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Impact of Privatization on Nigeria's Economy

Nigeria Economy	1945 VIEWS
Nigeria Economy
1945 VIEWS

Friday, April 24, 2020 / 06:00PM / State Owned Enterprises Department of The Nigerian Stock Exchange (NSE) / Header Image Credit: Wikipedia

At her earlier stage of development, Nigeria was characterized by a strong government presence which resulted in the establishment of about 600 public enterprises solely owned by the government. These public enterprises influenced various sectors of the economy chief of which was providing infrastructural facilities to enhance the overall welfare of the society.

The United Nations Development Programme (1990), noted that despite the huge sums spent by various governments on these state owned enterprises, their performance fell far below expectations. The problems of public enterprises are multidimensional and according to World Bank's Human Development Report of 1983, these problems include poorly planned investments; political influence in decision-making; costly and inefficient application of public funds; increasing budgetary burden; over-extension of government managerial capacity; and diversion of credit and other resources from the private sector.

In 1986, the inefficiency of state owned enterprises became the launching pad of a global programme - Structural Adjustment Programme (SAP) with the main objective of ensuring efficient and effective resource allocation and utilization in Nigeria. Privatization was then adopted to achieve this objective and formed an integral part of the SAP. Further, the Privatization and Commercialization Act of 1988, formally 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.

During the first phase of the privatization exercise which lasted from July 1988 till June 1993, about 88 government-owned enterprises were either fully or partially privatized jointly with foreign or private Nigerian investors. However, for basic industries with large capital requirements such as vehicle assembly plants, paper and steel mills and sugar and fertilizer companies, privatization proved challenging due to the financial insolvency and negative net assets of these entities. This first phase of the privatization programme had an absolutely positive outcome and succeeded in providing relief for government in financing public enterprises.

Furthermore, the Nigerian capital market was deepened and broadened by the large body of shareholders created as a result. An example is the Flourmills Nigeria Plc public offer price of N0.80 and market price of N0.61 as at 23^rd January 1989 which grew to a market price of N21.25 as at 31^st March 2020. The equity market capitalization of the Nigerian Stock Exchange (NSE) through which the shares were sold grew from N8.9 billion in 1987 to N65.5 billion in 1994 (after Phase-I) and N11.39 trillion as at the end of March 2020. The catalytic effect of the volume of shares released into the market via the privatization exercise cannot be overemphasized.

In 1999, under the Bureau for Public Enterprises (BPE), the second phase of the privatization programme kicked off with 97 enterprises slated for privatization. From December 1999 to date, additional enterprises have been privatized either through core investor sale or concession. This added a large volume of shares to the capital market whilst at the same time, the Federal government realized Significant revenues from the sales. These enterprises include Transnational Corporation of Nigeria (Transcorp), Power Holding Company of Nigeria (PHCN), Nigerian Telecommunication Company (NITEL), Nigeria Newsprint Manufacturing Company Limited, Abuja International Hotel (Le Meridien), National Clearing and Forwarding Agency, Stallion House, NICON Hilton Hotel and Eleme Petrochemicals Company Limited among others.

A positive effect of privatization in Nigeria is the increase in the number of companies listed on the Nigerian Stock Exchange (NSE) by privatizing through public offering and the attendant increments in public participation in capital market activities. It is important to note that the Capital Market plays a significant role and serves as a facilitator and stimulant for socioeconomic growth and development through the mobilization of long-term funds. So far, the privatized enterprises in Nigeria have been able to achieve the desired objectives of increased efficiency and productivity and this is reflected in the appreciated market prices in the now public companies.

Some other examples include; Okomu Oil Palm which was privatized and listed on the NSE in 1991 and has since grown to become Nigeria's leading oil palm company with a current share price of N68 and a market capitalization of over N52.51 Billion as at 31^st March 2020. The re-establishment of the Bureau for Public Enterprises (BPE) in 1999 led to the privatization of Benue Cement Company along with 24 other companies by the then Abdulsalam Abubakar regime. Consequently, the Federal Governments majority shares in the company were sold in April 2000 with the emergence of Dangote Industries Limited as the core investor in the Company. By 2006, the annual turnover of the company skyrocketed to a sum of N6.02billion from N391 million in 2003 indicating a giant stride. From a mere N5.00 at the end of the first quarter of 2006, the market price of the stock appreciated to about N55.00 in April 2007.

On the revenue side, privatization of Government Owned Businesses helped to create additional liquidity for the Government thereby facilitating debt reduction. Other direct and indirect benefits include; financing new expenditures, increasing the scope of investments in infrastructure and further improved tax revenues driven by the collections from the privatized businesses. For example, in the first phase of the privatization exercise in March 1991, over N200 billion was remitted to the Treasury, the proceeds which had by far exceeded initial expectations. Also, over N552 billion from the sales of public enterprises were realized in the third phase between 1999 to 2007.

With the positive impact highlighted above on privatization through public offering, it is possible in the long run to envisage the emergence of Nigeria as one of the attractive depots for investment given the Governments' continued efforts towards privatization of the state owned entities. Furthermore, privatization through public offering mays serve as a credible initiative that can be used to address the well-established infrastructure gap whilst ensuring good governance and democratized ownership within Nigeria.

Previous Article from the State Owned Enterprises Department of the NSE

1. Can Privatization of Government Owned Enterprises be Instrumental to the Economy's Sustainability?