AN ASSESSMENT OF THE IMPACT OF PRIVATIZATION ON THE NIGERIAN CAPITAL MARKET

ABSTRACT

This study examined the impact of privatisation on the Nigerian Capital Market. The main research questions developed were to see whether the Capital Market played an important role in the process of privatisation, whether the privatisation programme brought about efficiency in the privatised parastatals and whether there were increases in the profits of companies quoted on the stock exchange as a result of privatisation. The methods of data collection adopted were descriptive and the analytical tools used were arithmetic mean and percentages. The main findings of the research were that the volume of trade in the Nigerian Capital Market increased tremendously, mainly as a result of the privatisation exercise. There was a significant increase in the profit and output of the selected enterprises after privatisation and efficiency increased significantly. The recommendations that were made were that measures should be taken by Bureau of Public Enterprise (BPE) and National Orientation Agency (NOA) to educate members of the public about the activities of the Capital Market and the need for deregulation of the Capital Market.

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Public enterprises are government-owned enterprises established mainly to provide infrastructural facilities such as electricity, telecommunication services, water and other essential services.  Despite the huge sums spent by various governments on these public enterprises, their performance has been far below average (UNDP, 1990).  The problems of public enterprises are many:

• Ill-conceived investments;
• Political interference in decision-making;
• Costly and inefficient use of public resources;
• Growing budgetary burden;
• Over-extension of government managerial capacity; and
• Diversion of credit and other resources from the private sector.

These problems were well documented in a number of reports, notably the World Bank’s Human Development Report 1983.  This report became the launching pad of a global programme of public enterprises’ reforms in Nigeria.  We have thus become witnesses to a gradual evolution of a new economic order, which is characterised by structural adjustment programme

(SAP).  The primary objective of SAP is the rationalisation of national economy for the purposes of ensuring efficiency and effectiveness in

resource allocation and utilisation.

At independence in 1960, Nigerians found themselves in an odd situation where the foreigners among them held economic power and dominance, disproportionate to their number and contrary to the very essence of Independence. Obviously, the direction of the economy from the time of independence had to be changed. The urgency and expectation for rapid growth, early transformation of the economic structure, and improvement in society’s welfare meant that the only individuals and institutions with huge resources at their disposal would be able to achieve this. It was therefore in this context that government for purely strategic reasons acted on behalf of the citizens who could not raise the required equity capital by establishing public enterprises.

When there was improvement in the nation’s oil fortune, government involvement in the business became pervasive. In other words, the huge financial resources that came at the disposal of government enabled it to expand its activities which otherwise would have been executed by the private sector. But, despite the huge investment of money and time given by the government, public enterprises continuously recorded inefficient performance, became a drain of public resources. Government’s good intentions for venturing into commercial activities notwithstanding, the public sector enterprises in Nigeria became solely dependent on government subsidies and the oil revenue continued to provide the resources needed to meet the subsidies. As a consequence, there was no effort on the part of these public enterprises to look for opportunity at least to break-even.

However, with recession in the economy since 1981 and the decline in government revenue caused by fall in oil prices, the economy became characterised by declining industrial and agricultural output and heavy dependence on crude oil resulted in dwindling foreign exchange earnings.  Other disturbing factors included price distortions, non-optimal imports of consumer goods, poor debt management, inflation, unemployment, and scarcity of essential commodities.  In the face of all these, it became pertinent to review the previous economic and industrial policies, in addition, it was clear that it was not financially prudent to keep on subsidising companies without adequate returns, as this would indirectly mean slashing grants for good projects to prop up bad ones.

1.1.1 THE PRIVATISATION POLICY

The adoption of SAP by the government in August 1986 was a bold policy move aimed at changing the structure of the Nigerian economy. The objectives of SAP were to restructure the consumption and production pattern as well as to rationalise and restructure public expenditure, On this latter premise, came privatisation.   Privatisation is the transfer of the ownership and control of certain production processes from the public to the private sector. It firmly presupposes that the private sector operates at a higher level of efficiency to produce goods and services at lower costs. The major aim of privatisation thus is to create positive performance in profit terms through greater management efficiency by creating and adding more values in services rendered and for the fees and prices charged.

Understandably, the government would be able to realise more funds from the sale of its ownership in these enterprises and thus block the drain on government revenue from operating the enterprise inefficiently. It is hardly in doubt that many different institutions in the financial sector have a critical role to play in the implementation of privatisation in Nigeria. A general function performed by all of these institutions is to provide one form of financial intermediation or another between suppliers of funds and those who need them. In the case of privatisation, they will essentially perform the same role by bringing together the government that owns enterprises and private citizens and associations that want to buy such shares. Of relevance to this study is the particular role of the capital market in which the main players are the issuing houses and the stock-broking firms while the Nigeria

Stock Exchange (NSE) provides the medium and the Securities and Exchange Commission (SEC) acts as the primary regulator. These roles will be highlighted and the impact, which the privatisation exercise itself has in turn on the capital market, will be fully evaluated in this study. Since the focus later is on the adequacy of the Nigerian capital market to cope with the demands of the privatisation exercise, it becomes necessary to examine the institution and mechanism involved in the capital market transactions.

There are, of course, benefits that have been and can be derived with proper implementation of privatisation. These will also be highlighted in the course of the study. The research posits that an efficient capital market should have a catalytic impact on the growth of market oriented economies. Thus, the importance of an active and efficient capital market in ameliorating the country’s financial strain should be of great concern. It is the research contention that the- success of privatisation enhances not just the capital market, but the financial system as a whole.

1.2       STATEMENT OF THE PROBLEM

Available records have shown that government-owned enterprises are inefficient. Over the years, their performance level has been very low due to uncontrolled interference in their management and operations by the government. They are also subject of government bureaucracy and official red-tapism. EI-Rufai (2000) stated that the case for privatisation is the clear evidence that public enterprises (PE) have contributed to our economic stagnation and poor image. According to him, public enterprises have:

• Created economic inefficiencies;
• Consistently incurred financial losses;
• Absorbed disproportionate share of credit;
• Contributed to fiscal deficits and imbalances; • Facilitated and entrenched paratism and corruption; and
• Attracted rapacious military-civilian elites to politics.

Accordingly, the primary reason for privatisation is to achieve optimal use of available resources through increased use of managerial skills and efficiency and thus reduce government involvement. It was not easy to achieve this because of the gap in the financial system of Nigerian economy, which is the major factor in the implementation of the privatisation programme. A new orientation of the capital market within the framework of the financial institutions is needed to adequately take care of the privatisation exercise.  Attention is also needed to check whether fully or partially privatised enterprises (rural or urban, small and large) will ensure an effective and efficient allocation of resources.

At this point, one would like to know whether privatisation has solved the problems of the government-owned parastatals and whether the involvement of Nigerian public enterprises has become impressive in the securities market.  The following are then the central problems that have necessitated privatisation implementation and are the focus of this project: (a) Overbearing inefficiency of government owned companies;

• The alarming magnitude to national debt which has defied the traditional method of debt management;
• Low public awareness of the activities of the capital market;
• Political sensitivities – problem of equitable distribution of the nation’s wealth from geo-political considerations;
• Optimal utilisation of the proceeds from privatisation;
• Paucity of investible funds;
• The differences existing between the value determined by SEC and that as perceived by the privatised companies; and
• The regulatory role of SEC which has hindered some public enterprises from being quoted on the NSE.

1.3       OBJECTIVES OF THE STUDY

In the light of the problems highlighted above, the following are the objectives, which the research has set to achieve:

1. To examine the role of the capital market in the implementation of the privatisation programme.
2. To examine the profit performance of the privatised companies before and after privatisation.
3. To find out whether there is also an improvement in the efficiency of some of the privatised quoted companies in the stock exchange.

1.4       SCOPE OF THE STUDY

The study examined the impact of privatisation on the Nigerian capital market. The researcher collected data from 10 firms that have already been privatised. The study utilised data for the period 1983-1998.

1.5       RESEARCH QUESTIONS

The following questions have been developed for the purpose of this research:

1. Can privatisation bring efficiency in the privatised parastatals?
2. Does the capital market play an important role in the process of

privatisation?

3. Does privatisation increase the value of firms?
4. Is there increase in the profits of companies quoted on the Nigerian stock exchange as a result of privatisation?
5. Are the listing requirements and the close monitoring activities by the

Nigerian Stock Exchange (NSE) and Securities and Exchange Commission (SEC) be the reasons for the reluctance of Nigerian public enterprises’ participation in the Nigerian capital market?

1.6       SIGNIFICANCE OF THE STUDY

This study is significant because it is expected to bring out suggestions towards salvaging Nigeria’s ailing economy. Many citizens distrust the privatisation policy and its implementation. The significance of this study can be re-emphasised as it is expected to achieve among ether things the

following:

1. Correct the erroneous impression of the investing public about the Nigerian capital market as being elitist, by making a comprehensive analysis of its structure and operations;
2. Examine the ways of improving activities in the capital market;
3. Reveal why privatisation requires the capital market and help to improve the implementation of the exercise vis-à-vis the role of the capital market in this regard;
4. Determine whether there has been a change in terms of efficiency regarding sales, common equity and net income;
5. Suggest ways to further reduce government dominance in the capital market;
6. Elicit information regarding the need for the deregulation of the capital market; and
7. To look into the need for privatisation.

1.7       DEFINITION OF KEY TERMS

Capital Market: Is a network of specialised financial intermediaries or

functionaries, which have well defined function to perform in the floatation of issues, private or public.

Stock Exchange Market: Is a place where investors with surplus money

come into contact with those who wish to borrow it.

Value of the firm: Is the total worth of a firm obtained by multiplying the

share price by number of shares of the firm.

Transaction Cost: Is the cost such as “brokerage” associated with the sales

of stock by shareholders.

Primary market:         Is a market where new securities are issued.

traded.

Stockbroker: Is a person who is licensed as a registered representative

and thereby act as an intermediary between buyers and

sellers of securities.

Efficiency: Means doing things well, and without wastage.

Effectiveness:           Means doing things right to meet intended result.

Economy: Means carrying out the activities of an enterprise at a minimum

cost.

Privatisation: Means the transfer of the ownership and control of certain

production units and processes from the public to the private sector.

Fully Privatised: Means government divesting completely, its ownership

and control of the enterprises and selling same to the private sector.

Partially Privatised: Means that government has reduced its equity and

withdrawn its subsidies and subventions so that the government enterprises will be under commercial pressure and depend more on the capital market

for funds.

1.8       PLAN OF THE STUDY

The study is divided into five chapters. Chapter one, is the introductory aspect of this study, where the statement of problem is stated, research questions formulated and the objectives and significance of the study are also discussed.

Chapter two is the chapter in which the existing literature in the area covered by the study is reviewed with the aim of coming up with an objective reasoning.

Chapter three deals with the research methodology where the methods of data collection for his study are mentioned. Similarly, the methods of data presentation and analysis are also mentioned and the justification of using such methods.

Chapter four is where the data collected are presented and analysed.

Chapter five is the concluding chapter, which consists of summary of the study, conclusion and recommendations.

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