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.

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.

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.
Share on Google Plus


The publications and/or documents on this website are provided for general information purposes only. Your use of any of these sample documents is subjected to your own decision NB: Join our Social Media Network on Google Plus | Facebook | Twitter | Linkedin