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THE EFFECTS OF PRIVATIZATION OF PUBLIC ENTERPRISES IN NIGERIA

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ABSTRACT

The research work titled, “The Effects of Privatization on Public Enterprises in
Nigeria,” has revealed that over two decades old privatization of public enterprises in
Nigeria [since 1988] had significant positive effects on the economy and the polity in the
first place; but the effects could not withstand the unforgiving global economic meltdown
that swept across the globe especially in the year 2008 and 2009. The study shows that
the gains made initially were reduced to insignificance and the social cost of living was
raised as a result of the high record of failed businesses. Only a few the privatized state
owned companies significantly withstood the financial crisis and such companies were
those that provided unavoidable physiological needs such as food for feeding, fuel for
transportation and cement for the provision of shelter of which the demand for them is
inelastic. Areas of investment that were secondary to human existence suffered failure,
depreciating in value rather than showing value appreciation. With the hurricane of the
financial crises, most companies took to the option of acquisition or mergers and adopted
the public private partnership option for sustainability. The study considered the
parameters of visible trade, the rate of exchange of the naira to the dollar, the market
value of stocks, the quality of products and the rate of unemployment as yardsticks for
assessment. The scope of the study is for the five year period from 2006 to 2010 – a
period when most of the listed public enterprises were privatized and within which the
global economic meltdown became very obviously. The study concludes by
recommending fanatic discipline, productive paranoia and empirical creativity as the
antidote for withstanding the uncertainties that lie in the way of businesses. The work
depended largely on secondary data generated by the Central Bank of Nigeria (CBN), the
National Bureau of Statistics and some National Dailies; but not without a primary
interaction with stakeholders with respect to privatization – the economic policy that
became the in-thing the world over since the 1980s.

CHAPTER ONE

INTRODUCTION

1.0 Background to the Study
The optimal performance of economies of nations or states and their organized endeavours is
the desire of all conscious, conscientious and disciplined governments; and the leadership of the
organizations. Governments throughout the world face mounting demands on scarce public
resources. At the same time, the pressures of international competition mean that they want
efficient enterprises, capable of competing directly with, or delivering cost‐effective services to,
others.
In developing countries growing populations, and the need to provide an attractive environment
for business, require improved infrastructure. In developed countries there is a continuing
demand for higher standards in the provision of services, whether healthcare, electricity and
telecommunications or transport, and whether provided to the public or to businesses.
Yet everywhere Governments are under pressure to keep control of public finances. The
disparity between the demands on the public purse and the resources available to meet them is
leading Governments to look at how infrastructure can be developed, services provided, and
enterprise modernized in partnership with the private sector.
Governments of nations or states and leaders of organizations must seek to create enabling
environments that will engage all scarce resources including available human, material supplies
and capital inputs for the best possible results at all times so that nations and organizations will
not only survive but thrive.
Without the conscious engagement of the available resources, nations and their organizations
may suffer the disease of decline and eventually fall no matter how big they may be. Collins
(2009:2) captures this succinctly, “History shows, repeatedly, that the mighty can fall. The
Egyptian Old Kingdom, the Minoans of Crete, the Chou Dynasty, the Hittite Empire, the Mayan
Civilization – all fell. Athens fell. Rome fell. Even Britain, which stood a century before as a global
superpower, saw its position erode…”
In a world of scarce resources, there is nothing like institutional self‐perpetuation. Therefore,
real leaders seek to prevent, detect, or reverse decline of their nations and organizations. Great
leaders work hard to terminate institutional mediocrity or seek to transform mediocrity into
excellence (Collins, 2009:111).
To ensure that they thrive and not only survive, all countries initiate, formulate or adopt and
implement policies (economic policies in particular) that will ensure the best engagements of all
the factors of production at all times.
Hence, all nations do switch from one less desirable to the most result oriented economic policy
within a given period. Acknowledging the need for policy switches from time to time, Obasanjo (1999) at the inauguration of the National Council on Privatization observed that “… there was a
time when it was sound economic policy for Government to establish and invest in statutory
corporations and state owned companies. Then, socialism existed side by side with capitalism. It
was argued that public owned companies were better for stimulating and accelerating national
economic development than private capital. The result was a proliferation of such state‐owned
enterprises covering a broad spectrum of economic activities, from steel plants and petrochemicals,
through banks and hotels, to, as transit and abattoirs!”
Addressing the audience at a workshop on the Power Industry in 1996, the then head of state,
General Sani Abacha acknowledged the limitations of the country in coping with the provision of
services in the face of limited resources, “In view of our limited resources and competing
demands, it would seem that the best option available to us is…privatization…” The then Head
of State had with reference to electricity generation observed “The enormous responsibility of
generating, transmitting and distributing electricity throughout our country rests solely with the
National Electric Power Authority (NEPA), which is finding it increasingly difficult to cope. Power
outages have become disturbingly frequent in all parts of the country. Power generation and
supply have, like other social services in our country, been adversely affected by the decline in
our national income over the past decade. Existing lines and transformers have become
overloaded forcing NEPA to resort to load‐shedding in many areas to avoid blow‐outs and
damage to its expensive facilities.”
Public enterprises were however fashionable at one time and the reasons adduced as the
justification for creating public enterprises have been advanced by Nwoye (2006) as follows:
i. The first of these, especially in the context of developing countries is the development
emphasis. In many developing countries, the resources available to the private sector are not adequate for the provision of certain goods and services. For example, the investments
required in the construction of a hydroelectricity‐generating plant or a water scheme for a
large urban center are quite enormous and the returns on such investments will take a very
long time to realize.
ii. Secondly, political considerations influence governmental involvement in the provision of
certain social and economic services. In many African countries, development is closely
associated with the provision of social services; consequently, the performance of the
government, in many of these countries, is evaluated on the basis of its ability to provide
different types of public services in areas where such services do not exist.
iii. The third reason for governmental intervention in the provision and management of goods
and services in many parts of the world is the fact that no person should be permanently
deprived of the access to such facilities because of lack of finances or by reason of
geographical location.
iv. A fourth reason relates to the need to protect the consumer, which may not be of interest
to the private sector. For example, government intervenes in the provision of education in
many countries to protect children, who are not capable of making important decisions for
themselves, by making education up to a certain age compulsory and free.
v. The fifth reason for governmental intervention in the provision of certain goods and services
relates to the indivisibility that characterizes such services. Some facilities, such as bridges,
tunnels, roads, streetlights, and waste disposal facilities, cannot be divided or partially
provided. Either streetlights are provided for the benefit of everybody in the community or
they are not. Facilities of this type must therefore be provided publicly and financed through
taxation.
vi. The sixth reason for governmental intervention is the consciousness of the national security.
Certain facilities, like the National Ports Authority and the police, are too vital to be left at
the mercy of private citizens.
The evolution of public sector enterprises often takes one of two forms. First, they
could evolve from local calls or responses to an ad-hoc economic crisis, a specific
shortage, flagrant abuse of monopoly or oligopoly powers by private producers,
economic bottlenecks and scarcities, apparent market failures in resource allocation,
etc. It is economic crises that create socioeconomic conditions that justify public
intervention. Alternatively, the evolution can take the process of a carefully planned
body of ideas involving the issues of management, financial control, and/or pricing.
In most situations, the primary interests of the society such as “welfarism” are
predetermined and postulated. These two processes have characterized the evolution
of public sector enterprises in Nigeria, which dates back to the pre-colonial era.
However, no sooner had it been discovered that government’s direct involvement in
business is predominantly characterized by inefficiencies. A World Bank Study on Nigeria
reported that, “ (10 – 50) percent of equipment /machinery budget is spent on provision of
infrastructure, i.e. electricity, freight transportation, personnel transportation, water.
Barriers to participation of private sector should be removed i.e. Electricity, Water,
Telecommunication, Lease Laws, excessive political involvement in management issues.”
The report criticized the view that “government should handle all urban activities despite
the obvious weaknesses of public sector institutions in terms of (a) adequate budget (b)
lower remuneration of employees (c) poor management practices.”
Sachs (2005:254), observes that there are many odds against the governments as an
investor in business oriented ventures:
Experience has shown that private entrepreneurs do as much better job of running
businesses than governments. When governments run businesses, they tend to do so for
political rather than economic reasons. State enterprises tend to overstaff their
operations, since jobs equal votes for politicians, and layoffs can cost a politician the
next election. State‐owned banks tend to make loans for political reasons, rather than on
the basis of expected returns. Factories are likely to be built in the districts of powerful
politicians, not where they can best serve the broader population. Moreover,
governments rarely have the in‐house expertise to manage complex technologies, and
they shouldn’t, aside from sectors where government’s role is central, such as in defense,
infrastructure, health, and education.
The World Bank in a report “World Development Report” of 1983 cited in Nyagba
(1996) listed the following factors as responsible for poor performance of non privatized
government organizations:
1. Political influence
2. Bad siting
3. Ministerial interference
4. Board composition
5. Absence of clear policy
6. Confused planning philosophy
7. Manipulated contracts
8. Internal power tussle
9. Corruption
10. Manpower policy
11. Motivation policy
12. Defective structure
Sachs suggests that governments should support the private sector with investible capital
if the country is poor but leave business to the private hands while creating an enabling
environment for the businesses to perform at their best.
Hence, many nations deregulated to involve the private enterprises in the management of
business-oriented ventures that were hitherto run by the public sectors. Indeed, Nyagba
(1996) noted that “It is therefore not surprising that between 1988 and 1993, privatization
recorded 2655 transaction in 19 countries. The revenue yield of the transaction was put
at $271 billion. “
Historically, running the economies and enterprises of nations used to be the responsibility of
the private sectors. A paradigm shift to the ownership of property by the governments was
based on the philosophy of James Harrington (1611 – 1677) propagated that “Power Follows
Property” (cited in Drucker, 1999:58). The work of Harrington, the Father of the English political
philosophy laid down in his book Oceania grew the likes of Locke, Hume, Burke, and The
Federalist Papers. It was the shift in property from the great nobles to the country squires, he
argued that explained the English Revolution of the 1640s, the overthrow of absolute government and its replacement by the parliamentary government of the new property owners,
the local gentry.
Privatization is not an entirely new concept. According to Wikipedia, the history of privatization
dates back to Ancient Greece, when governments contracted out almost everything to the
private sector. The Roman Republic was also know for allowing the private individuals and
companies to perform the majority of services including tax collection (tax farming), army
supplies (military contractors), religious sacrifices and construction. However, the Roman
Empire also created state‐owned‐enterprises—for example, much of the grain was eventually
produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy
was one of the reasons for the fall of the Roman Empire.
Perhaps one of the first ideological movements towards privatization came during China’s
golden age of the Han Dynasty. Taoism came into prominence for the first time at a state level,
and it advocated the laissez‐faire principle of Wu Wei, literally meaning “do nothing”. The rulers
were counseled by the Taoist clergy that a strong ruler was virtually invisible.
During the Renaissance, most of Europe was still by and large following the feudal economic
model. By contrast, the Ming dynasty in China began once more to practice privatization,
especially with regards to their manufacturing industries. This was a reversal of the earlier Song
Dynasty policies, which had themselves overturned earlier policies in favor of more rigorous
state control.
In Britain, the privatization of common lands was referred to as enclosure (in Scotland as the
Lowland Clearance and the Highland Clearance). Significant privatizations of this nature
occurred from 1760 to 1820, coincident with the industrial revolution in that country.
For the transport sector, Professor Peter Turnbull has identified three historical phases in
the provision of transport since the industrial world. The first phase covers the period
when transport providers were private companies but their activities were subject to
various controls imposed by the public authorities (1769 – 1918). The second phase
covers the period when transport provision was increasingly brought under public control
(1918 – 1970) and the third phase is the return to private hands under the banner of
privatization and deregulation (1970- date) and of course we can add the fourth phase
which aims at controlling some aspects that were freed for the free market to determine.
In more recent times, Winston Churchill’s government privatized the British steel industry in the
1950s, and West Germany’s government embarked on large‐scale privatization, including selling
its majority stake in Volkswagen to small investors in a public share offering in 1961.
However, it was in the 1980s under the leaderships of Margaret Thatcher in the UK and Ronald
Reagan in the USA, that privatization gained worldwide momentum.
Deregulation of the transport sector became the predominant policy the worlds over in
the 1970s but it is on record that the transport sector showed ad hoc signs of deregulation
much earlier. In 1954, the Australian Government deregulated its road freight transport.

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