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AN APPRAISAL OF THE EFFECT OF PRIVATALIZATION AND COMMERCIALIZATION OF GOVERNMENT OWNED INDUSTRIES IN A DEVELOPING ECONOMY

Abstract
The rates of socioeconomic growth in many developing countries (DCs) are too sluggish and in some cases stagnant or dwindling. Many of them decry intractable and daunting national economic problems that ” defy all known economic laws “. The national governments had begun at Independence with state-owned enterprises (SOEs) in their efforts to provide goods and services to the people and to grow the country’s economy. The SOEs soon degenerated into inefficient and monopolistic concerns that tax government attention and treasury. This has necessitated privatization and commercialization, which have become important phenomena in both developed and developing countries. Over the past decade, SOEs have been privatized at an increasing rate, particularly in DCs. This article surveys the literature on privatization and commercialization of SOEs as strategies for stimulating rapid economic growth in DCs. For the countries which have embarked on privatization, the global privatization revenue increased from 17% in 1990 to 22% in 1996. The total sales volume in DCs (US$23.2 billion) was, for the first time, larger than the revenues generated by privatization in industrialized countries (US$17.3 billion) in 1992. The implementation of privatization programmes in DCs has also shown slight improvements in profitability, rising capital expenditure, and insignificant decrease in efficiency and sales output. Privatization plays a multifaceted role with the major aspects of improving the living standards and welfare of the people, and enhancing growth in the economy

INTRODUCTION

Most national governments at Independence begin with state-owned enterprises (SOEs) in their genuine and well-intentioned bid to provide goods and services to the people and to grow the country’s economy. Between her Independence in 1960 and 1999, Nigeria’s SOEs rose to over 1,000, covering a broad spectrum of economic activities to provide goods and services). India, like most other countries, also embarked on the establishment at Independence of statutory corporations and state-owned companies and parastatals. It was only in the 1980s that the Thatcher-led British government embarked on privatization of SOEs (Eneh, 2005; Eneh, 2007 and Encarta, 2005)The SOEs (Eneh, 2005):  soon relapse and sag into inefficient and monopolistic unbusiness-like concerns,  tax government attention that should be channeled to the provision of good governance and regulatory functions, and  gulp huge amounts of public fund in subsidies. Successive Nigerian governments invested up to US$6.25 billion (N800 billion) in public-owned enterprises. Unfortunately, annual returns were well below 10%, despite pronounced inefficiency in their provision of goods and services amidst their monopoly and escalating demand for their services. Factors responsible for these contradictions include (Eneh, 2005): 1. defective capital structure, 2. excessive bureaucratic control or intervention, 3. gross incompetence and ineptitude of staff and managers arising from neglect of merit in favour of mediocrity and nepotism during their employment considerations, and 4. blatant corruption and crippling complacency engendered by monopoly. Consequently, Nigeria lost over US$800 million due to unreliable electric power supply by the state-owned National Electric Power Authority (NEPA), and another US$400 million through inadequate and inefficient fuel distribution by statutory agencies. These few examples of and other losses add to the frustrations and debilitations of the informal sector operating business centres, repair workshops, hairdressing salons, etc. that depend on steady supply of electricity to function. About 80% of SOEs operated at a loss in Nigeria, while none was working at more than 30% of the installed capacity, except those in cement and fertilizer sectors. They were grossly inefficient and unresponsive to the macroeconomic and sector reforms. The gaps inherent in the lapses of SOEs lead to the emergence of voluntary organizations, who seek
3to fill such yawing and widening gaps in the provision of goods and services for the citizenry (Eneh, 2005 and Eneh, 2007). This ugly situation and the attendant retrogress in the socio-economic development obviously call for privatization. Yet, governments associate privatization with uncertainty, believing that it is highly risky. Public officers give only cautious privatization licenses to private agencies, which are usually viewed with skepticism as depleting existing sources of state revenue and undermining government authority and control. Government agencies feel threatened by admitting past ineffectiveness that necessitates privatization to address them. They are equally reluctant to explore the possibilities relating to privatization of services for fear that it will eliminate jobs in the public sector. Those, especially farmers, who depend on government provision of free or highly subsidized farm inputs and services, are reluctant to support privatization. In fact, Mrs. Margaret Thatcher was accused of “selling family silver” for executing privatization programme (Encarta, 2005). During the 1980s the British government, under Mrs. Margaret Thatcher, sold off assets worth about US$43.5 billion, roughly halving the size of the public sector. Other countries have followed: in Europe, in Asia, and more recently in Latin America and the former Communist countries of Eastern Europe. Since 1992, states in the United States of America have been allowed to privatize their infrastructure, and faced with budget problems many may be keen to sell off such investments as the airports and toll roads. Between 1985 and 1992 more than US$300 billion-worth of state assets were sold nationwide. Some African countries have taken tentative steps towards privatizing state assets or at least increasing private sector involvement (Encarta, 2005).
4For many developing countries (DCs) the rate of economic growth is slow, stagnant or dwindling, and the living standards are poor. As the military president of Nigeria, General I.B. Babangida was once quoted in the early 1990s as saying that the nation’s economic problems had defied all economic laws. He certainly was daunted by the economy of the country, which began ailing in the early 1980s, following the global oil-glut of the late 1970s (Todaro, 1989 and Chander, 1985). Since the 1980s, however, privatization has become an integral part of the public policies in many DCs. Through the programmes the governments aim to: 1. enhance efficiency of the SOE sector, 2. decrease budgetary burden on government, and 3. dynamize the capital market. This article surveys the literature on privatization and commercialization of SOEs as strategies for stimulating rapid economic growth in DCs.DEFINITION AND COMPARISON OF THEORETICAL CONCEPTS Privatization has been defined as: “the transfer of ownership of State Owned Enterprises (SOEs) to the private sector by sale (full or partial) of going concerns or by sale of assets following their liquidation” (World Bank, 1990); “the transferring to the private sector of part or the whole of equity or other interests held by the government, directly or indirectly, in a public enterprise” (Privatization Act 1996, Malawi);
5“change of ownership of enterprise from public sector to private sector” (Encarta, 2005); “the selling of state-owned assets to the private sector” (Encarta, 2005). A French sociologist, Andre Delion, used privatization as four types of measures like ownership change, deregulation, liberalism of government policy towards the private sector, and the application of private sector management methods or criteria to the public sector. Politicians and other people equate privatization with commercialization and deregulation or liberalization (Encarta, 2005). Commercialization has been defined as: “the re-organization of specified government departments into enterprises so that they may operate as profit making commercial ventures” (Malawi Privatization Act, 1996). Divestiture sequence plan has been defined as: “a list, as approved by the cabinet, of public enterprises categorized according to the sequence in which the whole or part of their shares will be disposed of over the period of the privatization programme” (Malawi Privatization Act, 1996). The term ‘commercialization’ includes injection of private sector management practice like decentralization or division of organization structure, introduction of incentive plans and balance sheet restructuring. Deregulation or liberalization includes the liberalization of entry into activities previously restricted to the public sector and abolishment of import controls. Liberalization also includes removal of distortions in labour markets, product markets and market development (Cornia, 1987).
6In economic terms privatization remains the transfer of ownership and/or control of the avenues of supply of goods and services from the public sector to the private sector. Thus, privatization excludes commercialization and liberalization, but includes (Van der Hoeven, 1995): 1. the outright or partial sale of assets by the state, 2. the transfer of assets to the private sector under leasing arrangements, and 3. the introduction of management contracting arrangements. While privatization refers to the transfer of ownership from government to the private sector, structural adjustment programmes involve different forms of liberalization measures, such as reduced controls and the removal of all anticompetitive barriers, which changes the market dynamics (Cornia, 1987). The objectives of privatization and commercialization are to (Chapelier, 1989): 1. reduce the government’s administrative and financial burden with respect to providing services; 2. improve the operational efficiency, effectiveness and productivity of public administration of enterprises, and their contribution to the national economy; 3. expand the role of the private sector in the economy, permitting the Government to concentrate public resources on its role as provider of basic public services, including health, education and social infrastructure; 4. increase competition and reduce monopoly; 5. foster increased efficiency in the economy; 6. promote wider participation by the people in the ownership and management of business; and 7. save revenue for government.
7These primary objectives are pursued by (Malawi Privatization Act, 1996):  Transformation of the performance of SOEs through commercialization, restructuring and divestiture; and  Ensuring liquidation of all non-viable SOEs as soon as possible. The divesture must meet the following secondary objectives of privatization (Malawi Privatization Act, 1996): 1. to create a more market-oriented economy; 2. to secure enhanced assess to foreign markets, to capital and to technology; 3. to promote the development of the capital market; and 4. to preserve the goal of self-reliance. Commercialization and restructuring of parastatals are designed such that they ensure the parastatals (Chapelier, 1989):  are responsive to markets, cost-conscious and profit-oriented;  act as business entities without being required to carry out non commercial activities except when explicitly compensated by the Government;  do not encounter political interference in their operations including the banks;  are guided by supervisory agencies to the minimum consistent with pursuit of consumers’ interest;  have boards and managements that are autonomous and accountable; and  have effective performance monitoring systems. Given these objectives, privatization and commercialization programme is expected to:  increase private sector savings and investment (both local and foreign) in all sector of the economy which, in turn, will stimulate sustainable employment opportunities;
8 increase tax collection from business that become more profitable after privatization;  create an environment that will encourage private investment and the emergence of indigenous entrepreneurs; and  improve the quality of delivery of utility and other public services. The methods of privatization include (Chapelier, 1989): Sale of shares: the Government offers its shares (equity) in the enterprise to the public. In most cases the management of the enterprise has stayed the same. The Government may hold on to the “golden shares” as a means of retaining the right to block any major deals, such as takeover by a foreign firm, affecting the newly privatized concern. Regulators might be appointed with powers to rule on price increases and refer the company to appropriate institution should there be any question that it might be operating in ways that be against the public interest. Concession: Government owns the land and most assets. The concessionaire can make capital expenditure and investment with the permission of the Government, which is paid a fee for the right to operate the business. Government reserves the right to cancel the concession where the concessionaire fails to perform. The concessionaire may be allowed to purchase the enterprise at a later date. Sale of assets: Government sells the assets (buildings, vehicles, stock, and fixtures) piece meal. Liquidation and dissolution: When the enterprise exists only on paper and has no value, liquidation is applied to identify the property and assets of the enterprise for realization to pay off its debts and disburse the surplus, if any, among the members of the enterprise in accordance with their entitlement under the articles and memorandum of association. Sale of enterprise: the business is sold as a going concern for the enterprise to continue to operate.
9Management buy out: the existing management buys a controlling share of the business. Management contract/service contract: a team of experts or enterprise is identified to run at a fee the SOE on behalf of the Government. Governments privatize for different reasons, and this explains the methods adopted. Partial privatization is common in African countries. Chile and Mexico implemented full privatization programmes. In many countries, privatization occurred with gradual, staggered sales where excessive stakes of the government ownership are sold mainly because of (1) a limited capital market, and (2) a reputation-building strategy by the selling government in which willingness to retain a minority stake and to bear residual risk signals commitment. Some countries, like Chile, South Korea and Singapore, have resorted to the sale of shares to the general public (public offerings) to spread ownership. Others, such as Malaysia, have sold shares or assets of SOEs mainly to private investors. In some cases, private sales to core investors (particularly in Latin America and in Turkey) or to particular social groups (such as the Bumiputras in Malaysia) have occurred jointly with public offerings of shares. Several African governments have also chosen privatization methods of management contracts, leases, and concessions. The use of management contracts is concentrated in Africa and mainly in the hotel industry. Overall, most governments have employed a broad mix of privatization techniques (Boubakri and Cosset, 1999). Privatization in DCs is usually prescribed by the International Donor agencies, such as the World Bank or the International Monetary Fund, as a prerequisite for development or structural adjustment loans. In Africa, it progresses more slowly than in other DCs, such as Latin America or Asia mainly because African countries are severely inhibited by environmental weaknesses, namely embryonic capital markets, scarce financial resources, weak private sector,
10and poor prudential regulation. The relatively low per capita income and risk aversion, acute asymmetries of information, poor investment incentive structures and general institutional instability are some of the most serious obstacles to the development of securities market and the pursuing of privatization in Africa. Therefore, implementing privatization in the continent presents serious socio-political challenges because it is widely perceived as a euphemism for employment, reduced government spending on social programmes and to the extent that foreign investors participate and make windfall profits, recolonization (Boubakri and Cosset, 1999).

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