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Privatisation and Commercialisation

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Narrowly defined, privatisation can be defined as the transfer of Government owned shareholding in designated enterprises to private shareholders, comprising individuals and corporate bodies. Broadly defined, Privatisation is an umbrella term to describe a variety of policies which encourage competition and emphasize the role of market forces in place of statutory restrictions and monopoly powers.
Commercialisation was defined in the TCPC Decree No 25 of 1988 as the reorganisation of enterprises wholly or partly owned by the Federal Government in which such commercialised enterprises shall operate as profit making commercial ventures without any subvention from the Federal Government. This is further broken down as follows:
  • Full Commercialisation
Enterprises so designated will be expected to operate profitably on a commercial basis and be able to raise funds from the capital market without government guarantee. Such enterprises are expected to use private sector procedures in the running of their business.
  • Partial Commercialisation
The enterprises so designated will be expected to generate enough revenue to cover their operating expenditures. Government may however consider them for capital grants to finance their capital intensive projects.
The Privatization Act gives the National Council on Privatization (NCP) sufficient flexibility in deciding the appropriate method/strategy to be adopted in privatizing each enterprise. However, in choosing the strategy for each enterprise, the following are always taken into consideration:
Government Policy
Opportunities and Constraints, and
Nature of the enterprise
The programme is therefore wide, dynamic and whichever strategy is adopted it is still superior to the hitherto prevailing situation whereby government owned, managed and controlled the public enterprises. However, in considering the strategy to adopt, priority is always given to the most economically and socially efficient option in order to maximize the benefits accruable to the government, the citizens, as well as the economy as a whole
The following strategies have been consistently used in the privatization exercise particularly since 1999:
Competitive Asset Sale
Core Investor Sale (of minority or majority equity stake)
Guided Liquidation (including as a going concern)
Private Placement
Sale to existing shareholders, and
Share floatation/Public offers
Share floatation/Public offers
Private placement method of privatisation was developed by the TCPC to address the issue of enterprises that cannot be floated on the Nigerian Stock Exchange either because the level of Government shareholding was too small or the enterprises track record of performance falls short of the listing requirements of the Nigerian Stock Exchange such that their shares could not be offered through public offer for sale.
An asset sale involves the sale of the different assets that the business owns. In generic usage, the assets may be tangible, such as equipment and inventory, or intangible, such as the goodwill your business has built up during the years of its operation or a trademark. However, in the Nigerian privatisation exercise, asset sale involves the sale of tangible goods.
In equity sale, one is selling the shares of the business, rather than its assets. In an equity sale, the liabilities are sold along with the rest of the business; in an asset sale, only assets are sold, meaning that the original owner may still be responsible for the business’s liabilities.
An asset sale can be used to sell any type of business; a share sale can only be used to sell an incorporated business.
Public Offer for sale of shares is a method whereby shares of affected enterprises are listed for sale through the Nigerian Capital Market provided the enterprise qualifies for listing on the Nigerian Stock Exchange. To qualify for listing on the stock exchange, the enterprise must have a track record of profitable operations for five years (now 3 year) and history of dividend payment of not less than 5% for 3 years running.
Under this method the entire or substantial part of the equity capital of the enterprises is sold to the management of the enterprise. It therefore became their responsibility to organize and manage the enterprises. 
The NCP at its 40thmeeting held on 4th April, 2005 resolved that in the case of public enterprises (PEs) listed for privatization where the expected proceeds to be realised from the sale of the enterprise are likely to be less than the liabilities of such an enterprise, the enterprise should be liquidated in accordance with the provisions of the Companies and Allied Matters Act (CAMA) while adopting the concept of core investor sale. Within the context of the privatization programme, this was termed ‘guided liquidation’. This is so because in a typical liquidation, the Liquidator, subject to directions of the court and committee of inspection has absolute control over the process. However, in the case of ‘guided liquidation’, while retaining his statutory powers under CAMA, the liquidator adopts the procedure for core investor sale. Thus instead of selling the public enterprise in bits, the sale is carried out such that a core investor buys the entire public enterprise to ensure its survival and not its extinction or dissolution.
The term ‘privatization’ is very elastic and has different meanings. If defined broadly, it includes concession and all forms of private-public partnership (PPP) but if narrowly defined, it excludes concession. However, though the two tend to achieve the same objectives – securing private sector management and operational expertise and investments. There are three key features of concession:
a) Concessions do not involve the sale or transfer of ownership of physical assets, only of the right to use the assets and to operate the enterprise;
b) Concession agreements are for a limited period – usually 10-30 years, depending on the context and sector; and
c) The Government, as owner of the assets, retains much close involvement and oversight in concessions through regulatory bodies.
The main rationale for concessions is that they can facilitate the regulation of natural monopolies – services that can be provided more cheaply by a single firm than by two or more – so power (transmission), gas (transmission and distribution), water distribution, transport are candidates for concession.