Promoting Privatisation, Deregulation, and Liberalisation by Dr. Ngozi Okonjo-Iweala

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Yesterday…
Dr Ngozi Okonjo-Iweala, former Managing Director of the World Bank Group and Nigeria’s Coordinating Minister of the Economy and Minister of Finance wrote about Nigeria being one of the most volatile economies of the world and highly undiversified.

Although successful macroeconomic stabilisation was necessary to restore economic growth, it was not sufficient.

To get to the 7 percent per year growth rate targeted in NEEDS and sustain it, we needed to complement macroeconomic stabilisation with a set of micro economic reforms designed to change the direction and structure of the economy and lay the basis for longer-term growth.

We focused on sectors and areas that our analysis showed were large drains on public finances or were blocking private-sector activity and in which economic activity tended to be marred by corruption and the role of the state was a hindrance rather than a help to economic growth.

We targeted deregulation and liberalisation of the telecommunications sector, the downstream petroleum sector, and the power sector; privatisation of hundreds of public-sector enterprises; reform of the civil service; reform of the trade, tariff, and customs regime; and restructuring and consolidation of the banking sector.

Liberalising important sectors of the economy and privatizing public enterprises

Between 1973 and 1999, the Federal Government of Nigeria invested the equivalent of about US$100 billion in 590 public enterprises, 160 of them commercial, in virtually every sector of the economy, from petroleum refineries to flour mills, from telephone and electric power companies to radio stations, from oil palm plantations to car assembly plants. By the early 1980s, with oil revenues dwindling, the financial burden of maintaining these enterprises had become overwhelming.

The fiscal unsustainability of the public enterprises was an indication of broader problems. Often they were not only poorly managed but were also hotbeds of corruption, resulting in severe inefficiencies in operation and poor service delivery.

State-owned enterprises depended predominantly on financial support from the government, which came through several direct and indirect means.

These included direct subventions from the budget for workers’ payments, annual grants awarded for capital accumulation, discounted loans, guaranteed third-party loans to enterprises, import duty waivers, exemptions from taxes applicable to comparable private companies, and monopoly privileges.

But there were further drains on the Treasury, in the form of their very low rates of return – O.5 percent, on average – forgone taxes on profits, mismanagement of assets, and bad debts. Between 1992 and 1999, public enterprises consumed an average US$3 billion per year in direct and indirect subsidies, the Bureau of Public Enterprises estimated.

Nigeria was not the only country that created state-owned enterprises. In the 1960s and the 1970s, many of the newly independent African countries did the same. In those years, the view of the role of the state was vastly different.

There was a much more interventionist ideology that saw the state not just as an enabler or a regulator of private enterprise but as a producer of goods and services.

First, the government was seen as the primary driver of economic development, and it was expected to provide critical infrastructure and services such as power, transportation, and telecommunications at affordable prices to support economic activity in the economy.

Second, given the relative weakness of the existing private sector after independence and the limited private capital available for investments, the government also participated actively in other sectors, including manufacturing, finance, and hospitality.

Government spending and investment were expected to produce multiplier effects in various sectors of the economy. Third, against the backdrop of nationalism, the government wanted to encourage indigenous enterprises in the place or absence of those run by the colonial powers.

Fourth, by promoting local production of goods and services, the government sought to reduce imports, in line with the prevailing import-substitution theory of the time.

The government proved to be a bad manager of businesses, however, and a poor and inefficient deliverer of basic services.

Most public enterprises were persistently in a precarious financial position, generating significant debts and losses. Often unable to pay workers’ salaries, they also had huge pension liabilities – more than a trillion naira (US$8.3 million) in 2003.

Moreover, the enterprises suffered from a great deal of political interference in the running of their affairs. More than 5,000 board seats were said to have been created, conferring enormous patronage powers on political leaders. Board members often saw themselves not as responsible for overseeing the organisations for the benefit of the Nigerian public, but as beneficiaries of financial payback for their political contributions.

Management decisions became infected with personal and political agendas costly to the economy. Four examples of poor performance and poor service delivery illustrate this state of affairs.

Electric Power

NEPA, the Nigerian Electric Power Authority – also said in Nigeria to stand for Never Expect Power Always – was a giant public utility responsible for generating, transmitting, and distributing electricity. It consistently delivered one of the lowest levels of average per capita electricity production in the world.

In 1999, when President Obasanjo took office, a review of the sector showed that no new plants had been built and no major overhauls of existing plants had taken place for a decade, that only 19 of 79 generating units were in operation, and that no transmission lines had been built since 1987.

One-fourth of the average start-up cost for a business was for private power generation, and virtually all Nigerian manufacturing firms and small and medium size enterprises had back-up generators.!

Telecommunications

The Nigerian Telecommunications company (NITEL), a 50-year-old government telecommunications monopoly, had been able to provide only 450,000 land lines to Nigerians by 1999, when President Obasanjo first opened the sector for licensing of new mobile providers. NITEL’s mobile telephony arm, MTEL, has never been able to compete.

Oil and Gas

At the center of Nigeria’s complex oil and gas sector is Nigeria’s giant petroleum company, the Nigerian National Petroleum Corporation, which controls both the upstream sector (that is, exploration and production) and the downstream sector (including four refineries that scarcely function despite repeated investments in turn-around maintenance). Because of the country’s moribund refineries, very little of the refining is done in the country; almost all the refined products are imported.

Moreover, prices of refined petroleum products were heavily subsidised, with subsidies running close to 40 percent of the international price at the time of the reform program in 2003.

A combination of inefficiency, corruption, and unsustainable subsidies led to frequent shortages of refined products, with long lines and rationing at gas stations nearly every day in the world’s eighth-largest oil exporter. Government had to step in to bear an annual financial burden of about US$l billion in subsidies – out of a federal budget of around US$10 billion as of 2004 – to keep petrol prices low at the pump.

Ports

The Nigerian Ports Authority, responsible for the operation of the country’s seven ports, was also extremely inefficient. Thousands of tons of imported goods slated for manufacturers were held up at the ports, resulting in higher costs for the businesses. Nigerian port charges were high even by West African standards. In addition, Nigerian ports were grossly overmanned. Corruption was endemic in the ports, organised crime was rife, and security was lax.

In addition, the Nigerian Railway Corporation, the Nigerian Gas Company, and dozens of commercially oriented enterprises were all operating inefficiently, running up debts, and incurring losses that were contingent or direct liabilities on the budget.

The scale of the inefficiencies, the staggering financial losses, and the poor or nonexistent service delivery to the Nigerian public and the Nigerian economy meant that Nigerians were paying twice over for these public enterprises. A solution was needed.

In 1999, the democratically elected government of President Obasanjo relaunched and reinvigorated the privatisation and commercialisation programme, including the modification of Decree 25 on privatisation and its enactment as the Privatisation Act.

In a July 1999 speech at the inauguration of the National Council on Privatisation, Obasanjo accused public enterprises of “gross incompetence and mismanagement, blatant corruption, and crippling complacency.”

The Bureau of Public Enterprises, under the leadership of Mallam Nasir El Rufai and later (2005-2007) Irene Chigbue, was strengthened, and a methodology and an institutional framework were put in place to guide the privatisation, commercialisation, and liberalisation programmes. As prominent members of the Economic Team, and with the support of team members, El Rufai and Chigbue fought many battles to keep this important part of the NEEDS agenda moving.

Telecommunications

The biggest and most successful push happened in the telecommunications sector. Decree 75 of 1992 liberalised that sector and opened it up to competition. The National Communications Commission (NCC) was established as the regulatory authority, and the national telephone company NITEL was commercialised. A number of private companies received licenses, but not much happened to transform the sector until 2001, when the NCC auctioned three digital mobile licenses to operators Econet (now Zain), MTN, and MTEL.

The use of mobile telephony in Nigeria began to explode. In 1999, NlTEL had an installed capacity of 450,000 telephone lines in the entire country. By 2007, owing to the mobile network, this number had increased to 38 million, making Nigeria the country with the world’s fastest-growing teledensity.

By April 2010, the number of mobile phone lines had increased to 85 million, with many people subscribing to multiple lines. The transformation of the telecommunications sector was a huge success.

This explosion was enhanced by the Telecommunications Act of 2003, which strengthened the role of the NCC and encouraged still more entry and competition in the sector. New national companies (including Glo, a Nigerian-owned mobile operator) also came on the scene.

The NCC estimates that there were new investments of about US$37.5 billion in the years 2003-2007, creating about 100,000 direct jobs and about 5 million indirect jobs. The sector continues to be one of the most profitable for investors in Nigeria, while opening up hitherto unavailable services to Nigerians everywhere but especially in the rural areas.

Mobile phones improved access to market information for farmers and traders, facilitated banking transactions, and improved connectivity among communities and families in both rural and urban areas and with the expansive Nigerian diaspora.

Experts believe that there is still a potential for expansion, and many applications are still to be exploited. This will be enhanced by bringing the relatively high unit costs of services down, and by improving quality.

While the liberalisation and deregulation of the sector was very successful, the privatisation of NITEL and its mobile arm MTEL did not achieve the same success, and at various times met with widespread public criticism and controversy. There were four attempts to privatize NITEL. The first attempt (in 2001) failed because the winning bidder, Investors International London Limited, a joint Nigerian foreign venture, famously failed to pay the balance of 90 percent of its bid price of US$1.3 billion, and the transaction was accordingly terminated.

NITEL was put under management contract for two years with the idea that perhaps it could be restructured and its operations improved, rendering it even more attractive for privatisation. The contract managers (Penta scope, a Dutch-Nigerian consortium) could not pull this off and came under public criticism for failure to do so while collecting significant management fees.

Its contract was terminated.

In December 2005, a second attempt was made to privatise NITEL.

That attempt failed because the amount offered by the top bidder, Orascom, a well-known Egyptian-based telecommunications company, at US$256.5 million, was felt to be unacceptably low and likely to lead to public criticism of selling off “one of the country’s crown jewels” at a giveaway price. In the meantime, NITEL’s operations had deteriorated, the company was in decline, and its 8,000 workers were a significant burden on the public purse.

In 2006, a third attempt was made to privatise the company. Through a negotiated “willing buyer-willing seller” approach, NITEL was sold to Transcorp, a new Nigerian conglomerate put together by a group of wealthy Nigerian investors and government officials. Transcorp paid US$500 million for 51 percent of NITEL’s shares, with the remaining 49 percent held by the Federal Government.

Even this sale at a more favorable price did not escape controversy.

Nigerians were suspicious and very critical of a sale that looked like an inside deal to a group of the elite. An editorial in the July 9, 2006 issue of the newspaper ThisDay captured the public mood: “From the stalled attempt by the Investors International (London Ltd. IILL) to acquire the company, to Pentascope’s controversial management of it, the NITEL story had been a running sore.

After years of poor management and loss of revenue, it ought to be something of good news that the telecommunication company is now privatised. Ironically, however, that joy is being clouded by doubts. And much of this doubt stems from the controversy over the ownership and vision of Transcorp.”

Even after two years, Transcorp failed to turn the fortunes of NITEL around. Consequently, in an emergency meeting on June 1, 2009, the National Council on Privatisation approved the revocation of NITEL’s sale to Transcorp, citing its failure to adhere to the terms of the Share Sales Purchase Agreement and its failure to pay the salaries of staff members for more than 12 months.

A fourth and final attempt at NlTEL’s privatisation, which commenced in 2009, was terminated in 2011 as New Generation Communications Limited and Omen International Limited – respectively the preferred and the reserve bidder – failed to pay their respective bid sums of US$2.5 billion and US$985 million.

Results, challenges, and opportunities

The deregulation, liberalisation, and privatisation agenda of the reform program was ambitious, and much progress was made. The fact that reforms met with mixed results even in the relatively successful telecommunications sector is a testimony to how difficult this agenda was and still is.

Though the opening up of the telecommunications sector was a huge success, the privatisation of NITEL and MTEL continues to be uncertain. Similarly, in the petroleum sector, the initial gains with phasing out subsidies, which could have opened up the downstream sector to competition, were not sustained and were soon reversed. Nevertheless, the privatisation program opened the door to a new way of doing business in many sectors of the economy.

It also brought receipts from the proceeds of privatisation into the Treasury – about 251.4 billion naira (the equivalent of about $US2 billion) between 1999 and 2011. Another US$10 billion in annual transfers to public enterprises was saved as a result of these reform efforts.

The program attracted investment from reputable international companies such as Lafarge (France), Holciem (Spain), and Scancem (Norway); from Dangote (a domestic cement firm), from A.P. Møller in ports, and from the Indonesian firm Indorama in petrochemicals.

Nigeria’s program of deregulation, liberalisation, and privatisation remains controversial. Part of this controversy is ideological. There is a core of intelligentsia inclined toward socialism in Nigeria – in academia, in the media, in labor unions, and elsewhere – who, despite the obvious failures of the state in Nigeria’s case, still believe in the role of the state as producer, employer, and equaliser in society.

To them, the whole privatisation agenda, far from being an attempt to get the state out of activities it has not done well, is a neoliberal ploy being visited on Nigeria by the West.

Part of the controversy is due to vested interests. There were and still are many members of the political elite who depend on the privileges and handouts from state-owned enterprises to take care of their dependents and large numbers of hangers-on. They were always going to be opposed to the privatisation agenda.

But part of the controversy is due to a suspicion among the general public – a suspicion that has sometimes been borne out – that not all of the privatisation agenda has been carried out in an open and transparent manner.

There has been political interference (leading to reversals of some deals), there has been a lack of transparency, and there have been hints of corruption in the implementation of some privatisations in telecommunications, petrochemicals, steel, aluminum, and other industries. Although these occurrences taint the privatisation agenda, their adverse effects do not outweigh the positive results that have been obtained.

Policy makers should pursue the agenda to its logical end, along the way learning lessons on what has gone right or wrong, particularly as to transparency, and using these lessons to conclude the privatisation of the remaining public enterprises and improve the regulatory framework of those sectors now in private hands.

 Read part one and two of the serialization of Reforming the Unreformable

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