following as compelling reason for privatisation: ·
Abuse of monopoly
powers, ·
Defective capital
structures resulting in heavy dependence on the treasury for funding, ·
Bureaucratic
bottlenecks, ·
Mismanagement ·
Corruption ·
Nepotism ·
Inefficiency
utilisation of resources. Economic
liberalisation and privatisation is therefore justified by gross failure
of PEs to provide the goods and services and operate efficiently and
profitably. OBJECTIVES OF PRIVATISATION IN NIGERIA The
objectives and benefits of privatisation in Nigeria include the
following: ·
Reduce
corruption; ·
Modernise
technology ·
Strengthen
domestic capital markets; ·
Dismantle
monopolies and open markets; ·
Promote
efficiency and better management; ·
Reduce debt
burden and fiscal deficits; ·
Resolve massive
pension funding problems; ·
Broaden base of
ownership ·
Generate funds
for the Treasury ·
Promote corporate
governance ·
Attract foreign
investment ·
Attract back
flight capital Different goals motivated privatisation in different countries. Country studies reveal that these goals included improving a government’s cash flow, enhancing the efficiency of the SOE sector, promoting “popular capitalism”, curbing the power of labour unions in the public sector, redistributing incomes and rents within society, and satisfying foreign donors preference for in the role of government in the economy. Moreover,
it is more prudent to direct our scarce resources to attacking poverty
through investment in health, education and rural development – social
programme s that will benefit millions of Nigerians, not just a few
thousand urban elite that are employed by, or capture the subsidies
granted to the public enterprises.
Public enterprises have also contributed to
income redistribution in favour of the rich over the poor, who generally
lack the connections to obtain the jobs, contracts or the goods and
services they are supposed to provide. The annual burden of over N200
billion that PEs imposes on the economy has become untenable, unbearable
and unsustainable. The above reasons notwithstanding, the
political will to make difficult decisions and stand by them, play
perhaps the most significant role in determining candidates for
privatisation. MODE
OF PRIVATISATION IN NIGERIA Public
Enterprises (Privatisation & Commercialisation) Act recognized the
following as the modes of privatisation: ·
Sale
of shares by public offer at the capital market. ·
Sale
of shares by public
offer shall be in accordance with the provisions of subsections (2), (3)
and (4) of the Act ·
The
shares on offer to Nigerians shall be sold on the basis of equality of
States of the Federation and of the residents of the Federal Capital
Territory, Abuja. ·
Not
less than 1 per cent of the shares to be offered for sale to
Nigerians shall be reserved for the staff of the public enterprises to
be privatised and the shares shall be held in trust by the public
enterprises for its employees. ·
Where
there is an over-subscription for the purchase of the shares of
privatised public enterprise no individual subscriber shall be entitled
to hold more than 0.1 per cent equity shares in the privatised
public enterprise. ·
Sale
of shares by private placement ·
Sale
of shares through a willing seller and willing buyer basis or through
any other means determined by NCP. ·
Dispose
of the shares or a part thereof to interested investors through any
local or international capital market. ·
Sale
of shares via core investor sales process CONCLUSION What
this piece attempted was a snapshot of privatisation and some of the
reasons why privatisation is embraced as form of reform.
The common definitions of privatisation was examined, so also
evolution of privatisation as a means of reform. The
factors that determine candidates for privatisation were also
enumerated. The objectives
and mode of privatisation in Nigeria concluded the write-up. OLATUNDE
K. AFUWAPE TEMELE
STREET WUSE
ZONE 3 ABUJA REFERENCES 1. Public Enterprises (Privatisation & Commercialisation) Act 1999 2. Ramamurti, R and R. Vernon et. al (1991), Privatisation and Control of State-Owned Enterprises, Economic Development Institute of the World Bank). 3. Ramanadham, V.V. et. al (1993), Privatisation: A Global Perspective, Routledge, London) 4. Final Report of the Technical Committee on Privatisation and Commercialisation 5. BPE Annual Reports (1993-2000) |