Why Do We Privatise? Part I

By

Olatunde Kabiru Afuwape

afuwape2001@yahoo.com

 

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)