Privatization and Commercialization in the Nigerian Economy

Privatization and Commercialization in the Nigerian Economy

PRIVATIZATION AND COMMERCIALIZATION

This two words are synonymous. But just as no two synonyms mean perfectly the same thing, there is a difference between the two of them; a difference that could make all the difference. Privatization have already been defined and reasoned that it became necessary in order to eliminate wastage of scarce resources through effective financing and management to be realized, there must be expertise, and a sense of commitment. Privatization and commercialisation, though having the same objective, have different approaches.

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It is this difference that may reduce or infact increase the wastage of public resources. This difference is in the nature or the structure of the management of the enterprises. The problem of the public enterprises has been traced to their nature or structure. These enterprises were created by either an act or decree and their articles and memorandum of association which spell out their objectives and mode of operations were prepared by the government which owned them. The government appointed all the members of the Board of Directors and the Chief Executive of the various companies and to a large extent other functionaries. Experience and investigation has shown that most of the appointment were based on political considerations. As a result some of the top managers in the public enterprises are not the square pegs holes which are imperative for such key positions.

Also Read: The Effect of Privatization and Commercialization of Government Owned Industries

And for the purpose of doing a conclusive literature review, this topic has been classified into 4 problem areas:-

1. What is privatization and commercialization.
2. Origin of privatization and commercialization.
3. Problems of privatization and commercialization.
4. Prospects of privatization and commercialization.

WHAT IS PRIVATIZATION AND COMMERCIALIZATION.

Privatization according to Richard Hemming in his paper title “ privatization and Efficiency” said that privatization implies a transfer of ownership of enterprises to the general public through the sale of their shares on the stock market, or by private placement. In the case of public quotations the company enterprise would change it Articles and memorandum of Association, reappoint its own board of directors, and select its management team who would be answerable to the shareholders on issues of profitability and efficient allocation and management or resources.

Privatization can be said to ensure the elimination of inefficiency. When efficiency is injected in the management of the enterprises it will have a new lease of life, prices of products, services will tend to be competitive and the Nigerian citizens will have value for their money. These results may not be realized under commercialisation.

He also said that privatization when accompanied by regulation to prevent anti-competitive prctises, privatization can increase not only productive efficiency but allocative efficiency as well, in that it should lead a structure of output that is highly valued by consumers’, given social costs of production.

Commercialisation on the other hand as defined by Chris. C. Nkwonta in his paper privatization and commercialization cannot definitely be to the interest of the economy. Commercialisation could, however, become a viable option with the caveat that the management of the companies to be commercialized are contracted out to a firm of experts like the Nigerian Airways was contracted tot eh Dutch Air-lines and the Nigerian Railway corporation to the RITES of India some year back.

Commercialisation simply means that the government, whilst retaining ownership, will hands off the funding and management of these enterprises leaving them to tend for themselves with what ever expertise they may have with this arrangement, most of these commercialized enterprises cannot tend for themselves because the inefficient management structure has not been retermed and because the top management is occupied by people with limited education and experience. Modern management techniques can hardly be introduced. At the end of the day, we shall remain in the same old boat as resources continue to be wasted and the commercialized enterprises will remain a drag on both the government and people of Nigeria.

ORIGIN OF PRIVATIZATION AND COMMERCIALIZATION

Though there was a formal declaration of a national debate on privatization of public enterprises in Nigeria, as was the case with the contemplated loan from the international monetary fund (IMF), and the structural adjustment programme (SAP), there has been a heated argument for and against privatization and commercialization, ever since the federal government declared it’s intentions to privatize, commercialize some public enterprises.

We will recall that the idea of privatization was made a conscious policy when president, Ibrahim – B – Babangida in the 1986 Budget speech, clearly stated that the federal and state government of Nigeria will embark on transfer of government interests in agricultural industrial and commercial enterprises to the private sector. Investigation have shown that privatization involves more than the mere will to sell shares to interest individuals.

Perhaps, the Government had regarded the whole exercise simply as the transfer of government holding in essence the whole exercise. But the process of accomplishing this exercise and the implications are another side of the story. It took the government more than one year to determine the enterprises to be affected.

Privatization is still a new concept in this part of the world and the use of the word lands itself to a number of misinterpretation Nigerians first became aware of the inability of government to have adequate resources to continually provide rising standard of living for its citizens in 1982, when the austerity measures, were announced. The issue of privatization had been coming up from time to time until the decision was taken to privatize some parastals and commercialized others as part of the structural adjustment programme to turn the economy around. In taking this decision, government was not unaware of the sensible nature of the issue and therefore was quick to explain the conditions under which any privatization would be undertaken.

These include the following:

1. It will be a gradual and deliberate process.
2. The methods used will ensure access to ownership by diverse groups and income classes across the country.
3. Divested holdings will not be concentrated in the hands of individuals or in any particular areas of the country.

PROBLEMS OF PRIVATIZATION AND COMMERCIALIZATION

 The introduction of privatization and commercialization on Nigeria economy was well received by both the public and private sectors of the economy since it took effect in 1988. however, certain indelequacies have been noticed.

In the administration of privatization and commercialization a lot of problems arose, they are as follows:

2. PROBLEM IMPLEMENTATION

One should of thought argued that privatization exercise would have problems of implementation. They forecasted such problems as: absorptive capacity of the capital market and operational problems. These issues were very well addressed by the managing Director of continental merchant Bank Limited in a paper he presented at a seminar, titled “strategies for successful privatization”. He identified some of the problems and advanced solutions. The first problem was the absorption capital market. This problem was further broken into operational and financial.

OPERATIONAL PROBLEM

In operational problem, the managing Director of continental merchant bank limited was confident that the Nigerian capital market has come of age with a reasonable level of competent operators. According to him, if the capital market was able to value companies with untrained brokers during the indigenization programme, albert with mixed results, there is no reason why it should be unable to handle all the shares to be privatized, especially now that the capital market has a reservoir of expertise in that area. However, he also recognized the need to beef up staffing in the regulatory area, particularly the securities and exchange commission.

2. THE PROBLEM OF FINANCIAL ABSORPTIVE CAPACITY

The problem of financial absorptive capacity simply seeks to answer the question: can the capital market buy all the shares to be privatized? The total value of the privatization exercise is estimated at N20 billion. To ensure that no shares remain unsold, and that the exercise was conducted an orderly manner a phased implementation ahs been suggested. The phased implementation suggests beginning with very attractive companies, while efforts are made to prepare the sick projects for the market. Such an approach will have the advantage of generating a high level of investor enthusiasm which may provide the initial momentum required for the success of the exercise. Another measure suggested to ensure that the financial market absorbs all the shares to be sold, is by increasing invisible funds in the economy.

This can be achieved by:

1. The creation of units trusts for aggregating pockets of investible funds across the country.
2. Allowing foreigners to participate in the scheme through the proposed debt/equity swap, while employing reasonably adequate controls and monitoring mechanism. The participation of well meaning foreigners in the privatization programme can be facilitated by making suitable amendments to the Nigerian Enterprises promotion Decree of 1977.
3. Equity investments by banks – Now that commercial banks have been allowed to participate in the equity of projects, they could be used to augment the absorptive capacity of the market. In this regard this banks, as the biggest repositories of investible funds in the economy can purchase a significant proportion of the shares on their own discount as well as eying as a warehouse.
4. Arrangements could be made to provide loans to serious investors for the purchase of the shares of the privatized companies. In doing this, preference should be given to workers to purchase shares in their own companies.

3. PROBLEM OF METHOD OF VALUATION (PRICING)

Another argument against privatization is the fear that the method of valuation to be used will undervalue the parastatals. This school of thought has cited the indigenization exercise as a case of point. They believe that shares of the parastatals will be sold at prices which will enable the purchasers to make substantial capital gains. According to them, the poor records of parastatals will result in poor pricing by the securities and exchange commission 9SEC) and the stock exchange.

4. PROBLEM OF STRUCTURAL REORGANIZATION
   

Commercialization unlike privatization may not necessitate the government divesting of its interest but will involve structural reorganization which are aimed at creating a similar profit orientation and competitive climate.

5. PROBLEM OF TRANSPARENCY

Also, transparency should be a major element in privatization programmes. Each affected enterprise must be studied in great detail to ensure the maximum benefit in the divestiture. In the selection of methods of privatization, mass participation should be encouraged through public offers of shares where a stock exchange exist. Quiet selling must be avoided.

PROSPECTS

Privatisation and commercialization study when completed will be advantageous to the national economy, the following are the most obvious:-

1. The programme has relieved the federal government of what was the huge and growing burden of financing the investment needs and operating deficits of public enterprises. Although we have not qualified this, we reckon it would run into billions of naira annually, such funds can be diverted to other deserving areas such as education, health, or hospitals etc.
2. The performance of privatized enterprises so far has meant considerable improvement in the volume of corporate taxes accruing to the national treasuring. Thus not only has the drain on public finance, been removed, it has become a positive bonus, with subsidy soaking deficits – being replaced by tax yielding profits.
3. The programme has greatly minimized the scope of political patronage in the form if board appointments, eluder current phase of the programme, the federal government has relinquished 750 directorship positions in the privatized enterprises.
4. Privatisation has massively expanded personal share ownership in Nigeria. To date, over 2,00.000 shareholders have been created almost twice as many as there were in 1988 when we started. The programme has also demystified the operation of capital market, created a new awareness in the virtues of share holding as a form of savings rather than an elitist past time which it was thought to be and this is good for capital formation and development of this country.
5. By reducing the reliance of public enterprises on the government for finance, the programme of privatization has encourage new investment in the enterprises concerned. The cold hands of treasury control have been replaced by the warm hands of the capital market which are as stimulating as they invisible.
6. The new operational economy autonomy of public enterprises and freedom from interference in day to day management has improved the internal efficiency of these enterprises allowing them to liberalize purchasing and rationalize labour practice and so increase massively their profitability. An improvement in the overall efficiency of the economy has therefore resulted.

—-This article is not complete———–This article is not complete————

This article was extracted from a Project Research Work Topic

“THE REALITIES OF PRIVATIZATION AND COMMERCIALIZATION ON NIGERIAN ECONOMY”

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