Thursday, 19 November 2015

REFORMS: Privatisation of Government Enterprises.



The Problem 
During post-independence, the dominant economic wisdom was for government direct intervention and control of the commanding heights in the economic sector through the vehicle of public enterprises (PEs). This was justified mostly by the need to promote rapid industrialisation against the backdrop of dearth of local entrepreneurial class and indigenous capital at this time. In order to actualise this objective, the federal government invested over a US$100 billion in establishing PEs. More importantly, the aftermath of the civil war in 1970 promoted the federal government to pursue a ‘Reconciliation, Reconstruction and Rehabilitation’ policy, equivalent to the George Marshall Plan of 1948- 1952.

This policy, aided by the oil price boom of the early 1970s, saw government investing in massive industrial and infrastructural facilities in Nigeria. Thus billions of money were, therefore, spent in the construction of refineries, steel plants and rolling mills, establishment of development/industrial banks, oil companies, telecommunications companies, electricity plants, airports, sugar companies, cement companies, paper mills, fertiliser plants, glass industries, breweries, railways, river basin development authorities, dams, shipping lines, etc. These were managed as government-owned companies and enterprises.

In 1972, the government enacted the Indigenisation Decree that stipulated increased participation of Nigerians in companies/enterprises. Arising from this economic philosophy and huge oil revenues, government established PEs in every sector with over US$100 billion was invested to create over 600 ventures, employing less than 500,000 workers and creating more than 5,000 board seats.

However, over time it became evident that the PEs, which had been established with noble and egalitarian objectives, had failed in the country with their dismal performance. It was estimated that PEs were consuming about US$3 billion of national resources annually by way of grants, subventions, subsidies (both direct and indirect) through import duty waivers, tax exemptions, etc. Tax deductions at source were not remitted to appropriate authorities. Additionally, the PE's became avenues for political patronage, rent seeking, and parasitism, with more than 5,000 board appointments that control funds in excess of ₦1trillion. Cumulatively PEs never served their customers, their employees, or the taxpayers well.

Reform Actions
The federal government soon became disenchanted with the dismal and poor performance of PEs and could no longer continue to support the monumental waste and inefficiencies of the PEs. Government commissioned several studies to find the factors for this dismal performance. These included the Adebo (1969), Udoji (1973), Onosode (1981), and Al- Hakim (1984) studies. A summary of the findings from these studies showed that the PEs were inefficient, corrupt, misused monopoly powers, depended heavily on treasury, had defective capital structure, and suffered incessant political interference, etc.

In 1985, the federal government set up the Presidential Study Group to review the Al- Hakim (1984) Committee Report. The main conclusion arising from the Committee’s recommendation was the need for radical measures to be taken to address the problems of the PEs. Consequently, government began to take steps to address the problems associated with PEs. The federal government commenced a programme of liberalisation and established the Technical Committee on Privatisation and Commercialisation (TCPC) by enacting the Privatisation and Commercialisation Decree No. 25 of July 1988. The Committee was inaugurated on 27 July 1988 and charged with the responsibility of withdrawing government from business while making the private sector the main driver of enterprise ownership and management. The TCPC began the implementation of the inception phase of the privatisation programme (1998-1992).

In furtherance of the implementation of the programme and the need to operate along the line of international best practices, in 1999, the federal government restructured the implementation modalities by enacting the Public Enterprises (Privatisation and Commercialisation) Act that established the National Council on Privatisation (NCP), and the Bureau of Public Enterprises (BPE). The new institutional structure ensured that NCP determines political, economic and social objectives of the programme, approves policies and public enterprises to be privatised or commercialised, and issues directives to BPE, while the BPE implements Council’s policies and directives.

The Public Enterprises (Privatisation and Commercialisation) Act of 1999 provides various strategies for BPE to carry out the privatisation policy. These include:
  1. Public offering
  2. Private placement of shares
  3. Core investor sale
  4. Commercialisation
  5. Concession
  6. Sale by willing seller/willing buyer
  7. Sale of assets and liquidation
Following the enactment of the Act (1999), the National Council on Privatisation (NCP) and the Bureau of Public Enterprises (BPE) have been implementing subsequent phases of the privatisation programme of government from 1999 to date. The privatisation programme is a key aspect of government’s economic reform programme as enshrined in the FGN Transformation Agenda. The programme is designed to:
  1. Diversify the economy
  2. Strengthen the private sector as Nigeria’s engine of growth
  3. Assist in restructuring the public sector in a manner that will effect a new synergy between a leaner and more efficient government and a revitalised, efficient, and service-oriented private sector
  4. Ensure government concentrates resources on core functions and responsibilities of governance
  5. Improve efficiency and reduce waste in the public sector
  6. Modernise technology in Nigerian industries
  7. Dismantle monopolies and service arrogance
  8. Reduce debt burden and fiscal deficits
  9. Resolve massive/perennial pension gaps
10. Promote transparency in corporate governance
11. Attract foreign direct investments
12. Promote competition
13. Enthrone sound corporate governance in public and private sector
14. Institutionalise social accountability and efficient use of public resources.

Main Achievement
The enactment of the Telecom Act (2003) and the licensing of several service providers has created many new jobs in the country and revolutionised the country’s telecom sector. From a teledensity of 0.42%, representing 450,000 telephone lines in 2001, the country’s teledensity has grown to 82%, representing 123 million telephone lines as at June 2013. The enactment of the Pension Reform Act 2004, establishment of Pension Commission, and entrenchment of a stable pension policy in Nigeria are notable achievements.
The establishment of the Debt Management Office (DMO) is also one of the outcomes of the reform works of the Bureau. Previously, PEs and government agencies borrowed arbitrarily without looking at the national picture. How much Nigeria owed then was unknown, but this problem was addressed with the establishment of the DMO.

The transport sector reform that led to the unbundling of the Nigeria Ports Authority (NPA) and the eventual concession of the Port terminals to various concessionaires has greatly reduced the cost of doing business in the Ports, increased revenue to government and enhanced operational efficiency, with drastic reduction in the waiting time for clearing of goods and services.

Similarly, the Power sector reform that led to the unbundling, privatisation/concession and handing over of the ownership/management of the PHCN successor companies, an exercise that has been described by the World Bank and the international community, as not only most transparent and credible, but also the single largest privatisation transaction in the world, has become a reference point globally.

Other achievements of the privatisation programme include:
  1. The sum of ₦251.5 billion was realised as gross proceeds (excluding power) and over ₦147 billion (net) has been remitted to the Privatisation Proceeds Account with the CBN.
  2. 66% of the privatised enterprises are performing well as against 34% that are not doing well.
  3. No treasury allocation to privatised PEs – drain pipe plugged.
  4. Proceeds utilised for other socio-economic objectives.
  5. New operators pay corporate taxes.
  6. New owners are investing heavily - e.g. ports, oil marketing companies, cement plants, etc.
  7. Neglected and under-utilised assets being more efficiently utilised.
  8. Oil services companies have expanded: Oando, ConOil, etc.
  9. Nigerian truck manufacturing company that was shut down is back and producing.
  10. An improving agro-allied sector: Notore (Nafcon), Okomu Oil palm, sugar companies like Savannah Sugar Company, etc.

  1. Eleme Petrochemical Company that was moribund has grown to become the highest dividend paying company in Nigeria
  2. NAHCO that was moribund has more than tripled its share value since privatisation.
  3. Federal Palace Hotel was dilapidated and is now functional and expanding.
  4. Remarkable improvement in investments and ports operations.
  5. Cement companies like Cement company of Northern Nigeria, Ewekoro Cement Company, Benue Cement Company, have been refurbished, expanded and serving the cement requirements of country compared with their initial dismal performances.

  6. Privatisation of the power sector with the following essential elements:

- Power Sector Policy, 2001: Aimed at ensuring electricity supply by creating a conducive investment environment for private sector investment and managerial expertise
- Investor-friendly Power Sector Reform Act: Enacted in 2005
- Breaking the monopoly: Introduction of a competitive electricity market
- PHCN unbundled into six generating companies, 11 distribution companies, and one transmission company (6-1-11 configuration)
- 18 successor companies were incorporated and assets, liabilities and employees of PHCN transferred to the successor companies.
- Privatisation and concessioning of the successor companies from which over N400 Billion was released as proceeds.
- Full settlement of all labour benefits to the ex-staff and Pensioners of the successor companies amounting to over N410 Billion.
- The Nigeria Electricity Supply Industry regulator, Nigerian Electricity Regulatory Commission (NERC) was established in 2006.
- The Nigeria electricity Bulk Trader (NBET) has been established and its board inaugurated, to play the vital role credit assurance to critical players in the industry.
- The Nigeria Electricity Liabilities Management Company (NELMCO) has been established, its board constituted, and it has taken over the stranded liabilities and legacy debts of the old PHCN. 


Reference:  Public Service Reforms in Nigeria (1999-2014) - A Comprehensive Review

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