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Nigeria unveils new privatization plan

The IMF is pleased, but critics worry about job losses and social inequities

By Tunde Obadina

Nigeria's government is kicking off a privatization programme that promises to be one of the biggest in Africa and to help mend the country's strained relations with international financial institutions. In early October the Bureau of Public Enterprises, a state agency, invited local and international investors to flag their interest in more than two dozen state-owned companies slated for privatization. Companies up for sale range from giant state telecommunications and power utilities to cement, sugar and vehicle plants, as part of what the government says is a comprehensive programme of privatization and commercialization of public enterprises. Government officials say the aim is to turn around poorly managed and cash-strapped state enterprises whose inefficiencies have hampered economic development in Africa's most populous nation.

General Abdulsalami Abubakar, who came to power in June following the death of his predecessor, General Sani Abacha, aims to get the privatization programme on track before restoring civilian democratic rule, now scheduled for May 29, 1999. His commitment to market-oriented reform has won him praise from Western creditors and international financial institutions.

Resumption of a serious privatization effort has been one of the pre-conditions set by the International Monetary Fund (IMF) for negotiating an interim programme monitored by Fund staff that would open the way for talks on a medium-term economic strategy agreement for Nigeria. Nigeria also needs an accord with the IMF and the World Bank to pave the way for debt relief talks with the Paris Club. Its members account for 70 per cent of the country's total foreign debt of roughly $31 bn (in 1996). During a visit to Nigeria in mid-September by World Bank Vice-President for Africa Jean-Louis Sarbib, Bank officials told reporters they were encouraged by the reforms introduced by General Abubakar, including privatization.

Seeking 'strategic investors'

Under the new programme, the government plans to sell 40 per cent of its equity in the enterprises to "strategic investors" -- usually understood to mean foreign companies -- which also will gain management control of the concerns. The shares will be sold through international open tenders to investors with proven technical and financial capabilities. Another 20 per cent will go to Nigerian investors through public share offers, leaving the government with a 40 per cent stake.

The biggest companies to go on the auction block are the National Electric Power Authority (NEPA) and Nigerian Telecommunications (NITEL), respectively Nigeria's second and third largest public corporations, after the giant Nigerian National Petroleum Corporation (NNPC). NEPA is to be broken up and sold off in separate units comprising eight generating companies, 15 distribution and sales companies and the national grid company. Also on offer are the National Fertilizer Company, two hotels, three steel rolling mills, three paper companies, six vehicle assembly firms, a cement company and a sugar plant. Although not included among the companies mentioned in the advertisements inviting inquiries, the government has said it also plans to privatize the country's four oil refineries owned by the NNPC; their dismal performance has caused perennial fuel shortages in this oil-producing country.

By handing over management control of public enterprises to strategic investors, the government hopes to repeat the success of its partnership with oil multinationals, which hold minority stakes in joint ventures that produce more than 95 per cent of Nigeria's crude oil output.

Besides enhancing efficiency, privatization is seen as a way of increasing foreign investment and drawing Nigeria more fully into the global economy. "This administration invites the international community and Nigerians to come and participate in our privatization programme," General Abubakar told a news conference in early September. "We also invite international investment banks, commercial banks, export credit agencies and management consultants to work with us in our liberalization of markets, deregulation and privatization."

A controversial measure

Not all Nigerians are convinced of the wisdom of selling off state assets or giving foreigners control of crucial utilities. "The federal government is headed on a [path] of unprecedented national calamity with the foreign ownership of any part of NEPA, NITEL, the refineries or the railways," wrote commentator Ken Ogbuagu in the Lagos-based Guardian newspaper in late October. "There is an international conspiracy whose aim is to grab the central nervous system of Nigeria, hence Africa. The sale of strategic national assets is absolutely wrong." Many people share the writer's concern that control of important public utilities by private companies -- whose prime objective is profit-making -- will halt the spread of development to poor sectors of society, particularly in the rural areas.

Privatization has been one of the most controversial aspects of economic liberalization that Nigeria's military rulers have wrestled with since embarking on free-market reforms in 1986. From one side, the government has been under immense pressure from local private sector groups and foreign creditor institutions to offload inefficient, under-funded and corruption-ridden state enterprises. According to official figures, federal government investment in public enterprises was about 100 bn naira ($4.6 bn) in 1996, with an average rate of return of only about 2 per cent.

From the other side, trade unionists and nationalist politicians have opposed the sale of government equity holdings, and pointed out the potentially negative social consequences of privatization, including job losses and increased charges for essential services. Sections of the ruling elite that rely on state enterprises for patronage also oppose the sell-offs. At the same time, there have been worries that privatization could lead to concentrated ownership of former state enterprises in the hands of members of certain ethnic groups, in a country where historically ethnicity has been extremely sensitive.

Faced with strong pressure from both advocates and opponents of privatization, Nigerian government policy on reforming ailing public corporations has been marked by uncertainty and hesitation in recent years. The last administration of General Abacha made several promises to privatize, but never acted.

Balancing equity holdings

In approaching privatization carefully, government officials have been mindful of the difficulties in striking the right equilibrium with a population that is sensitive about ethnic balance in access to national resources. Last May, Mr. Tom Ikimi, then Nigeria's foreign minister, said that the government was deliberately taking its time in privatizing state assets to ensure the benefits were fairly shared. "One of the fundamental problems of Nigeria is the distribution of wealth," he told the Reuters news agency. "This is what has consistently caused instability in Nigeria, and in order to ensure that this does not occur again, these things have to be taken very carefully and worked out very well," he said.

Nigeria had already carried out one successful privatization programme, which to a large degree accommodated the various concerns of different interest groups. Under a scheme launched by then President Ibrahim Babangida in 1988 as part of an IMF-backed structural adjustment programme, 73 enterprises were privatized by the end of 1992. Various methods were used to privatize the enterprises, mainly small and medium-scale concerns in agro-processing, cement, petroleum marketing, insurance and banking. Thirty-five were sold through public share offers, using a scheme that sought to ensure the equitable spread of ownership among different social classes and ethnic and regional groupings. An elaborate formula restricted the amount of equity that any individual or region could purchase and allocated a proportion of shares to all states of the federation as well as to employees. By allocating the bulk of the shares to people and institutions purchasing between 100 and 5,000 shares, the government encouraged small investors to participate in the scheme.

As a result, the exercise created well over half a million new shareholders in Nigeria, more than doubling the number of equity holders in an underdeveloped capital market. For instance, some 250,000 new shareholders bought shares in 12 privatized banks, the most prized category of enterprises sold. In terms of increasing the spread and penetration of share ownership in Nigeria, the Babangida programme was undoubtedly successful. Mr. Hamza Zayyad, the head of the Bureau of Public Enterprises, could claim with justification that the privatization programme revolutionized the Nigerian capital market. "There is no local government in Nigeria today where there are no shareholders," he said in 1994. His agency also helped establish the Shareholders Association, whose aims include educating shareholders on their rights and obligations, as well as promoting their interest in the activities of their companies. The association, organized into seven zones, has played an important role in developing a culture of shareholding in the country.

The divestment exercise occurred without much resistance from traditional opponents of market reforms, largely because the outcome did not confirm fears of major job losses or the concentration of wealth in certain regions of this multi-ethnic society. It also did not result in the transfer of majority ownership of national assets to foreigners, since the sales occurred before 1995, when the government scrapped laws that restricted the amount of equity foreigners could hold in companies in Nigeria.

Shift to the big enterprises

However, it was one thing for the government to sell its stake in small enterprises, in many of which it was only a minority shareholder. It is another matter to relinquish ownership and control of major fully state-owned national corporations. Over 1988-92, a total of some N3.4 bn ($155 mn) was earned from the sale of N468.2 mn ($21.3 mn) worth of original government equity. This is less than the state's holding in either NEPA or NITEL. None of the companies privatized by the Babangida regime symbolized the Nigerian state in the way that these large state-operated utility companies do.

Lacking a consensus on the extension of the privatization programme to the large state corporations, the government in 1993 suspended the scheme (after another eight enterprises were privatized in the early part of the year). In 1995, it announced a policy of leasing major state enterprises to private sector organizations, but the proposal was criticized by foreign creditor institutions as a poor substitute for privatization and never implemented.

Now, seeking to mend relations with the IMF and World Bank, the government is taking on a major new initiative, one that is likely to raise many of the long-standing controversies surrounding privatization in Nigeria. The response of foreign investors also remains to be seen. Analysts do not expect the country to be inundated with applications to buy up 40 per cent equity stakes in the companies slated for privatization. Outside of the oil sector, foreign investors have shown limited interest in Nigeria, a country tarnished by a reputation for corruption, inefficiency, decaying infrastructure and a generally difficult business environment. Besides assuring Nigerians of the wisdom of the privatization programme, the government also will have to convince investors that Nigeria is a sound bet.

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