The Case For Privatisation and SMEs in Nigeria and Sub-Saharan Africa

In the first five years of this decade, 37 countries in Sub-Saharan Africa together raised more than $11 billion through privatisation programmes. Although the bulk of this corpus was raised in low-value transactions in competitive sectors, the figure puts the region next only to Europe and Latin America in global privatisation trends. While Africa, Ghana and Zambia were among the top contributors, Nigeria takes the undisputed lead. Africa’s third largest economy contributed more than 70% of the $975 million generated between 2004 and 2005, most of it through a single deal involving the disinvestment of a major port operation.

Across Africa, privatisation had become the guiding principle for countries trying to develop dynamic private sectors and expand their economies. Yet, countries continue to face tough challenges in terms of disappointing social indicators, deficient infrastructure and huge productivity shortfalls. Essentially, the continent’s integration into the global economy had been held back by extreme poverty, especially in the Western regions where it continues to vitiate attempts at sustainable development.

Nigeria has managed to lead the pack in aggressive privatisation in Africa based on the realisation that it is the only relevant and economically viable means towards rapid and inclusive growth. Since the return of civilian rule at the end of the last century, Nigeria has also prioritised poverty alleviation based on sound macroeconomic policy interventions. The thrust of its endeavour has been on curbing state expenditure and involvement in direct economic production, mobilisation of resources and promotion of local and foreign investment. However, given its overwhelming dependence on oil exports and the gross mismanagement that marked successive decades of military rule, Nigeria faces a dizzyingly uphill climb.

While its intention for economic reform has never been in question, Nigeria’s track record in handling privatisation deals has been rather chequered. The broad parameters of its initiative drew on past successes elsewhere in the world, from the UK to Russia, and from Europe to the USA and Asia. Nigeria’s formal introduction with the concept came about with the Privatisation and Commercialisation Decree of 1988, an initiative mandated by the IMF-funded Structural Adjustment Programme. In 1999, the Bureau of Public Enterprise (BSE) was set up by federal government enactment to prepare and implement the government’s privatisation policies. Embarrassingly, a number of the first privatisation deals ended in fiasco.

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The government of former president Obasanjo sold off two refineries to a private consortium, but the sale was later overturned by the administration of Late President UM Yar’Adua over allegations of wrongdoing. Subsequent efforts to privatise refineries have had to be stalled because of policy loopholes. Disinvestment of the Nigerian public sector telecom monopoly NITEL ended in disaster when the company suffered huge losses and failed debt obligations, forcing the government to retake control earlier this year. The now defunct national carrier, Nigerian Airways, likewise failed to take off despite several attempts at commercialisation. Besides indicating ineptitude in policy and implementation, these instances, more importantly, serve to highlight the extensive failure of big business in Nigeria.

In the US, small firms with less then 500 employees account for 99.9% of the country’s 24 million business. SMEs in the European Union together provide 65 million jobs or two-thirds of all employment, while 90% of all Latin American businesses are micro-enterprises. Nearer home in Kenya, 2003 figures reveal SMEs contributed 18% of national GDP. Considering global trends in the last several decades, the arguments in favour of SMEs over large enterprises are simply overwhelming. Rapid enterprise development in an atmosphere conducive to private sector growth is the only way Nigeria can hope to achieve it MDG commitments or its indigenous Vision 2020 goals.

The benefits arising out of privatisation are too crucial for Nigeria to ignore in the context of its long-term growth plans:

• Depending on prudent implementation, privatisation can help strengthen capital markets by widening local ownership through reservation of shares for citizens.

• Many governments have successfully reduced national debt by raising money through disinvestment and related instruments, curbing the need for subsidies and tax concessions.

• Privatisation engenders healthy competition that helps expand markets, establishes best practices and improves production and service standards.

• World Bank research confirms substantial performance improvement in private enterprises with the removal of administrative constraints typical of public sector operation.

• Developing countries like India and Brazil with strong commitment to free markets have succeeded in acquiring massive foreign investment by privatising public sector monopolies.

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Foreign direct investment in Africa jumped from less than $1 billion in 1995 to $6.3 billion in 2000. Although this makes for a healthy increase, the flow of investment into Nigeria and the rest of sub-Saharan Africa remains curtailed because of local restrictions. The region lacks competitive markets and consistent regulatory frameworks that provide the right atmosphere for privatisation. Considering its past experiences, it is imperative that Nigeria formulate effective public sector reforms before pushing ahead with any further sale of public assets. Moreover, such measure must be undertaken as part of a larger effort at promoting economic efficiency.

The privatisation of utilities and large public-sector infrastructure tends to throw up even harder challenges. Nigerian lawmakers must be particularly concerned about strengthening institutional mechanisms that regulate market operations. This entails reinforcement of administrative and legal systems, capacity building of implementation agencies and reduction of corruption and political interference. The failed disinvestment of Nigeria’s flagship RORO Port in Lagos is a case in point when it comes to demonstrating the pitfalls in the privatisation process in this corner of the world.

The three separate facilities at the Lagos port that handle an estimated 180,000 tonnes of annual cargo was under private operation for a number of years. The owners showed huge salary expenditure to explain dismal profits averaging just over $40,000 annually, forcing the Nigerian Port Authority to resume control. Within a year and without any further investment, profits had jumped back up to over $1 billion.

Although shocking, such incidents suggesting massive corruption have regularly punctuated Nigeria’s economic recovery. Some estimates go so far as to say that 70 Kobo of every Naira the federal government spends is absorbed by the very bureaucracy that it meant to deliver it. Whatever the direction of its privatisation policies, governance in Nigeria is as much in need of radical reforms as its economy!

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by Peter O Osalor