PRIVATIZATION AND FINANCIAL/OPERATING PERFORMANCE OF PRIVATIZED PUBLIC ENTERPRISE IN NIGERIA AN EMPIRICAL ANALYSIS
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PRIVATIZATION
AND FINANCIAL/OPERATING PERFORMANCE OF PRIVATIZED PUBLIC ENTERPRISE IN NIGERIA
AN EMPIRICAL ANALYSIS
ABSTRACT
This study compares the pre-
and post-privatization performances of ten enterprises from five sectors of the
economy that experienced full or partial privatization through public share
offerings during the first phase of the privatization programme in Nigeria. The
study examines whether the financial and operating performance of the
privatized enterprises improved affect divestiture and whether the performance
improvement is attributable to the privatization programme. Wilcoxon signed
rank test was used as the principal method of test for significant change in
profitability, operating efficiency, output, capital investment spending and
dividend payout of the privatized enterprise. The study documented
significant increases in profitability, operating efficiency, output and
dividend payout for our full sample of firms after divestiture. The results of
our sub-sample further revealed that the performance improvements were induced
by privatization. This is evidence in the sale of voting control by government
and the remarkable changes in the composition of the Board of Directors and
Chief Executive Offices of the privatized enterprises. These results, in
comparison with those of previous studies, suggest that privatization yields
significant performance improvements in diverted public enterprises.
TABLE OF CONTENTS
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
Table of
Contents vii
CHAPTER ONE: INTRODUCTION
1.1 background of study 1
1.2 Statement of the problem 6
1.3 purpose of the study 9
1.4 research questions 11
1.5 research hypotheses 12
1.6 significance of the study 13
1.7 scope of study 14
1.8 limitation of the study 15
1.9 definition of terms 16
1.10
organization of the study 18
CHAPTER TWO: LITERATURE REVIEW
2.1 The concept of privatization 19
2.2
definitional issues 19
2.3 objectives of privatization 22
2.4 brief history of public enterprises in
Nigeria 25
2.5 the failure of public enterprises 26
2.6 profiles of privatization in Africa 28
2.7 methods of privatization 29
2.8 the Nigeria privatization programme 30
2.9 privatization and efficiency 32
2.10
privatization and competition 33
2.11
privatization and regulation 34
2.12
principal agency theory 36
2.13 fiscal
theory 37
2.14
privatization experience of other countries 39
2.15 lesson
of experience for Nigeria 40
2.16 arguments
for and against privatization 44
2.17 the
performance of privatized firms results from
Empirical
studies 48
CHAPTER THREE; RESEARCH METHODOLOGY
3.1 Introduction 50
3.2 research design 52
3.3 population of study 54
3.4 sampling procedure and determination of
sampling
size
determination of sample size 55
3.5 data collection methods and testable
predictions 57
3.6 operational measures of the variables 59
3.7 data analysis technique 60
CHAPTER
FOUR: PRESENTATION AND ANALYSIS OF RESULTS
4.1 The
financial and operating performance of privatized
public
enterprises 62
4.2 changes
in the composition of board of directors and
chief
executive offices 63
4.3 changes
in government shareholding in the privatized
enterprises 67
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1 summary
of findings 70
5.2 Conclusion 72
5.3 recommendations
80
Bibliography 88
Appendix 100
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
The
role of government in market economics around the world has changed
dramatically over the past two decades; privatization of Public Enterprises
(PEs) perhaps most strongly associated with Great Britain under Margaret
Thatcher, has become a worldwide phenomenon
Privatization
of State Owned Enterprises (OSEs) or Public Enterprises has been generally
debates and discussion World-Wide. In Nigeria, it continues to evoke strong
feelings among proponents and opponents, leading to a clash of viewpoints on
the concept as the debate and discussion range.
From
the ear of President Shehu Shagari, when in 1981, the Onosode Commission on
Parastatals was set up to study our public enterprises operational problems and
recommend how these can be solved to make them provide efficiently the services
for which they were set up. To this end the commission recommended that
commercially oriented parastatals able to subject themselves to the discipline
of the capital market should be encouraged to borrow money on their own or
issue bonds. It observed that many of the problems which seem internal to
parastatals derive from the realities of the social and political environments
in which they operate and to propose only reforms internal to the parastatals
or in their relation with government, as the answer to the problem of getting
parastatals to satisfy public expectations is simply to ignore significant
variables. Experts interpreted this to mean that the commission recommended
privatization of certain enterprises.\
Not-too
long after, General Buhari took over as the Head of State, appointed a study
group of statutory corporations and the state owned companies to review the
financing, profitability and performance records of public ventures headed by
Ali Alhakim, the managing Director and Chief Executive, Bank of the North.
The
commission submitted its report on November 29, 1984. It identified the major
problems of these enterprises as:
a. Vague and conflicting objectives
b. Inadequate autonomy
c. Inflexibility in decision making process
d. Inappropriate capital structure
e. Underutilization of assets
f. Absence of good credit system etc
It
was in the light of the above that the Federal Military Government embarked on
major reforms of its public enterprises under a programme of privatization and
commercialization.
The
first step in the development of the programme was the establishment of study
groups under the general guidance of the World Bank groups to renew and
classify all public enterprises in Nigeria into the categories of Public
utilizes, Strategic Industries, Economic/Commercial Enterprises and
Departmental/ Statutory Boards.
Enterprises which constitute public utilities and strategic industries were
initially designated for commercialization while economic/commercial
enterprises were slated for privatization.
After
the ousted of Gen. Buhari by Gen. Babangida in a military coup in 1985, Gen.
Babangida issued a charter for prosperous Nigeria. Hence, privatization was not
only an economic, but also a political decision. In fact the Bahangida regime
in its 1986 budget speech put the issue adequately: they (public enterprises)
“have come to constitute an unnecessary high burden on government resources”.
The President was right. According to much quoted statistics released by the
secretary to the then Federal Government, Chief Olu Falae: that between 1980
and 1985 alone, the government invested N23 Billion in its parastatals and
received a paltry return on investment of N933, 701,134. And from subventions
of N11 billion, the government got a repayment of only N67, 959,735 with N26,
124, 463 as interest (Osuji Charles 2001:11).
This
according to Olu Falae led the government to the inevitable conclusion that the
answer lies in privatization. Hence, the promulgation of privatization and
commercialization Decree No. 25 of 1988. This initiated the privatization and
commercialization process.
The
decree established the Technical Committee on Privatization and
Commercialization (TCPC) with the late Dr. Hamza Zayyad as the Chairman. The
period between 1988 and 1993 made up the first phase of the privatization and
commercialization programme. During this period, the TCPC was able to privatize
88 out of the 111 enterprises slated for full or partial privatization.
(Othman, 2003).
On
20th July 1998, the then head of state, Gen. Abdulsalam, Abubaka
Established the National Council on privatization (NCP) with the Bureau of
Public Enterprises (BPE) as the secretariat. The enabling law was the Public
Enterprises (Privatization and Commercialization) Decree No. 28 of 1999 which
late became an Act of Parliament with the enthronement of Democracy in Nigeria
on May 29, 1999. The NCP was headed by the Vice President of the Federal
Republic of Nigeria, Alhaji Atiku Abubaka, while PBE was headed by Mallam Nasir
el Rufai as Director General. The promulgation of the Public Enterprises
(Privatization and Commercialization) Act of 1999 marked the beginning of the
second phase of the privatization programme. The second phase was subdivided
into three: the first phase began in November 1999 to June 2000; the second
phase between June 2000 and December 2000 and the third phase has not been
concluded. In fact the programme is still in a continuous process.
1.2 STATEMENT OF THE PROBLEM
Experience
among many nations of the world shows that most Public Enterprises (PEs) have
failed to meet the objectives for which they were set up. Rather than
contribute to the national economic prosperity, they tend to consume a large
proportion of national resources, thereby becoming economic drain pipes. The
enterprises become a burden to the state.
Against
the background of the economic recession which began around 1981, the Federal
Government began to focus its attention on the activities of the public
enterprises most of which were established on questionable commercial and
financial viability. With the oil boom, no one complained of the wastes and
inefficiencies of the public enterprises. Over the years, many of them
developed into organized monsters that gulped huge national and financial
resources of the government with insignificant returns on investment.
The
government therefore appointed several study groups to examine the operations
of such public enterprises with the view to determining the basis for a new
funding scheme, appropriate capital structure as well as incentive measures to
enhance their productivity and general efficiency. Without exception, such
enterprises were found to be infested with monumental problem ranging from inefficiency
through defective capital structures to outright mismanagement. (Ityokyaa
2007:9)
The
failure of State Owned Enterprises (SOEs) to meet the economic objectives for
which they were set up generated the need for the divestiture of state interest
in these enterprises. Faced with multiple economic problems, the state must
find ways of promoting growth and development with the limited resources at its
disposal. In response to this demand, modern economic resort to finding means
by which resources can be deployed for greater economic prosperity.
It
is usually expected that private sector involvement in the ownership and
management of State Owned Enterprises would help promote economic prosperity
while allowing government to concentrate on governance, create an enabling
environment, and deploy other resources to human development. Experience has
shown that most governments with problematic State Owned Enterprises fail to
allocate these resources efficiently. In Nigeria, one only needs to compare
what the National Electric Power Authority (NEPA) draws from the Federal
Treasury to its level of coverage and inefficiency in providing electricity, to
appreciate this point. Public Enterprises consume about N200 billions of
Natural resources annually, by way of grants, subsides, import duty waivers,
tax exemptions, and the like
In
the words of Othman (2003:2)
Most
government owned industries and business operate at sub-optimal levels of
capacity and are among the most inefficient in the world. (NEPA, NITEL, NPA,
PAPER mills are examples).
No
government business in Nigeria makes true profit today. None has ever made real
profits unless managed by Technical partners (the NITEL, Niger dock and NAFCON
stories are typical examples. The Public Enterprises returned 0.5% profit and
employed about 420,000 people. Without NICON and CBN they would have provided
negative returns. (Othman 2003:3).
1.3 PURPOSE OF THE STUDY
The
major purpose of this study is to compare the pre and post privatization
performance of some selected enterprises from different sectors of the economy
that experience full or partial privatization, through public share offerings
during the first phase of the privatization programme in Nigeria. The study
aims at examining whether the financial and operating performance of these
privatized enterprises improved after divestiture and whether the performance
improvement is attributable to the privatization programme.
The
accepted wisdom in all countries that have undertaken successful privatization
is that in order to create a successful privatization track record and to
acquire sufficient momentum, complex issues need to be resolved and sufficient
experience need to be acquired of first privatization transaction. Among the
complex issues that have to be resolved are:
i. Whether
objective criteria have been established for the purpose of activating the
performance of the privatized and/or commercialized enterprises;
ii. Whether
such criteria have been employed to access the success or failures in terms of
the impact of such reform programme on the performance of the enterprises; and
iii. Whether
the impact (success or failure) as revealed by the criteria is attributable to
the reform progrmme.
To
this end, the study aptly set out to accomplish the following other objectives:
a. To
determine if privatization improves an enterprises profitability.
b. To
determine if privatization improves an enterprises efficiency
c. To
examine the effect of privatization on enterprises capital investment spending.
d. To
examine if privatization improves an enterprises output.
e. And
also to examine if privatization improves an enterprises divided payments.
f. Based
on the above make appropriate recommendations in the area of project
evaluation.
1.4 RESEARCH QUESTIONS
Given
the objectives of this study and the underlying significance, the subject
matter of the study is examined through answers to the following questions.
a. Does privatization improve an enterprise’s
profitability?
b. Does privatization improve an enterprise’s
efficiency?
c. Does
privatization improve an enterprise capital investment spending?
d. Does
privatization improve an enterprise’s output
e. Does
privatization improve an enterprise’s dividend payments?
1.5 RESEARCH HYPOTHESES
There
are two key issues to be evaluated in this project. They are the operating
performance and the financial performance of the affected enterprises before
and after the privatization exercise. To this effect, therefore we have the
following hypotheses:
H01:
There is no significant relationship between privatization and an enterprise’s
profitability.
H02:
There is no significant relationship between privatization and an enterprise’s
operating efficiency.
H03:
Privatization does no significantly improve on enterprise’s capital investment
spending.
H04:
There is no significant relationship between privatization and the output of an
enterprise.
H05:
There is no significant relationship between privatization and an enterprise’s
dividend payments.
1.6 SIGNIFICANCE OF THE STUDY
Privatization
is a global phenomenon which is being taken seriously in recent times by the
Nigeria government. Although many for a and workshops have been held and number
of scholars have published and presented papers on selected issues on the
subject of privatization, this study derives its significance from an attempt
to add to existing literature on the subject and more especially by providing
empirical evidence of the performance of these enterprises before and after
privatization. Further, it makes suggestions that seek to make the government
and the critiques of the programme to amicably sink their differences.
The
study addresses the complex issues that have arisen following the conclusion of
the first phase of the privatization programme in Nigeria. Specially, the study
identifies objectives criteria for assessing the impact of privatization on the
privatized firms, which have been applied and recommended by reform experts.
1.7 SCOPE OF STUDY
The
study is limited to the evaluation of the operating and financial performances
of privatized firms involved in the first phase of the exercise, before and
after the privatization exercise. This is restricted to only about ten
companies about five sectors of the economy.
1.8 LIMITATION OF THE STUDY
The
study was limited by the following constraining factors:
Funding:
The cost of conducting a research of general application is quite enormous and
given the understanding that students usually have lean purse, the research was
limited to the extent of resources which the researcher has to carry out the
investigation.
Respondents Constraints:
This constraint is a major one worth mentioning here as the initial response
rate in disclosing vital information regarding some of the companies delayed
the work and have compelled the researcher to go the Bureau for Public
enterprise (BPE) and the Stock Exchange to obtain some of the information
required. More so, permission has to be sought from the highest authorities in
almost all the firms visited before the necessary data was released.
1.9 DEFINITION OF TERMS
Privatization:
In the Nigeria context, this may be defined (narrowly) as the sale of
government interest in public owned enterprises to the private sector.
Debt/Equity SWAP:
This is a method whereby privately held debts of a government owned enterprises
is converted into equity, thus privatizing the enterprise in the percentage
that the new equity bears to total equity outstanding.
Joint Ventures:
A joint venture in the context of privatization means a new company whose
shares are partially owned by the government and partially owned by private
sector investors.
Leases:
A method whereby a private sector is granted the use of some or all of the
assets of a State Owned Enterprise (SOE) for specified period of time and for
specified fee.
Liquidation:
A method of dissolving and winding up of an entity in accordance with
procedures under insolvency laws or administrative rules.
Management Contracts: A method where the
government enters into a contract with a private sector operator who becomes
responsible for the management of the state owned enterprise for a specified
period of time and for a fee which may be based partially on performance.
Commercialization:
This may be defined as the recognition of the enterprises wholly or partly owned
by the federal government in which such commercialized ventures are allowed to
operate without the subvention from the federal government of Nigeria.
1.10 ORGANIZATION OF THE STUDY
The
study is organized into five chapter wherein chapter one(1) being the
introductory part of the study, deals with the background of the study,
statement of the problem, purpose of study, statement of hypotheses, research
questions and the operational definitions of terms used.
Chapter
two (2) focuses on the review of relevant, related literature to enhance a
better understanding of the theme of the study while chapter three (3) deals
with the methodology employed in the study.
Chapter
four (4) deals with the analysis of data collected as well as testing and
validation of hypotheses formulated in chapter one.
Chapter
five (5) being the final chapter discusses findings of the research and ends
with conclusion and recommendation on the entire research.
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