CHAPTER ONE

INTRODUCTION

• BACKGROUND OF THE STUDY

Privatization of state-owned enterprises (SOEs) has become a key component of the structural reform process and globalization strategy in many economies. Several developing and transition economies have embarked on extensive privatization and commercialization programmes in the last one and a half decades or so, as a means of fostering economic growth, attaining macroeconomic stability, and reducing public sector borrowing requirements arising from corruption, subsidies and subventions to unprofitable SOEs. By the end of 1996, all but five countries in Africa had divested some public enterprises within the framework of macroeconomic reform and liberalization (White and Bhatia, 1998).

 

In line with the trend worldwide, the spate of empirical works on privatization has also increased, albeit with a microeconomic orientation that emphasizes efficiency gains (La Porta and López-de-Silanes, 1997; D’Souza and Megginson, 1999; Boubakri and Cosset, 1998; Dewenter and Malatesta, 2001). Yet despite the upsurge in research, our empirical knowledge of the privatization programme in Africa is limited. Aside from theoretical predictions, not much is known about the process and outcome of privatization exercises in Africa in spite of the impressive level of activism in its implementation.

Current research is yet to provide useful insights into the peculiar circumstances of Africa, such as the presence of embryonic financial markets and weak regulatory institutions and the manner in which they influence the pace and outcome of privatization efforts. Most objective observers agree, however, that the high expectations of the 1980s about the “magical power” of privatization bailing Africa out of its quagmire remain unrealized (Adam et al., 1992; World Bank, 1995; Ariyo and Jerome, 1999; Jerome, 2005).

 

As in most developing countries, Nigeria until recently witnessed the growing involvement of the state in economic activities. The expansion of SOEs into diverse economic activities was viewed as an important strategy for fostering rapid economic growth and development. This view was reinforced by massive foreign exchange earnings from crude oil, which fuelled unbridled Federal Government of Nigeria (FGN) investment in public enterprises. Unfortunately, most of the enterprises were poorly conceived and economically inefficient. They accumulated huge financial losses and absorbed a disproportionate share of domestic credit. By l985, they had become an unsustainable burden on the budget.

 

With the adoption of the structural adjustment programme (SAP) in 1986, privatization of public enterprises came to the forefront as a major component of Nigeria’s economic reform process at the behest of the World Bank and other international organizations

 

 

1.1.1  HISTORICAL BACKGROUND OF POWER HOLDING COMPANY          NIGERIA

A major energy product which has emerged from the development of Nigeria’s energy resources is electricity. Although at independence in 1960 the country inherited a rudimentary electric power generation and distribution system under the Electricity Corporation of Nigeria (ECN) and later changed to NEPA.

 

Nigeria’s Electric Grid is being run on hydroelectric and thermal plants. The former are predominantly utilized in the northern part of Nigeria while the later which are fueled by petroleum appear to be largely favoured in the southern parts. The disadvantages of these approaches become evident in the harmattan seasons when the water level drops and in the chronic spate of fuel scarcity.

 

Nigeria has about 5,900MW of installed electric generating capacity consisting of 3 hydro-based stations and 5 thermal power plants. Nigeria faces a serious energy crisis due to declining electricity generation from the power plants. Power outages are frequent and the power sector operates well below its capacity. NEPA is in charge of a sector which is grossly inefficient.

 

The Nigerian government has set a 10,000MW target capacity for electricity generation by 2007 as a way of increasing power supply which has been epileptic over a long period.

 

When the present administration came on board in May of 1999 one of the first tasks it undertook was to charge the then Minister of Power and Steel to put an end to power outages. The minister wasted no time in making some necessary changes in the composition of NEPA. NEPA was reconstituted and new appointments were made bringing a team of specialists and technocrats to replace most of the politically appointed members of the management board. Yet the country recorded no significant improvement in its power sector. Indeed somewhat that the situation got much worse.

 

A new technical board directly answerable to Mr. President under the chairmanship of senator Liyel Imoke was appointed in 2006 to oversee the administration of NEPA and its eventual privatization. An improvement is still yet to be seen.

 

On July, 1st 2006, NEPA was transformed to PHCN in line with the on-going government power sector reform programme.

 

The Nigeria Electricity Regulatory Commission (NERC) was thereby established under the Electric Power Sector Reforms Act 2005 to provide regulatory oversight in electricity sector. PHCN was set up to have a life span of one year after which successor companies owned by private operations would take over from the firm. But, however, exactly a year after the company was established and the exact date it was scheduled to cease to exist, nothing happened.

 

Part of the efforts to realize this ambition is the on going power plants construction in different parts of the country. Ten power stations are in the pipeline. They include the 414MW Geregu power station in Kogi State, 335MW Omotosho Gas Turbine Power Station in Ondo State, 335MW Papalanto Thermal Station in Ogun State, all these are at various stages of completion. Others include the Mambilla Station in Taraba State, a 250MW in Calabar, a 500MW plant in Eyaea, Edo State, a 270MW in Ikot Abasi, Akwa Ibom State, a 500MW in Sapele, Delta State and a 230MW plant in Omoku, River State. The existing power stations and their installed capacities are Egbin Thermal Statio, Lagos (1320MW) Afam Thermal Station, Delta State (1020MW) Ijoro Thermal Plant, Lagos (40MW), Kainji Hydro Station, Niger State (760MW), Jebba Hydro Station, Niger State (578MW) and Shiroro Hydro, Niger State (600MW). But the actual power capacity currently generating in the country is presumed to be below 4000MW.

The country’s power generating potential is said to be the highest in Africa. This is attributed to her abundant natural resources. With natural gas reserve of about 188 trillion cubic feet, the country has enough associated gas potential to power the biggest thermal station in Africa. While other countries are busy encouraging investment in nuclear power in addition to the sources of energy. Nigeria is still struggling to meet the areas other countries have left behind. South Africa for instance has hit a power generating capacity of 26,000MW and is planning to construct additional 5,000MW by 2010. 4000MW is not enough for the country and the projected target of 10,000MW of electricity in 2007 might be hampered. There is still over dependence on the aged plants and obsolete equipment, and also the incessant vandalization of election cables nationwide

 

POWER HOLDING COMPANY OF NIGERIA PLC DOKA BUSINESS UNIT

ORGANOGRAM OF THE BUSINESS UNIT

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

SOURCE: PHCN          Brochure, 2008                                                                                                            

 

1.2     STATEMENT OF THE PROBLEM

The first problem recorded with the privatization programme in Nigeria was lack of relevant fundamental economic environment needed before taking off. Some public enterprises that were not ripe enough in terms of competitiveness were privatized. Consideration was not given to capable buyers but to political cronies who could not successfully manage their new enterprises. This led to closure of some of these privatized firms. Lack of transparency in the entire sales has shown up its negative repercaution.

 

 

 

It is reported that privatized firms in Nigeria are refusing monitoring by Bureau of Public Enterprises. In this wise there has been no substantial studies on the operational activities of the privatized firms. The expected difference in the perception of efficiency after privatization could not be proved. In all, it is therefore difficult to identify the performing and non-performing privatized firms.

Among the pertinent issues to be addressed are: What is the extent and pattern of privatization and commercialization? What have been the results of privatization in Nigeria? Has privatization and commercialization improved enterprise performance as anticipated? Finally, what policy lessons are to be learned from the privatization experience so far? These are the issues that come into focus in the study.

 

1.3     OBJECTIVES OF THE STUDY

The objective of the study are

1. To assess the effort of privatization in Nigeria, by examining the antecedent, pattern, volume and status of privatization undertaken so far.
2. Find out the prospects and problems of the implementation of the privatization programme on public enterprises.

• Find out to what extend the programme can be able to get rid of ineffectiveness and inefficiency of public enterprises.

1. Find out its possibilities of fostering development on the Nigeria economy.
2. Find out if will improve the welfare and standard of public workers.

 

 

• SIGNIFICANCE OF STUDY

Privatization has its expected benefits which prompted its emergence all over the world.  The success level of the programme or failure level depends on the procedure employed and sincerity of purpose attached from country to country.  Therefore the following are the reasons importance of this study.

When completed this study should be a good partner to the privatized enterprises that will be used for performance analysis. It will provide a mirror to the enterprises from where they can view themselves, the way we see them from outside.

 

The reports and recommendations in this study should serve as evidences of findings and suggestions to the government before privatizing and commercializing  other public enterprises that are yet to be privatized or those partly privatized that will soon be fully privatized.

 

It is expected that BPE will be interested in this study as it can provide some guidelines into a better way of handling the programme. BPE is expected to borrow a leaf from those countries that successfully implemented the programme and got candid positive results.

 

Finally the project will be of immense importance to the general public either for research work or just to increase their knowledge and create more awareness on the concept of privatization and commercialization programme as well as the problems and solution to the problems of Nigeria public Nigeria.

 

 

• HYPOTHESIS

The following hypotheses were made

Ho₁:   Privatization of Public Enterprises has no significant effect on Nigeria economy.

Hi₁:    Privatization of Public Enterprises have     significant impact on Nigeria economy.

 

1.7     SCOPE AND LIMITATION OF THE STUDY

This study intends to cover assess the effort of privatization and commercialization exercise on public enterprises in Nigeria. Also the work will be limited to Power Holding Company of Nigeria Plc. It will also measure the effect of the privatization on the national income, government fiscal condition and capital market.

 

To undertake a study of this nature is not easy because it is a wide field of study and thus has various limitation/problem.

 

The first limitation is for the success of any research work depends on availability of fund. The fund is needed for buying of materials, browsing etc.

 

In the case of primary data. The respondent may not be granted the audience for interview another limitation is high cost place or more current information on the net. A long the line, the administrative bottleneck of the organization may jeopardize the effort of the researcher in union case the management would refuse to disclose vital information as a matter of policy.

1.7     DEFINITION OF TERMS.

Commercialization: Transferring of Government control of an enterprise to a new management for the purpose of cost effectiveness.

Management Contract: Contracting of a government firm to private firm for management purpose.

Globalization: Cross boarder operations of economic activities, production, investment, financing, technology utilization and marketing.

Deregulation: Elimination or substantially reducing the regulation/control of price and entry into domestic business activities.

Liberalization: Freeing the economic activities in order to provide a conducive economic and business climate necessary for continuous growth.

Shares:       Part as portion of target amount which is divided among general or among people or to which many people contribute.

Share Holders:    Owners of shares in Business Company.