The issue of privatization has been a subject of intense global debate in recent years. In Africa, it has remained highly controversial and politically risky. Privatization in Nigeria has not been a popular reform. It has received so much criticism from labor, academia, and individuals. There have been numerous strikes against proposed sell-offs by unions fearing loss of jobs. While proponents of privatization see that aspect of economic reform as an instrument of efficient resource management for rapid economic development and poverty reduction, the critics argue that privatization inflicts damage on the poor through loss of employment, reduction in income, and reduced access to basic social services or increases in prices. Whatever are the views of the two parties, the only group that has no voice in the matter is the poor. The author is of the view that privatization is not inherently good or bad, but the poor performance or effectiveness depends on implementation (Nightingale and Pindus, 1997).
This paper draws extensively from the empirical research by the author, Management Practices and Performance Determinants of Public and Private Sector Enterprises in Anambra, Edo and Delta States of Nigeria: A Factor Analysis (Nwoye, 1997). Comparing the effectiveness of public versus private service delivery, the analysis shows no clear evidence that private service delivery is inherently more effective or less effective than public service delivery but rather that each sector has its own strengths and weaknesses.
The paper provides a general overview of the extent, effect, and consequences of privatization of public enterprises in Nigeria in terms of opinions held within various schools of thought. The paper is not intended in any way to be a panacea in the treatment of the overall subject of privatization; rather, it is a review of support or apprehension specifically relating to the issues of employment, income, social services, and economic welfare including prices.
The concept of privatization in recent times evokes sharp political reactions from many angles. Privatization can be defined as the transfer of ownership and control of enterprise from the state to the private sector. Various groups have also defined it differently. The Privatization and Commercialization Act of 1988 and the Bureau of Public Enterprises Act of 1993 defined privatization as the relinquishment of part or all of the equity and other interests held by the Federal Government or any of its agencies, in enterprises whether wholly or partly owned by the Federal Government. But, however privatization is defined, it transfers ownership of production and control of enterprises from the public to the private sector. It is an ideological concept.
Justification for Establishment of Public Enterprises
Many reasons have been adduced as the justification for creating public enterprises. Following are six important ones:
The first of these, especially in the context of developing countries such as Nigeria, 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.
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.
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.
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.
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.
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 precolonial era.
A Brief Historical Perspective on Development of Public Enterprises in Nigeria
The private sector was the traditional structure of the world’s economies. The Nigerian economy is largely private-sector based. The public sector emerged in Nigeria as a result of the need to harness rationally the scarce resources to produce goods and services for economic improvement, as well as for promotion of the welfare of the citizens. The involvement of the public sector in Nigeria became significant during the period after independence.
The railways were probably the first major example of public sector enterprises in Nigeria. At first, conceived mainly in terms of colonial strategic and administrative needs, they quickly acquired the dimension of a welcomed economic utility for transporting the goods of international commerce, like cocoa, groundnut, and palm kernels. Given the structural nature of the colonial private ownership and control of the railways in the metropolitan countries, it would hardly be expected that the Nigerian Railways Corporation could have been started as any other project than as a public sector enterprise for such mass transportation.
The colonial administration was the nucleus of necessary economic and social infrastructural facilities that private enterprise could not provide. Facilities included railways, roads, bridges, electricity, ports and harbors, waterworks, and telecommunication. Social services like education and health were still substantially left in the related hands of the Christian Mission. But even at this initial stage government itself moved positively into some of the direct productive sectors of the economy: the stone quarry at Aro, the colliery at Udi, and the saw mill and furniture factory at Ijora. Those were the early stages.
The emergence of the crude oil industry into the Nigerian economy, after the civil war in the 1970s, with the associated boom intensified governmental involvement in production and in control of the Nigerian economy. One major aim of government at that time was to convert as much as possible of the growing oil revenue into social, physical, and economic infrastructural investments. The Nigerian Enterprises Promotion Decree of 1972, which took effect on 1 April, 1974, with its subsequent amendment in 1976, provided a concrete basis for government’s extensive participation in the ownership and management of enterprises. Given these developments, public enterprises at the federal level had exceeded 100 in number by 1985; and these had spread over agriculture, energy, mining, banking, insurance, manufacturing, transport, commerce, and other service activities. Before long, the range of Nigerian public enterprises had stretched from farm organizations to manufacturing, from municipal transport to mining, from housing to multipurpose power, and from trading to banking and insurance. At the state and local governmental levels, the range of activities that had attracted public sector investment also had become quite large. Thus, a variety of enterprises - with public interest in terms of majority equity participation or fully-owned by state and local government as well as other governmental entities - became visible in various parts of Nigeria. Between 1975 and 1995, it was estimated that the Federal Government of Nigeria had invested more than $100 billion in public enterprises.
Problems of the Economy in the 1980s
The 1980s witnessed steady economic deterioration and seemingly faulty economic policies. At the beginning of the 1980s, the country had entered difficult times. Scarcity of foreign exchange had set in. By the mid-1980s, reality had dawned on the nation’s economy. Retrenchment of workers was rampant in both private and public sectors. There were inflation, very high levels of unemployment affecting both skilled and unskilled workers, and low levels of plant capacity utilization. The origin of the socioeconomic difficulties was generally traced to the global economic recession which opened with the decade of the 1980s. Earlier, these socioeconomic problems had forced the Federal Government, under President Shehu Shagari, to embark on an economic stabilization program (Aboyade, 1974).
The problems of performance of the public sector enterprises in Nigeria were further complicated by the downturn in socioeconomic development in the country due to the global economic recession and the collapse of the oil market. Thus, Nigeria’s precarious fiscal and monetary posture could no longer sustain the requirements of its public sector enterprises, particularly since they performed below expectations in terms of their returns on investments and quality of services. Towards the end of 1980s, the public enterprises, which had grown too large, began to suffer from fundamental problems of defective capital structures, excessive bureaucratic control and intervention, inappropriate technologies, gross incompetence, and blatant corruption. With the deep internal crises that included high rates of inflation and unemployment, external debt obligations, and foreign exchange misalignment, Nigeria and many other African countries were strongly advised by the worldwide lending agencies, particularly IMF and the World Bank, to divest their public enterprises as one of the conditions for economic assistance. With the intensified push for economic liberalization, Nigerian and other African leaders were told that privatization as an economic reform would help cut public sector inefficiency and waste, provide greater scope to the private sector, attract more investments, bring in new technologies, and hence revive economic growth. Thus many countries, including Nigeria, embarked on privatization and other market oriented reforms to pull them out of the structural imbalances (Nwoye, 1997).
It is against this background that the Structural Adjustment Programmes (SAP) proposed a kind of reform which would affect the goals, administration, and management of most of the public sector enterprises for purposes of efficiency (Federal Republic of Nigeria, 1986). One of the main objectives of SAP was, therefore, to pursue deregulation and privatization leading to removal of subsidies, reduction in wage expenses, and retrenchment in the public sector ostensibly to trim the state down to size.
Under the reformation scheme, public sector enterprises were expected to be classified into three broad categories:
1. fully privatized or partially privatized,
2. fully commercialized or partially commercialized, or
3. retained as public sector institutions.
Whereas SAP has shown the broad categories under which the public sector enterprises can be grouped, it has failed to actually classify the existing enterprises into specific categories.
Privatization in Nigeria
Privatization in Nigeria was formally introduced by the Privatization and Commercialization Act of 1988, which later set up the Technical Committee on Privatization and Commercialization (TCPC) chaired by Dr. Hamza Zayyad with a mandate to privatize 111 public enterprises and commercialize 34 others. In 1993, having privatized 88 out of the 111 enterprises listed in the decree, the TCPC concluded its assignment and submitted a final report. Based on the recommendation of the TCPC, the Federal Military Government promulgated the Bureau for Public Enterprises Act of 1993, which repealed the 1988 Act and set up the Bureau for Public Enterprises (BPE) to implement the privatization program in Nigeria. In 1999, the Federal Government enacted the Public Enterprise (Privatization and Commercialization) Act, which created the National Council on Privatization chaired by the Vice President, Alhaji Atiku Abubakar. The functions of the council include:
making policies on privatization and commercialization;
determining the modalities for privatization and advising the government accordingly;
determining the timing of privatization for particular enterprises;
approving the prices for shares and the appointment of privatization advisers;
ensuring that commercialized public enterprises are managed in accordance with sound commercial principles and prudent financial practices; and
interfacing between the public enterprises and the supervising ministries in order to ensure effective monitoring and safeguarding of the managerial autonomy of the public enterprises.
The 1999 Act also established the Bureau of Public Enterprises (BPE) as the secretariat of the National Council on Privatization. The functions of the bureau include among others to do the following:
implement the council’s policies on privatization and commercialization;
prepare public enterprises approved by the council for privatization and commercialization;
advise the council on capital restructuring needs of enterprises to be privatized;
ensure financial discipline and accountability of commercialized enterprises;
make recommendations to the council in the appointment of consultants, advisers, investment bankers, issuing houses, stockbrokers, solicitors, trustees, accountants, and other professionals required for the purpose of either privatization or commercialization; and
ensure the success of privatization and commercialization implementation through monitoring and evaluation.
The subsequent exercise brought with it controversies that are still raging on. Western countries, and in particular IMF and the World Bank, have been blamed for forcing the privatization of public services and natural resources in Africa as a condition for development assistance (Nwoye, 1995). They are accused of telling impoverished countries to turn their public services over to private owners and to sell off their oil, gas, mining, electric, telecommunication, transport, and water companies, which are also said to be conditions for debt relief. Many African countries are neck deep in debt and begging for debt forgiveness. It is said that Nigeria has a debt burden of $32.3 billion, where servicing is estimated to gulp as much as $2.91 billion in 2003.
Bias against Privatization
Given the fact that the initial impetus for privatization in Africa came from creditor institutions, especially the IMF and the World Bank, as part of the push for structural adjustment, many believed that there must be a hidden agenda in the form of economic exploitation. It is principally the conditionality that was attached to privatization vis-à-vis debt relief and financial assistance that provoked resentment from the public view, especially labor, which views privatization as creditors’ initiative. As in some of the other African countries, resentment is intensified because a good number of the larger enterprises being privatized are bought over by foreign interests.
Several of the arguments against privatization are as follows:
Rising Prices - Opponents fear that the private sector will exploit consumers where there is monopoly or oligopoly power such as by raising the prices of goods.
Creating Poverty - At the heart of the criticism of privatization is the perception that it has not been fair - hurting the poor and the vulnerable work force, while benefiting the rich, the powerful, and the privileged - thereby perpetrating poverty.
Breaking of Unions - Workers dismissed as a result of privatization have great difficulty finding other work; the large number of people out of jobs is forced to accept jobs with lower pay, less security, and fewer benefits. They, therefore, believe that the aims of privatization are to reduce labor costs and numbers, and to break union power.
- There is this argument that even if privatization contributes to improved efficiency and financial performance, it has a negative effect on the distribution of wealth perhaps arising from corruption. Corruption is the single most destructive factor responsible for the pitiable state of affairs in many developing countries. It distorts the economy through waste and misallocation of resources and creates need for external assistance. Transparency International has for a long time decried the evil consequences of corruption and has identified acute corruption in many developing countries. For example, in 1997
, its Annual Corruption Index rated Nigeria as the most corrupt country on earth, followed by Pakistan and Kenya. By 1998, the index moved and Cameroon displaced Nigeria as number one.
Some misguided Nigerians have argued thus “…after all, corruption is everywhere, including industrialized countries.” It is true that corruption is a worldwide phenomenon, and so are industrial development and technological advancement. Why is it then that when industrialized countries are pushing for technological invention, African countries are busy expanding only the frontiers of corruption and poverty-prone ventures?
Public Enterprises Should Stay - There is this strong belief that privatization is not necessary. Public enterprises need not run at a loss; all they require is good managers, less political interference, competent boards of directors, and especially more rational pricing policies.
Injustice - There is an assertion that it is the politicians and bureaucrats that caused the public enterprises to perform poorly but only labor is asked to carry the burden of reform. Critics view this as injustice.
Exploitation by Capitalist Countries - Privatization is seen as an imposition by foreign capitalists and agencies like the IMF and the World Bank; therefore, privatization must be meant to exploit the developing countries.
Privatization Is Foreign - Some critics have argued that privatization is neo-colonialism since the policy is being pushed by International Monetary Fund, World Bank, and their agencies. It is not an indigenous idea; therefore, it will not work.
Labor’s Demands for Job Protection -Right from the onset, the most publicly persistent and organized opposition of privatization in Nigeria has come from the labor movement. There always have been strikes and counterstrikes against any decision to privatize a government agency. Sometimes workers have succeeded in blocking or slowing down the privatization of specific enterprises. In other cases the government simply has brushed aside the labor opposition leaving a legacy of anger and political tension. What is obvious is that workers are reacting against threatened jobs or the possibility that benefits might be jeopardized under new management.
Perhaps it may be likely that it is the continued pressure from World Bank to get the reform process moving and to keep it on track that causes some of these humanitarian issues somehow to be brushed aside. These indictments are not a rarity. The fears about privatization are not only Nigerian-made apprehensions. Worldwide, proponents of labor have been the most vigorous and persistent. Critics of privatization are consistently portraying its negative effects on income distribution and worker welfare. Not enough is yet known empirically about the impact of privatization in Nigeria to form definitive judgments; the current statements on the issue still lie between propositions and conclusions.
Objectives of Privatization
It is possible that some of these popular and critical perceptions and assertions about privatization are accurate. There is no doubt that mistakes have been made in the past and that promises have not been kept, for instance the incidence of interference from political office holders. However, it may turn out to be a mistake to judge privatization from a limited perspective. The set of objectives privatization programs are meant to achieve is broad and involved; it has many fundamental components that can act together for the enhancement of microeconomic efficiency. There are, indeed, some critical long run objectives to be achieved through privatization including the following:
- increasing productive efficiency;
strengthening the role of the private sector in the economy, which will guarantee employment and higher capacity utilization;
improving the financial health of public services with savings from suspended subsidies;
freeing more resources for allocation to other needy areas of governmental activities (for example, finances that would have been applied for subsidies should now be channeled to the development of rural communities); and
reducing corruption because interference by politicians will cease.
Invariably, a privatization program ought to be judged and assessed by the extent to which the stated objectives have been met. Furthermore privatization could take a slow but steady developmental speed.
Agenda for a Successful Privatization Exercise
Capturing the Confidence of Labor
Government should endeavor to win over labor’s acceptance of privatization by giving them ownership of shares in the enterprises. Workers could be allocated a percentage of the shareholding at a special discounted price.
There is need for good follow up on privatized enterprises. There is need to keep a record of accurate figures on pre- and post-privatization employment levels including statistics to show whether employment is declining or increasing to calm the fear of labor unions. Other statistics should include how much of capable and qualified labor will be absorbed by the buyers, etc.
Labor on the other hand must also realize that many of the jobs also might have been lost anyway by retrenchment, since government could not keep subsidizing crises-ridden public enterprises indefinitely; the only exercise that could be guaranteed is constant layoff. Other than privatization, any serious attempt to address the deficiencies and losses of public sector enterprises must necessarily involve downsizing.
Inclusion of Labor
Interaction with the unions as stakeholders is often a good strategy. One of the major mistakes that is common in privatization in Africa is taking the workers for granted. When the unions are not involved in the organized process, it may be difficult to gain their cooperation. The stakeholders must be sensitized to the impending constraints that privatization is likely to bring about, especially in the short run.
Monitoring of Privatization Processes
Some countries have created strong semi-autonomous privatization commissions with participation from government, business, and other sectors. Nigeria can create such a commission consisting of governmental representative(s) - possibly the BPE, labor union representative(s), and representatives of Chambers of Commerce - to be involved in the monitoring and implementation processes.
Transparency and Accountability
One of the most important issues in privatization is the concern for transparency and accountability. The Nigerian nation is characterized by distrust and suspicion. Suspicions of corruption that follow privatization deals require that separate auditing and House of Assembly Oversight Committees be established to help in the monitoring process. Transparency creates a perception of honesty and accountability. The funds realized from sale of public enterprises can be invested in tangible public interests like services of education and health. Some developing countries apply their proceeds towards debt repayments. It is my considered opinion that money realized from sale of public enterprises and saved through withdrawal of subsidies should be invested in the hinterland for provision of infrastructure. This will not only enhance development, but also will check the drift of rural-urban migration, especially among the youth, since the cities are getting overpopulated while the rural areas are quickly deteriorating.
Consistency and Credibility
I learned sometime ago that consistency plus credibility equals economic confidence. There is no doubt that the public always desires an unbroken record of credibility to win their confidence in any structural reform program. The key to credibility is consistency and communication. Whenever government lacks credibility, people refuse to change, until the confrontation that ensues imposes unavoidable cost on the warring parties at the expense of the economy.
It is quite instructive to note that successful structural reform cannot be recorded unless:
1. the government trusts, respects, and, most importantly, informs the public adequately, every step of the way, as to why certain actions are being taken
2. privatization is done properly with no special concessions or privileges when selling public enterprises; and
3. the creditor countries consider Nigeria’s specific circumstances while mounting pressure on the speed of the privatization exercise because ours is a low-income country characterized by poverty.
The Bottom Line
The concluding point is that if privatization is carried out with sincerity of purpose, almost every group will come out ahead as a result of divestiture. Workers will be shareholders. Consumers will be better off because of better services. New graduates and the unemployed will get jobs because of expansion. Government will be relieved of the burden of subsidies. Investors will gain investment opportunities. Ultimately, the public (both foreigners and nationals) will be free to pursue any private economic interest.
Given the enormity of the socioeconomic problems facing Nigeria, there is every reason to worry about the state of our plans and actions. The issues involved, from development of infrastructure through production of vegetables, all have serious ramifications, not only for the public sector but also for the economy as a whole.
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About the author:
May Ifeoma Nwoye, Ph.D., (Nigeria), obtained her BBA (Accounting) from George Washington University, USA, MBPA (Finance) from SouthEastern University, Wasington DC, and Ph.D (Management), University of Benin, Nigeria. She is Certified National Accountant of Nigeria (CNA), and a member, Nigerian Institute of Management. She is a Nigerian female writer. Her doctoral dissertation research was related to the Public and Private sector enterprises in Nigeria. She is the author of a number of books and many scholarly articles on entrepreneurship and management in many local and international journals.
E-mail : email@example.com