In attempting a definition of
Privatization and Commercialization, it is necessary to distinguish between two
basic concepts, that is, Public ownership and Public management. Production facilities
may be owned entirely by the public sector or entirely by the private sector or
jointly by both sectors. Where it is owned entirely by the public, management
can still be provided by the private sector. It is unusual for the private
sector to own an Enterprise while the public sector holds the management. When
the ownership is with the public sector, it is often vital for efficient
operations to separate it from the management even if both are in the public
domain[1].
Many Public Sector Enterprises are
operated without due regard to costs or returns. While it is admittedly
difficult to measure the returns on the outlays of public safety, for the
production of most goods and services, it is easy to gauge whether the outlays
are justified and to what extent they are justified by the returns on the
investment. Not all such investments is expected to yield immediate returns as
some of the benefits are social rather than private in character, that is, they
accrue to society as a whole rather than exclusively to individuals[2].
Often, however, where the benefits can be appropriated exclusively by
individuals, it is usually recommended that the enterprise be operated on
commercial lines; that is, that the yardstick to measure success must include
the return on the investment. It means that the production methods must be more
efficient and that the prices charged should, at least cover the cost of the
production. Thus Commercialization is quite different from Privatization but it
represents an important part of the reform of Public Sector Enterprises. The
word Privatization is a concept as well as a process. This aspect will be
considered appropriately in the course of this work.
STRATEGIC
INVESTORS/CORE GROUPS OF PRIVATIZATION AND COMMERCIALIZATION IN NIGERIA
Core investors or strategic investors
can be described as formidable and experienced groups with the capabilities for
adding value to an Enterprise and making it operate profitably in the face of
international competition. They should possess the capabilities of turning
around the fortune of such an Enterprise, if by the time of their investments,
the Enterprise is unhealthy. The major characteristics that distinguish
strategic/core group investors are:
-
They must possess the technical know-how in
relation to the activities of the Enterprise they wish to invest in. For
example, a core investor in a cement company must have access to cement
production expertise with regard to optimal use of the machinery, maintenance
of such machinery and other technical aspects of cement production such as
procurement of raw materials, e.t.c.
-
The core investors must also possess the
financial muscle not only to pay competitive price for the Enterprises they
wish to buy into, but also to turn around its fortune using their own resources
without relying on the government for funds. Each core/strategic investor is
expected to prepare a short/medium/long-term plan for the development of the
Enterprise and indicate how it will be financed.
-
The core investor must have the management know-how
to run a business profitably in a competitive environment.
However,
in consonance with s.4 of the privatization act, Privatized Enterprise which
requires participation by strategic investors may be managed by the strategic
investors as from the effective date of privatization on such terms and
conditions as may be agreed upon. Although the law requires the National
Council on Privatization to encourage staff participation in the Privatization
of any Enterprise, with 1% of the shares to be offered to Nigerians being
reserved for this purpose, and to prohibit any individual shareholder from
owning more than 0.1% of the privatized Enterprise. When there is an
over-subscription for the shares on offer, it remains fair to suggest that the
motive of wider shareholder is secondary to that of attracting a suitable core
investor. It is the core investor, and not the mass of small shareholders that
satisfy the reasons for privatization, that is, reviving the financial base of
the enterprise and reorganizing the administration of the company.
A core
investor is interested in individuals and the enhanced value of his
shareholding. He therefore takes a more proactive role in realizing this. The
core investor will typically buy a majority or a significant percentage of the
equity of the target company in order to secure either control or significant
voice in the company. His objective is to influence the way in which the
company is run. The choice of which company to invest in is usually based on
the belief that the target company has potentials that can be unlocked by the
application of particular qualities, typical funds from new capital, particular
management skill and access to market that the core investor has access to.
Thus, a core investor takes on a much more interventionist role than a small
investor does. In so doing he merges the role of the shareholder with that of
management; he wears two hats3.
DEFINITION OF TERMS
Under
this heading, we are going to be considering the meaning of certain terms that
are related to the subject matter. The word Privatization can be considered as
a concept as well as a process. As a concept, it is not only emotive but
controversial. As a process, the methods adopted vary from sector to sector,
country to country and in Nigeria, from one place to another. It also has a
narrow and broad meaning. Yet at another level, it can mean the Privatization
of a sector or the entire economy. Sometimes the level of irreversibility of
the Privatization transaction is critical in determining its classification. As
a concept, it is the process of transferring ownership and sometimes control of
a business, an enterprise, an agency, a Sector or Public Enterprise from the
public sector to the private sector. Some transfers will involve the
introduction of private entry, often by the abolition of monopolies or barriers
to entry and the introduction of competition. In a narrow sense, Privatization
implies permanent transfer of control from the public sector to the private
sector. Broadly, Privatization involves all forms of Public Private Partnership
[PPP] where measures are adopted for the transfer from the public sector to the
private sector of activities exercised until then by a public authority. It is
in this broad category that we have sub-contracting, management contracts,
lease and concessions. As a process, Privatization describes the sequencing of
transactions and the methods of sale. For example, how do you determine the
Public Enterprise or Sector to be privatized? Secondly, how do you determine
the strategy to be adopted in privatizing a Public Enterprise? Thirdly, how do
you attract investors; local or international? Fourthly, how do you determine whether
it is full or partial Privatization? Fifthly, how do you carry out full
diligence on the Enterprise? Sixthly, who and how will the transaction
documents [advertisement for expression of interest, information memorandum,
non-disclosure agreement, Request for proposal, asset sale agreement,
concession agreement and management contract] be prepared? Seventhly, who is
the approving authority and what administrative structure will you create?
According to the provisions of S.14 of the Privatization and Commercialization
Act, Cap 369, Laws of the federation of Nigeria, 1990, now repealed,
Commercialization means the reorganization of Enterprises wholly or partly
owned by the Federal Government in which such Commercialized Enterprises shall
operate as profit-making commercial ventures and without subventions from the
Federal Government. Although the Act did not define Commercialization, S.8 of
the Act provides thus: Notwithstanding the provision of any other enactment and
without prejudice to the generality of S.6 of this Act, a Commercialized
Enterprise shall operate as a purely commercial Enterprise and may subject to
the Government of the federation
-
Fix the rates, prices and charges for goods
and services it provides;
-
Capitalize its assets;
-
Borrow money and issue debenture stocks; and
-
Sue and be sued in its cooperate name.
It is clear, therefore, that when a Public
Enterprise is fully commercialized, the expectation is that it should operate
as a purely commercial Enterprise without subventions from the Federal
Government.
Privatization
is simply defined as the transfer of ownership of production and control of
enterprises from the public to the private sector. While in S.14 of the Act,
Privatization is defined as the relinquishment of part or all of the equity and
other interests held by the Federal Government or its agency in enterprises
whether wholly or partly owned by the Federal Government. Unfortunately, there
is no definition of the word privatization in the Public Enterprise
(Privatization and Commercialization) Act, Cap p38. LFN, 2004. See also Amina
Tukar Othman. Privatization in Nigeria [Kaduna: Tahalim limited, 2003] PI S.83
of the Public Enterprises Act[3]
defines Public Enterprise as:
-
Any commission, board, agency, committee,
organization or Authority established for any state or states under the
constitution or any decree, Edict or any other enactment.
-
Any
company or Enterprise in which Government of the Federation, State, Local
Government or its agency owns controlling interest including a bank or other
financial institutions, under decree No 18 of 1994 as Amended, the banks and
other financial institutions decree 1991 [BOFID] and the Nigeria Deposit
insurance corporation decree, 1986 [NDIC].
Also
S.33 of the Act[4] Defines
a Public Enterprise as any corporation, board, company or parastatal
established by or under any enactment in which the Government of the
Federation, a ministry or extra ministerial department or agency has ownership
or equity interest and includes a partnership, joint venture or any other form
of business arrangement or organization for ease of exposition.
A
glance at the opening words of this section; that is, ‘’any Commission, Board,
Agency, Committee, Organization or Authority’’, one seems to gather that all
conceivable business production units capable of being owned by the government
will be involved. But this is not so. There are two questionable limitations in
the definition above. The first is that of the Act[5].
The
second problem in the definition above lies in the exclusion from the meaning
of Public Enterprises, Banks, and Financial Institutions, under Act No.18 of
1994 as Amended, The BOFID and the NDIC decree of 1998. It does not appear to
me that there is any good reason, both in law and in good conscience, to
justify this exclusion. It creates the impression that the government must have
CONTROLLING INTEREST in a company or Enterprise before it is called a Public
Enterprise. Even in most popular Public Enterprises, what Government owns is
40% equity interest in Nigeria. For instance the Federal Government had only
10% equity interest in Nigeria Cement
Company Limited Nkalagu[6]
[NIGERCEM] and still the Company was a Public Enterprise. I rather think that
Government need not have up to 40% controlling interest in a company for it to
be a Public Enterprise.
It
would appear that my observation above is in order when we realize that S.34 of
the Public Enterprise [Privatization and commercialization] Act, Cap 38 LFN,
2004 has excluded these two questionable ingredients from the definition of
Public Enterprises. The section provides that:- “Public Enterprises or
parastatals established by or under any enactment in which the Government of
the Federation, a Ministry or Extra ministerial Agency has ownership or EQUITY
INTEREST and includes a partnership, joint venture or any other form of
business arrangement or organization”.
This
definition seems to have identified the short comings of the previous ones
discussed and have taken care of them. For instance, it simply highlights that what
Government needs to do is to have an equity share in an Enterprise for that
Enterprise to be public. It carefully avoided any measurement in the
Enterprise. This gives Government an opportunity to earn just how much or how
many shares it wants in a Public Enterprise.
In the
second Nigerian Economic summit of 1995, Privatization was defined as a term
used to describe a variety of policies, which are designed to transfer fully or
partially, ownership and control of Public Enterprises to the private sector to
encourage competition and emphasis the role of market forces in place of
statutory restrictions and monopoly of powers. On the other hand, the summit
defined Commercialization as the reorganization of enterprise whole or
partially owned by Government to ensure that such enterprises operate as profit
making commercial ventures without subventions from Government.
Privatization
can also be defined as any of a variety of measures adopted by government to
expose a Public Enterprise to competition or to be in private ownership or
control or management into a Public Enterprise and accordingly to reduce the
usual weight of public ownership or control or management. However, in a strict
sense, Privatization means the transfer of ownership (and all the incidence of
ownership, including management) of a Public Enterprise to private investors.
The latter meaning has the advantage of helping one to draw a line between
Privatization and other varieties of Public Enterprise reform.
Starr
(1998) defines Privatization, as a shift from the public to the private sector,
not shift from within sectors. He further stated that the conversion of a state
agency into an autonomous public authority or state owned enterprise is not
Privatization, neither is the conversion of a private non-profit organization
into profit-making form.
Ogunde
(2002) defines Privatization as the state policy whereby state owned companies
are sold out to private individuals. Critically he added, “it is a process
whereby collectively owned properties are auctioned out to “money bags” who
naturally are the ones that can afford effectively the cost of such ventures”.
It is
important to note that Privatization or Commercialization of an enterprise
might be partial or full. Where:
-
Full Privatization means divestment by the
Federal Government of all its ordinary shareholding in the designated
enterprise.
-
Partial Privatization means divestment by the
Federal Government of part of its ordinary shareholding in the designated
Enterprise.
-
Full Commercialization means that Enterprises
so designated will be expected to operate profitably on a commercial basis and
be able to raise funds from the capital market without Government guarantee.
Such Enterprises are expected to use private sector procedures in the running of
their business.
-
Partial Commercialization means that such
Enterprises so designated will be expected to generate enough revenue to cover
their operating expenditure. The Government may consider giving them capital
grants to finance their capital projects.
In both
full and partial Commercialization, no divestment of the Federal Government
shareholding will be involved.
[1]
Pius okigbo; op. cit. at p.35
[2]
Thus, public health and sanitation measures yield benefits to the community
generally.
[3]
Cap 38 LFN, 2004.
[4] No
35 of 1996.
[5]
5.836 of the Public Enterprise Act No 35, 1996
[6] 1st
schedule, Public Enterprises [Privatization and Commercialization] Act Cap 38
LFN, 2004.