IMPACT OF PRIVATIZATION ON BUSINESS DEVELOPMENT IN NIGERIA CASE STUDY OF POWER HOLDING COMPANY OF NIGERIA


Content

ABSTRACT

It has been widely accepted among developing nations that economic development can be accelerated with active industrial sector. In the same vein it is the power and energy sector that drives industrialization. Nigeria, as a typical developing country that is anxious to grow has failed in the provision of domestic energy to her citizenry and industries. In her recent efforts to fulfill this obligation, Nigeria chose to privatize her electricity supply unit in pursuit of greater market efficiency. Unfortunately, the effort has not yielded the desired result. Homes, government establishments and industries have suffered a great deal of power outage. This has questioned the economic rationale behind the pursuit of profit at the expense of very huge loss in welfare.

In this paper, an attempt has been made to estimate the impact of privatizations on business development in Nigerian and to examine the effect privatization has had on the pattern of private sectors and public sectors. Privatization broadens and deepens the power sector resulting from increased listings consumer size. Privatization has also provided opportunity for risk diversification, enhanced professionalism and increased government attention. The implementation of the first and second round privatization has resulted in a tremendous boost to the total power supply, and consumer price index.

This paper posits that; in a primitive undeveloped private sector, utilities such as energy and power cannot be privatized without jeopardizing the development motives of the nation. Standard econometric methods were used to show that the structure of supply of electrical energy is different in the hands of undeveloped private sector and inimical to the overall development of the nation.   In spite of the identified shortcomings, the privatization program has enhanced the development of the Nigerian power sector.

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENT

 

CHAPTER ONE

1.0     Introduction

1.1     Reasons why PHCN should be privatized

1.2     Statement of problem

1.3     Objective of study

1.4     Significance of the study

1.5     Research questions

1.6     Hypothesis 

1.7     Scope of the study

1.8     Definition of terms

 

 

CHAPTER TWO:     LITERATURE REVIEW

2.0     Introduction

2.1     Historical background on restructuring and                  privatization of the power holding sectors in Nigeria

2.2     The concept of privatization

2.3     Evolution of privatization as a means of reform

2.4     Objectives of privatization programme

2.5     Objectives of privatization in Nigeria

2.6     Reason for privatization of power holding company

2.7     Benefits of privatization to the economy

2.8     Problems of privatization to business development

2.9     The role of financial sector on privatization of public               sector in Nigeria economy

2.10   Options for privatization from commercialization

 

 

CHAPTER THREE:       RESEARCH METHODOLOGY AND           METHOD OF DATA COLLECTION

3.1     Introduction

3.2     Research design

3.3     Nature of data collection

3.4     Study population

3.5     Sample size and procedure

3.6     Formation or re-statement of hypothesis

3.7     Instrument of analysis

3.8     Problems encountered on the field

 

 

 

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.0     Introduction

4.1     Presentation of Bio-Data

4.2     Presentation of Research Questions

4.3     Hypothesis Testing:

 

CHAPTER FIVE:  SUMMARY AND CONCLUSION

5.1     Introduction

5.2     Summary of findings

5.3     Limitation of the study

5.4     Suggestion for further studies

5.5     Conclusion

5.6     Recommendation 

References                                        

 

                                         

CHAPTER ONE

INTRODUCTION

 

1.0   BACKGROUND TO THE STUDY

In recent years, privatization of public enterprises has re-occupied policy analyst in search of solution to improve the performance of government owned enterprises and profit maximization from relying on government subvention and vote, several developing countries, including African countries have embarked on extensive privatization as a measure to revive their economy which is a most common programme in capitalist nation, within the framework of macro-economic reform and liberalization.

At the beginning of 1990, few African countries had undertaken some form of privatization, and by 1993 the number had doubled, by the end of 1996 other but five countries had divested some public enterprises.

However, the widespread resort to privatization is formed by severed development, since the beginning of the 1980’s; privatization of public enterprises has become a major policy tool in both developed and developing countries following the apparent successful privatization programme in Britain.

The urge for privatization was further reinforced by the need to reduce government expenditure in the face of burgeoning fiscal deficit and also in conformity with the resurgence of ‘Economic Liberalization’. In this development, the adoption of privatization is a renewed interest in the private sector as the impetus for economic growth despite an impressive level of privatization activity across Africa and compelling evidence from other developed countries and developing countries that privatization is viable and capable of injecting dynamism into previously regulated economy, this evidence indicated that the anticipated benefit of privatization are yet to be felt in African countries. Most study reveals that Africa privatization programmes are narrow in scope, subject to policy reversals and extremely limited impact as measured by any criteria. (Adam 1994, The high expectation of the 1980’s)                

This gives the desirability and even in viability of privatization as a major tool for meaningful and sustainable economic reform. Against this background this study undertakes a comparative analysis of the privatization experience with emphasis on Power Holding Company of Nigeria (PHCN).

Power Holding Company of Nigeria is one of the public enterprises which operate with government approval as monopoly with the aim to maximize their benefit while unintended and undesirable repercussions are minimized. In Nigeria such monopolies are usually confirmed on these enterprises through legislative act ordinance of decrees.      

Public enterprises were established to achieve certain objectives that is rendering service to the people, but the reverse is the case in Nigeria, it has been observed that they were unable to achieve these set objectives because of their non – performance. Despite the non - performance, they still consumed a large proportion of the government expenditure role in the public sector. It is the poor performance coupled with the downturn in the economy of Nigeria that led General Ibrahim Babangida’s regime in 1986 to adopt the Structural Adjustment Programs (SAP).

Since the introduction of SAP in July 1986, various measures have been introduced, some with the aim of gradually deregulating government control in certain section of the Nigerian economy.

On 1st July, 1988, SAP officially came to an end after being implemented for two years. However, the Federal Government of Nigeria promulgated the privatization and commercialization program, which remained one of the key ingredients in Structural Adjustment Programs that has not been implemented accordingly.

The Technical Committee on Privatization and Commercialization (TCPC) was set up in 1988 under Privatization and Commercialization Act.  The TCPC was charged with the following responsibility:

1.       Advising on the capital restructuring needs of enterprises to be privatized on commercialization under this act, in order to ensure a good reception in the Stock Exchange Market (SEM) for those to be privatized as well as to facilitate good management and independence across to the capital market.   

2.       Carrying out all activities required for the successful public issues of shares of the enterprises to be privatized including the appointment of issuing house, stock brokers, solicitors, accountants and other experts to the issue.

3.       Advising the Federal Government, after consulting with the Securities and Exchange Commission (SEC) on the allotment pattern for the sales of shares of the enterprises concerned in accordance with the act.

4.       Overseeing the actual sales of shares of the enterprises concerned by the issuing houses on accordance with the act.

5.       Submitting to the Federal Government for approval from time to time proposal on the sales of government shares in such designated enterprises with a view to ensure a fair price and even spread of the ownership of the shares.          

Originally, some 110 enterprises were agreed for privatization by end of 1991, of these was split into sages and 18 were rescheduled before 1989, when the TCPC was established. This left a total of 92 enterprises to be privatized under the TCPC distinguishing it from partial privatization, however a total of 23 enterprises using profitable activities such as mostly heavy industries, strategic important as Steel, Mills, Cement Industries, Nigeria Airways, Nigeria telecommunication, were slated for partial privatization. Another 67 enterprises using profitable activities such as Hotels, Textiles, Food and Beverages, Banking and Insurance were scheduled for full privatization, meaning that government equity was to be reduced to not more than 40% by March 1992; TCPC has privatized 40 parastatals, adding the pre TCPC.

In September 2001, National Council of privatization came up with three set of motion process which involves a logical sequence of side by side policy formulation, legal and regulatory framework designed to strengthen the sector, restructuring and liberalization which will lead to the actual privatization transaction.          

1.2   STATEMENT OF PROBLEM:

In spite of the huge investment in public enterprises in Nigeria, their services could not meet the demand aspiration of the populace.

In fact the report of the Onosode Presidential Commission on public enterprises (1984) reveals that most of the public enterprises were affected with some problems which are related to:

1.           Defection capital structure resulting in heavy dependence burden on national treasure.

2.           Mismanagement of funds and operations.

3.           Misuse of monopoly of power culminating in corruption.

4.           Bureaucratic bottleneck within public enterprises.  

These problems according to the Commission (1984) resulted in an all - conceived investment, political interference in public enterprises, decision making processes and inefficient use of scarce resources, growing budgetary burden, demanding of 10% in budget approval by the Executive and diversion of credit and other resources meant for the operation of this sectors.

Against this background and the impact of the economic crisis of the 1980 in Nigeria, the country’s harsh micro - economic environment become unaccommodating to the prolonged inefficiencies of this sector. Hence there is need to privatize Public enterprises suffer from fundamental problem of defective capital structure excessive bureaucratic control of intervention, impropriate technology, gross incompetence, mis-use of business organic function, wrong decision making, corruption and crippling complacence with monopoly engenders, these shortcomings takes a heavy toll on the national economy. It was estimated that the nation may have lost about 800 million US Dollars due to unreliable electricity circulation by PHCN.

1.3  OBJECTIVE OF STUDY

The public sector does not have a basic responsibility to maximize profit. However, they operate below cost irrespective of the amount of resources committed to their establishment. The private enterprise on the other hand are more profit oriented, i. e. maximize profit for its shareholders.

The need to privatize is to reduce government heavy expenditure without equal revenue with the aim highlighted below:

1.               To determine whether privatization have actually achieved its aim in Nigeria Most especially in area of efficiency, effectiveness and profitability.

2.               Government interference and bureaucracy that lead to inefficiency be eradicated.

3.               Truly, to determine the extent of favor on what privatization will do to our economy.

4.               To put in shape the socio-economic political program with the overall objective of achieving economic expenditure such that budget deficits should not exceed 3-4% of the GDP. It could therefore allow Government to shed off part its various expenditure items and provide a concrete base for the attainment of its goals.

1.4    SIGNIFICANCE OF THE STUDY:

Moreover, privatization is part of the process of Structural Adjustment Program introduced during the Babangida regime disengaging the State from those activities which are best done by the private sector with the overall objective of achieving economic efficiency; it is first and foremost a political process, although it has to carry out as an economic exercise.

Professional policy makers and economic planners alike, tend to hold the view that, the privatization policy (guided / unguided) can yield substantial benefits in terms of greater efficiency, renewed investment, budgetary savings and the reservation of scarce resources for the improvement of public finance (Obadan & Ayodele 1998). Thus, the economic rationale for this policy in Nigeria derives broadly from three main considerations, which touch on the nature and structure of the precarious financial and monetary conditions in the country. The first macro economics in nature, centre on the need for the restoration of fiscal balance in the light of the inflationary impact of the country’s excessive budget deficits of which public enterprises constituted a major part, in fact the SAP has place a rein on government.

1.5    RESEARCH QUESTIONS

Ø    Is privatization of a national interest?

Ø    Why insisting on privatization of national utility (PHCN); 

Ø    Is privatization a lasting solution?

Ø    Reasons for privatizing utility like PHCN;

Ø    Are the assets viable enough for privatization?

Ø    The cost and benefits expected from privatization option;

1.6    RESEARCH HYPOTHESES

HO:     Privatization of government enterprises do not lead to efficiency and profitability

H1:     Privatization of government enterprises will lead to efficiency and profitability    

HO:     Privatization does not make the cost of utilities higher for customers/users.

H1:  Privatization makes the cost of utilities higher for customers/users.

HO:  Privatization does not lead to accountability and transparency.

H1:  Privatization leads to accountability and transparency.

HO:     Privatization of enterprises is not sensible to purse, its cost outweigh its benefit.

H1:     Privatization of enterprises is sensible to purse, its cost outweigh its benefit.

1.7    SCOPE OF THE STUDY

Enterprises that are to be oriented and within industrial, commercial and service, established either fully or partially owned by the Federal Government for full privatization, complete divestment and ownership of such controlled enterprises shall lease selling 100% equity ownership to the privatize sector that include individuals.

For partial privatization, art of the shares would be sold holding on a part of it’s equity enterprises or parastatals in these categories are  public oriented services e.g. Bans, Rolling Mills, Media Houses, Oil Marketing Companies. Subvention to these enterprises will cease due to the fact that the capital market will have to be approaches by such enterprise to meet its financial requirements though government could still legislate through representation of Board Members.

While in full commercialization enterprises, equity is retained by government excluding subvention while some parastatals and enterprises are allowed to charge economic tariffs for their products. Enterprises in this categories are NNPC, NITEL probity must be given to their balance sheet, rising capital for capital market on the basis of quality of operations, partial commercialization occurs where government realizes such sectors need support in terms of operation cost and future investment and also the nature of such goods. Such categories are PHCN, NRC and NTA.

1.8    DEFINITION OF TERMS

Privatisation:  Selling or transferring of ownership and control of asset of public sector to private sector for better economic results.

Federal Government: A central unit that control affairs of a nation.

State Government: Another centralized unit that control with local boundary to identify territorial jurisdiction.     

Equity: Share(s) holding in an enterprise. 

Effectiveness: Ways of performing a task rightly. 

Efficiency: Act of performing a task at the right time.

EFCC: Economic and Financial Crime Commission.

ICPC: Independent Corrupt practice Commission.

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