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The case of privatization and SMEs in Nigeria and sub-Saharan Africa

In the first five years of this decade, 37 sub-Saharan African countries together raised more than $11 billion through privatization programs. Although most of this corpus was raised in low-value transactions in competitive sectors, the figure places the region alongside Europe and Latin America in global privatization trends. While Africa, Ghana and Zambia were among the top contributors, Nigeria takes the clear 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 divestment of a major port operation.

Throughout Africa, privatization had become the guiding principle for countries seeking to develop vibrant private sectors and expand their economies. However, countries continue to face difficult challenges in terms of disappointing social indicators, poor infrastructure, and huge productivity deficits. Essentially, the continent’s integration into the global economy has 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 aggressive privatization in Africa based on the understanding 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 prioritized poverty alleviation based on sound macroeconomic policy interventions. The axis of his effort has been to curb state spending and participation in direct economic production, the mobilization of resources and the promotion of local and foreign investment. However, given its overwhelming dependence on oil exports and the serious mismanagement that marked successive decades of military rule, Nigeria faces a dizzying uphill climb.

While its intent for economic reform has never been questioned, Nigeria’s record in handling privatization deals has been quite checkered. The broad parameters of his initiative were based on previous successes in other parts of the world, from the UK to Russia and from Europe to the US and Asia. Nigeria’s formal introduction to the concept came with the Privatization and Commercialization Decree of 1988, an initiative mandated by the IMF-funded Structural Adjustment Program. In 1999, the Office of Public Enterprises (BSE) was established by decree of the federal government to prepare and implement the government’s privatization policies. Shamefully, several of the early privatization deals ended in fiasco.

Former President Obasanjo’s government sold two refineries to a private consortium, but the sale was later annulled by the late President UM Yar’Adua’s administration over allegations of wrongdoing. Subsequent efforts to privatize the refineries had to stall due to policy loopholes. The divestiture of Nigerian public sector telecoms monopoly NITEL ended in disaster when the company suffered huge losses and defaulted on its debt obligations, forcing the government to retake control earlier this year. The now-defunct national airline, Nigerian Airways, also failed to get off the ground despite various marketing attempts. As well as indicating ineptitude in policy and implementation, these cases more importantly serve to highlight the widespread failure of big business in Nigeria.

In the US, small businesses with fewer than 500 employees make up 99.9% of the country’s 24 million businesses. SMEs in the European Union as a whole provide 65 million jobs or two-thirds of all employment, while 90% of all Latin American companies are micro-enterprises. Closer to home in Kenya, figures for 2003 reveal that SMEs contributed 18% of the national GDP. Considering the global trends of the last few decades, the arguments in favor of SMEs over large companies are simply overwhelming. Rapid business development in an environment conducive to private sector growth is the only way Nigeria can hope to achieve its MDG commitments or its indigenous Vision 2020 targets.

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

• Depending on prudent implementation, privatization can help strengthen capital markets by expanding local ownership through the reserving of shares for citizens.

• Many governments have succeeded in reducing the national debt by raising money through divestment and related instruments, limiting the need for subsidies and tax concessions.

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

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

• Developing countries like India and Brazil, with a strong commitment to free markets, have managed to acquire massive foreign investment by privatizing public sector monopolies.

Foreign direct investment in Africa jumped from less than $1 billion in 1995 to $6.3 billion in 2000. Although this represents a healthy increase, the flow of investment into Nigeria and the rest of sub-Saharan Africa remains restricted due to local restrictions. The region lacks competitive markets and consistent regulatory frameworks that provide the right atmosphere for privatization. Given its past experiences, it is imperative that Nigeria formulate effective public sector reforms before proceeding with any further sales of public assets. Furthermore, such a measure should be undertaken as part of a larger effort to promote economic efficiency.

The privatization of public services and large public sector infrastructure tends to present even more difficult challenges. Nigerian legislators should be particularly concerned with strengthening the institutional mechanisms that regulate market operations. This involves strengthening administrative and legal systems, building the capacities of implementing agencies, and reducing corruption and political interference. The failed divestment of Nigeria’s flagship RORO port in Lagos is a good example when it comes to demonstrating the pitfalls in the privatization process in this corner of the world.

The three separate facilities at the port of Lagos that handle some 180,000 tons of cargo annually were under private operation for several years. The owners showed a huge wage bill to explain dismal benefits that averaged just over $40,000 a year, forcing the Nigerian Ports Authority to retake control. Within a year and without any additional investment, profits had climbed back to over a billion dollars.

Although shocking, incidents of this kind suggesting massive corruption have regularly marked 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 intended to deliver it. Whatever the direction of its privatization policies, Nigeria’s governance needs radical reform as much as its economy!

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