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

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Tuesday, March 17, 2020 06:00PM / State Owned Enterprises Department of The Nigerian Stock Exchange (NSE) / Header Image Credit: Thisday


 

Privatization of Government Owned Enterprises has become an important instrument for the revitalization and optimization whilst also improving the overall efficiency of public sector entities. Privatisation has also served as a catalyst for promoting sustainable economic growth all over the world due to the benefits it provides which includes, improved government revenues, improved efficiency, reduced government interference and risk transfer from the government to the private sector among others. Nigeria's privatization program had been one of the most successful in the Sub-Sahara Africa as it meets the objective of enhancing economic efficiency by improving firm performances, decreased government intervention and increment in revenue.


 

Privatization's Special Children


A good example of the success recorded over the years is the privatization of telecommunications in Nigeria, an act that has not only made the Nigerian telecommunications sector one of the biggest in Africa, contributing up to 11.39% to Nigeria's GDP in Q2 2019 but has also catalyzed improvements in the banking and E-commerce sectors. 

 

Another privatization success story is that of The Nigerian Aviation Handling Company (NAHCO). The Federal Government's 60% ownership of NAHCO was hitherto vested in the Federal Airports Authority of Nigerian (FAAN) while some foreign airlines owned the remaining 40%. Since its privatization in 2005, operational performance of NAHCO has improved greatly; for instance, in 2003 and 2004, total flights handled by NAHCO was 7,782 and 9,967 respectively. 

 

In 2005, 9,586 were handled which post privatization grew by 34% to 12,879 in 2006 and further increased to 16,564 in 2007 representing a 29% growth.  Growth was also seen in trading profits with the company recording ₦1.5Billion in 2010. The remarkable improvement in operational performance, revenues and profitability justified the privatization of NAHCO by the Federal Government of Nigeria.

 

In spite of good intentions by government, the public sector faces challenges in its capacity to directly operate profitable, efficient, innovative and customer-centric enterprises across varied industries. For instance, state ownership limits the ability of an enterprise to invest or source for required funding from alternative sources as the government typically underwrites its loans and advances which become somewhat indistinguishable in the governments funding structure. Entities also have to contend with the numerous needs vying for government funding, often taking the back seat to macroeconomic issues of seeming higher priority.


 

The Politics of Inefficiency- Shuffling A Deck of Cards


Political influence on state-owned enterprises also has a negative impact on efficiency. The hiring process can have other considerations with merit taking a backseat for hiring based on political considerations which can lead to elevated staff count and bloated staff costs, ultimately impacting negatively on the company's bottom line.

 

The private sector on the other hand, with a keen focus on profitability leverages optimum process management and efficiency. It simply puts the interest and survival of the entity above any other objective which is reflected in management decisions.  This naturally leads to a higher level of efficiency resulting in better customer service, allocation of resources, research and development of new and improved products and services to meet customers' needs all aimed to foster growth and increase profitability.  Managers in the private sector know that losses cannot be passed on and therefore, tend to make better decisions.

 

As good as privatization is, it must however be done in a structured and transparent way with the controlling shares sold to the private sector in order to attain the full realization of the benefits associated with privatization.  A number of methods can be applied to privatization of entities such as Core investor sales, Concession and divestment to the investing public through a Public Offer. The choice of a suitable method depends on the desired outcome and the nature of the entities. Some of the methods that can be applied to privatization of the Government entities are described below:


 

Privatization via Public Offer - A Game of Crowns


This is one of the most desirable approaches as it not only divests the government equity in these entities and allows private owners to have controlling shares, but also allays the fear of concentrated ownership by broadening the investor base.  In so doing, ownership of privatized entities is more democratic and better able to represent a broad section of the population. In this process, shares of these enterprises can be bought during the initial public offering (IPO) and subsequently traded on the Nigerian Stock Exchange, making the process transparent and easily accessible. 

 

By using this method, the government will cleverly shift large areas of public concern to where they will be subjected to economic discipline, efficiency, accountability, and competition. This will result in not only the enhanced profitability of these entities but also ensure continuous growth & sustainability, improved governance and visibility.


 

Deferred Public Offer- Another Road To Travel


This method is better suited to public enterprises that do not meet the listing requirements of the Exchange or require extensive work to become market ready. With a positive future outlook, they can be first privatized by private placement with a clause to make them public after a predetermined period or once certain conditions have been met.

 

This provides an opportunity for private investors to bring them up to profitability, after which listing them on the Exchange will promote sustainability. Currently, majority of State Owned Enterprises fall under this category and Deferred Public Offering approach may be best suitable to improve their viability to investible funds for revitalization and to further stimulate the economy rather than leaving them at their current state of underperformance.


 

Core Investor Asset Sale 


Simply put, this occurs when government decides to cede 100% ownership holdings on such entities to the private sector.


 

Concession- Bringing Private Capital, Saving Public Money


This is the temporary transfer of public resources, utility or other assets from the government to the private sector to develop, operate and manage for a specified period of time. In typical concessions, the concessionaire (private sector) is obligated to pay a fixed amount or percentage of revenues as agreed in the contract to the government for the concession. Concessions are an effective method for the privatization of public assets without the government loosing permanent control of those assets as ownership automatically falls back to the government after the contract elapses.

 

Summarily, privatization has an effect in shifting the Governments focus from immediate political goals to long-term economic goals, which leads to development of the domestic economy. Having noted that many developing countries require restructuring of their SOEs in order to improve efficiency, which can be achieved through privatization.

 

It is also important that the Nigerian capital market is involved in all structural reforms especially those relating to public private partnerships and privatization. This is because the market helps to provide right-sized capital, encourage investment culture and create investment liquidity. This will go a long way in further strengthening the capital market and attract more foreign investment thereby boosting the economy and ultimately fostering fundamental economic growth.

 

Ultimately, the government should look beyond the immediate revenue gain from privatization, and privatize entities that will open up the real sector of the economy and make individual businesses profitable and sustainable. This move will also free up government resources and cause a focus on its primary role of creating an enabling environment to support economic growth. Furthermore, the spillover effect of privatization will unwittingly develop all sectors of the economy which can also be attributed to government's efforts.

 

 

Proshare Nigeria Pvt. Ltd.



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