Reform of Govt. Enterprises in the 3rd World:
Can Privatization do the Magic?

Contents
Introduction

1. Generalization
• Arguments for Privatization
• Modified forms of Privatization
2. Packaging and Value
3. Post Acquisition Management Skills

Peculiarities of the Market.
Options
Making Government Enterprises More Efficient.

Introduction
Privatization is the turning over of control or ownership of a business, agency, enterprise or public service into private hands. This apparently is the reverse of Nationalization, which was very popular Socialist policy in the last century.

It was logical that if nationalization turned once flourishing industries to loss making plants, privatization should do the opposite.
Many government enterprises were privatized by the Margaret Thatcher administration in Britain.
This was obviously aimed at reducing public spending while the sale of enterprises of the old East Germany was to reduce the cost of German re unification.

Nigerian bureaucrats then thought it might be Nigeria's solution to mismanaged enterprises.

A spate of privatization then commenced. The state owed NITEL (Nigerian Telecommunications Limited), the Refineries, Steel plants Vehicle assembly plants, National railway lines and even schools were then slated for privatization. The Government expects to regulate the industries in which the privatized companies operate through regulatory commissions, as can be seen in the way the Nigerian Telecommunications Commission regulates the telecom industry.

Government gave many reasons to justify privatization, among them, To inject "private sector discipline" into the enterprises and to shield it from government corruption.

The good question is: Will this new thinking solve the latent problems of mismanagement of enterprises in third world countries like Nigeria?
This question will be answered under three broad subheadings - Generalization, Packaging and Value, and Post Acquisition/Privatization Management skills.

1. Generalization

It is very important to know what brought about Government participation in these sectors in the first instance.
Some are enterprises in sectors so crucial to rapid development that Governments became obligated to establish them.
They include telecommunications in the earlier years, Electricity, Air/Seaports, Maritime and rail transportation, mining etc.
These ventures then were so expensive and strategic that Governments established them with public taxes and in some cases, additional external loans. The benefits to the society went beyond the short run profits or losses that were realized from their operations.

Governments have now liberalized these sectors for greater competition.

With growing wealth and capital bases, many private companies are able to compete effectively with government agencies. In the less developed world. Some of these enterprises became monopolies, either by design, or due to absence or scarcity of private investors willing to operate in the sector.
Some were even set up as partnerships with bigger private companies from the developed world.
They established other services such as in the health and education sectors, to complement whatever is available through private organizations.
Government involvement in these organizations range from full control (like a Government Agency) to representation on the board, with the power to appoint, (or influence the appointment of) key officials, if there is a controlling ownership.

The private sector will always have reasons to interact with these agencies from time to time. So they can be seen as catalysts for development.
Not all these government establishments can be run by the private sector. There is therefore a limit to which privatization can be employed to ensure efficient management of these establishments.

The arguments for privatization as stated earlier are as follows:-

1. The enterprise will operate without government bureaucracy, and as such should take decisions quickly.


2. Should operate with the private sector discipline and efficiency. Wastes should be eliminated as managers will be adversely affected by loss of profit from unsatisfied customers.


3. Workers will shed the "Civil Service Mentality" where workers display a carefree attitude with the notion that their salaries will always be paid whatever happens to the enterprise.


4. Private companies are less corrupt.

It is obvious that today, not all these assumptions are generally true. Workers can shed the Civil Service mentality with appropriate leadership.

There is also corruption in the private sector, and as such, many industries are overseen by government regulators.

If the judicious use of these powers and financial resources cannot be entrusted to Government, why then should we entrust them with the powers to constitute industry regulators, supervisory agencies, Tax administrators, heads of law enforcement agencies, Judges etc.?
Some of these agencies even require much higher level of discipline than the much touted "Private Sector Disciple".

Many private businesses have also failed just like many public sector establishments. Some failures have been traced to mismanagement or excesses, the scale of which may not even be found in the public sector.

A modified form of privatization, known as Public Private Partnership, is being promoted in some areas to address the well known shortcomings of Privatization.
It is proposed that these partnerships may involve BOT (Build, Operate, and Transfer infrastructure to the public sector) or BOOT (Build, Own, Operate and Transfer). The builder is expected to charge user fees, tolls until the transfer to the public sector.
Some of the conditions for the implementation of this partnership are among others commitment from the top, active participation by the public sector, etc.
If the public sector is to be involved and committed as required, why don't they just build it on their own, and, at the best, involve the private sector in the maintenance as the need will still arise after the said transfer to the public?

When a builder constructs, for example, a highway, he would be expected to recoup his investment through tolls and charges paid by users, and then transfer ownership to the public sector. Income taxes paid by citizens are meant for infrastructure development such as the roads in question.
Paying such tolls, without a corresponding reduction in taxes, therefore amounts to double taxation, as the toll charges will naturally include charges to offset construction costs, which is one of the main reasons citizens pay taxes.

The types of government enterprises to be turned into private ownership should therefore be selective, as government is still required to manage some public services.

2. Packaging and Value.
While privatization provides a great value to the investor, they, in most cases, cannot readily comprehend the full opportunities and hence mobilize the capital needed effectively to exploit those potentials. Some of those enterprises operated as Government monopolies.
Investments made were authorized by successive acts of parliament over the years, in reaction to the prevailing situations. The records, in most cases, were not accurately kept.
Giving a value to the assets/enterprise itself is a daunting task.
The buyer therefore, does not know the full value of his investment, taking at the best, the lucky dip approach.
In most cases, just a section of the whole enterprise is focused on, while the other parts suffer neglect.

The privatization agencies therefore might have taken a different approach to the exercise, if a near accurate value of the investments had been taken. It might have become obvious that some of the enterprises should have been broken down into smaller units which would have been easier to sell by government, and to manage by the buyer.
In the case of NITEL, the former telephone monopoly, an initial value was estimated at $1 billion dollars. The wining bidder paid a deposit, but could not come up with the balance.
It was later sold to Transcorp Plc. for about $500 million.

In the early days of deregulation, when the sector was opened for competition to the mobile operators, there were still 500,000 operational fixed lines and 200,000 subscribers in its mobile subsidiary, MTEL.
Private managers, known as Pentascope were invited to manage the company.
As their performance did not satisfy the authorities, full privatization was pursued.
Today, after the purchase by Transcorp, less than 40,000 lines are now operational, and the mobile arm has only 200,000 lines, the same figure for the past eight years. The Government is again looking out for another core investor after Transcorp, who has failed to improve its fortunes, even when competitors are recording great successes.

Some zones/regions are obviously more viable than the others, as former Nigerian Dictators established telephone services only with regard to parochial, rather than economic considerations.
Trying to sell the enterprise whole, will force buyers to carry on the burden of such errors.

The buyers should focus on the opportunities in their zones and then adopt appropriate strategies.
This is important as the country is not homogeneous with regards to habits, culture, spending and behavioral patterns.
A similar approach should be adopted with regards to the electricity sector.
Each or the power stations should be sold to different operators with each buyer focusing on the station it has purchased.
The other constituents, such as transmission and distribution should then be managed by others with expertise in that field.
This should attract more investors, and therefore more competition in the industries.

3. Post Acquisition/Privatization Management skills.
The discipline and effort needed to position a company taken over, is usually underestimated.
The staff in such companies can give valuable insights into the operation of the company and its inadequacies. This is obviously preferable to learning by experience, as it may be very expensive.

Government enterprises in Nigeria can be broadly categorized into two:-

1. 1.Enterprises which were previously operated as monopolies
2. 2.and those which competed with the local operators.

The former consists of refineries, the telephone company (NITEL) and the Electricity company, mining corporations etc.
As it was a major offense to operate these industries commercially while the monopolies existed, most Nationals with any experience at all in managing them must be current or former employees.
Others are those who worked in similar organizations outside of the country, or foreigners altogether, who may need some time and assistance to fully understand the local operating environment.

This may explain why most, if not all privatized companies, as we see in Nigeria today, don't perform creditably.

Many investors, faced with costs associated with laying off staff, or settling retirement benefits, don't come up with a comprehensive way of utilizing the investment made on them by the government over the years from seminars, symposia, workshops, in service training, short courses, long courses, study leave, etc. etc.
The staff, who know and understand the internal workings, problems, and shortcomings of these enterprises are unceremoniously laid off.
It will now take a while for the new investor to learn and understand the intricacies and potentials of the behemoth and to fashion out and implement an appropriate strategy.
In business, time means money.

Many investors look for an easy way out by just trying to integrate a newly acquired business as a branch of a parent company. Some will just introduce an existing management system, procedure or software without adequate modification.
The newly acquired company is then forced to imbibe the culture of the new parent company. Staff incentive, in a branch located in London, for example, may be in form of a month travel or Oyster card.
For a branch in Nigeria, an incentive may be some assistance in buying an imported second hand car, after a probation period.

Peculiarities of the operating terrain or market, may necessitate a different culture.
A work study is necessary for companies which are in operation after purchase. An unbiased assessment of the operations is made. Only then should changes be made to practices.
Some companies which might have succeeded without these precautions have invariably opened a door for competitors who, by employing the qualified ones among the retrenched staff make quick inroads into the market.

The peculiarities of a market can be illustrated by the following experiences:

1. A foreign consultant who helped set up an egg laying unit for a poultry industry chose a particular breed of birds because the specifications indicated they could lay up to 25% more eggs in their active life, and would adapt well to the Nigerian climate.
   After the usual 18 weeks of rearing, the birds started laying eggs, and the laying pattern was true to the specifications.
   However, this breed laid white eggs, which was not accepted by the local market. The company made a lot of efforts to market them also to direct consumers, who, at that time, accounted for most of the eggs consumed.

   After assembling the members of a big market group, an opinion leader was invited to give advice on the white eggs.
   After ensuring the eggs had yolks like the more common brown eggs, he then opined that the eggs must be deficient in some nutrients, just the same way white corn has less of vitamin A in comparison to yellow corn.
   He took notice of our disappointment and then advised: "feed those birds exclusively on yellow corn for a week, or include 'carophyl red' in their diets and let us see what happens to their egg shell color."



2. While trying to market enamelled copper wires for the electric motor rewinding indusry, it was the unanimous opinion of the local re-sellers, contacted through telephone interviews, that the size in highest demand was "point three six henmu emmu" .
   We then placed an order from Britain with a large proportion of the wires being those with 0.36 mm diameter. When the consignment arrived, they wouldn't buy as they claimed it was too thin.

   I paid one of them a personal visit and measured a sample with my micrometer screw gauge to convince them.
   One of them brought out what they believed to be "point three six henmu emmu" and I was able to demonstrate that it was thicker. He then brought out his own micrometer screw gauge and showed me his reading.
   It was in Imperial scale and read 0.036 inches.
   "This is the original one! Yours is fake 'point three six henmu emmu'" he claimed.



3. I witnessed a hot exchange between a chemist shop's manager and a pharmaceutical company's sales representative.
   The manager was complaining bitterly about the company's inability to supply "Indocid" (indomethacin) capsules.
   The manager then explained to me that Indocid sales was very hot, and that the sales representative knew this, but only supplied substitutes.
   Indocid, is a medication to ease backaches, and some muscular pains (in humans of course).
   I later learnt that most buyers rip open the capsule and pour the white powder into a small, flattened slice of bread, roll it or mix with ground biscuits and place in strategic corners of places where it serves as a very effective rat poison. This was a rural area close to several poultry farms.
I still cannot understand how the local folks figured out its effectiveness as a rat poison.
A marketing executive of the pharmaceutical company could notice strong sales of the medication in a certain area, but may never guess that the company's rivals are producers of rat poison, until a more thorough research is carried out.
The numbers alone don't always tell the whole story.

Options
Privatizing agencies should also consider the possibilities of selling enterprises to employees in an Employee Stock Ownership Program (ESOP).
The legal, financial and management framework should be developed by the agency to assist the workers in this scheme.
The workers know themselves and can honestly identify those who can make the industry function.

The solutions to the problems of inefficient management appear to be deeper than what can be solved just by privatization, or any of these schemes, as many perceived short comings of the public sector are also present in the private sector and Non Government organzations.
These problems, which range from the level or public awareness, consumer rights, enforcements of standards to the effectiveness of regulatory agencies, are entrenched in a society and could determine the success of a public or privale enterprise, just the same way it should influence political activities.

Government companies (as well as private ones) can be made more profitable and efficient by taking the following steps:

1. Guarantee independence of the Management of such companies.
   The managers should be held accountable for their decisions.
   Undue influence should not be allowed from Governments, or family members in the case of private companies.


2. There should be regular audits into the activities of the company. Contracts with external audit firms should be renewed every three or four years.


3. Staff should only be recruited by external Human Resources consultants to eliminate undue interference by insiders.


4. Compensation structure should br independent of Government Salary structures.


5. Governments sould encourage competition as a means of evaluating the performance of its agencies/enterprises.


6. Managers should receive commissions, while those on lower cadre receive bonuses based on the profits made by the enterprise at the end of a given period.

Third world countries which embark on privatization as a means of solving public sector management inadequacies will eventually be disappointed.
This is because privatization itself, may require even higher levels of expertise, skills, knowledge and experience in business and public administration, which should be brought into play, not only in the planning and execution of the exercise itself, but also, the monitoring, coordination and fair regulation of the industry after the exercise.