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The case for privatization of NNPC

By Odilim Enwegbara

Private ownership of businesses has been as old as the human civilisation. And there has never been any great economy without an army of private business owners. Why not so when private ownership of enterprises is always better than state ownership because unlike state ownership, they have optimal capital structure, high profitability, high efficiency, and above all, are set up with growth, investment and jobs in mind.

The US economy has remained the world’s best run and most efficient simply because it is always in the hands of the private sector firms. But that has happened also because the state has always provided the best level playing field ever; where all the competing businesses enjoy equal treatment, second-to-none enabling environment. For this reason, the US anti-trust law ensures that there is no place for monopoly to thrive.

Confirming this truth on page 824 of his famous book ‘The Wealth of Nation,’ Adam Smith the father of economics stated, “In every great monarchy in Europe the sale of the crown lands would produce a very large sum of money which, if applied to the payments of the public debts, would deliver from mortgage a much greater revenue than any which those lands have ever afforded to the crown…When the crown lands had become private property, they would, in the course of a few years, become well improved and well cultivated.”

This remained the case, until as a result of modern democracy made the state involvement inevitable in western economic activities, especially when it became obvious in the 19th century that private owners of business were abusing their business ownership through their inhumane exploitation of workers to the level of slavery and efforts to dodge paying taxes to the state.

Also their refusal to take some corporate social responsibilities in the promotion of the commonwealth made it inevitable for the state to begin to go into business ownership. This became more pronounced immediately after the Word War II, when capital as the most important means of production was scarce all over western societies.

Also during the Cold War fought between capitalism and socialism, to prove that capitalism too had a human face, western government made sure the state participated in the critical sectors of the economy in an effort to provide jobs and used state owned utility companies for example to provide these services far below their true market costs.

But as these state owned companies became synonymous with corruption and cronyism, exaggerated cost transfers to the public, forcing huge deficit spending on the state, privatising these state-owned enterprises became rampant throughout the 1970s and 1980s. And where privatisation could not happen to avoid product price skyrocketing, to stop the increasingly difficult to fill huge deficit holes, commercialisation became the next option.

During this same time, most western government created powerful regulatory institutions, set to ensure that private owners of businesses no longer engage in the race to the bottom, where they enjoy free ride, without having to take commensurate responsibility in the commonwealth. With these regulatory authorities, it became obvious that there was no more room for state run monopoly.

And as private owners of businesses were forced to provide better working environment and better pay for workers, it became obvious that these same roles once the main reason state had to also own businesses had become less important, hence state owned enterprises handed to the private sector for better management and for more taxes to government.

Not being purely created for profit making along with being created for political patronage-seekers, was why to save these quasi-bankrupt state enterprises, and stop continuing as subsidy guzzlers, they had to be either privatised or commercialised. Also with the problem of high unemployment resolved in most western economies through income transfer social programs along with high level of tax evasion and lack of corporate social responsibility fully addressed, the continued need for state ownership of businesses became finally defeated.

Today, as we speak there are few state owned businesses around development economies, and where they inevitably exist, they are highly commercialised with government having little or no say in their daily operations. And to ensure that they are never populated by top politicians’ cronies, hiring is conducted in the open where only the most qualified and best performers get the job. While in such cases where they still enjoy special government patronage, they are treated by government like any other corporate competitors in the economy.

Africa’s — particularly Nigeria’s — case remains different. Coming out of colonialism with capital mostly in the hands of colonial businesses, in such absence private capital accumulation, state ownership of businesses was the only way for the newly independent states to participate in growing and developing their economies, and above all create jobs and generate tax revenues for the state for the onward investment in critical social infrastructure.

But with politicians soon discovering how to use the state owned businesses as a payback for political allegiance, rather than these post-colonial state owned enterprises being focused on growth and profit-making, they became the easiest way politicians could channel the scarce resources of the state for personal gains. Hence the appointment of cronies to manage these state owned enterprises.

Thus, unlike developed economies where the inevitable changes occurred, the inevitable transfer of these state owned businesses to private ownership has never truly occurred in most African countries, including Nigeria. And where the transfer occurred, it was almost always done in the dark with politicians in power using their fronts to acquire these state owned enterprises for a pittance. Understandably, it is this obvious truth that has forced Nigerians to oppose privatisation of public assets, believing that at the end of such exercise, publicly owned assets are cheaply and illegally transferred to the politicians through their corporate friends.

But the fact that previous privatisation exercises were done in the dark does not remove the fact that to truly and genuinely grow the economy we too should transfer many of our public enterprises to the most financially and technically capable private hands, who by investing their hard earned money in them, by bringing in more competent hands and more technical know-how and innovations will drive these enterprises into the competitive edge as well as ensure with more profits mean more investment in plant and equipment and more jobs to Nigerians and more taxes to government. And above all, it would mean the permanent end of government providing subsidy to state owned enterprises.

One major reason this has remained unresolved is the very fact that state owned businesses, including the country’s refineries have since become sources of political, ethnic and religious patronage, where patron-client relationship is so strong to be easily done way with by the same politicians who have to appoint friends and well-wishers in both management and board positions.

And there is no place where this patron–client relationship is more pronounced than in the Nigerian National Petroleum Corporation (NNPC), especially in its four refineries populated by politicians’ inexperienced cronies, whose only qualification for getting the top jobs is because they are friends and family members of politicians. Synonymous with bloated cost of operations, over invoicing, sheer corruption through revenues diversion into private accounts, mostly accounts indirectly belonging to politicians in power.

It is ironic that the NNPC and its downstream oil subsector are kept alive thanks to government life support machines in the form of subsidies. But the question no government has ever boldly addressed is: for how long should what are arguably Nigeria’s flagship corporations, otherwise the economic engine-room, supposedly earning over 70% of government revenues and over 90% of its foreign exchange earnings continue to be run by incompetent cronies of every government in power, when handing them to private hands is the best way to make them more profitable, pay more taxes, innovate and compete locally and internationally so that petroleum products are made readily available to Nigerians at affordable prices?

Here we are talking about the country’s downstream oil subsector that rather than supposedly generating a lot of revenues for the country as it is the case in most countries, including our peer economies, we are talking about state owned refineries run in such absolute corruption that instead of refining petroleum products have their managers conniving with the big boys involved in fuel importation to always sabotage its refining operations. Quite understandably, the country’s refineries have always been the more you look the less you see.

It is not that we don’t know that this is true state of these refineries today. Of course, we all know that they have never worked and will never work. But the problem has always been who will have the gut to stop this by privatising these enterprises.

But speaking recently as part of his agenda to overhaul the whole economy and position it for growth if elected president in 2019, Atiku Abubakar announced his readiness to immediately privatise the country’s rundown refineries. Being a highly successful businessman, he understands that it is only by transferring these moribund and inefficiently run state-owned enterprises to private sector hands should we stop spending trillions of naira annually in fuel subsidy along with other trillions of naira lost in taxes. But for how long will government after government continue to bankroll the same refineries that should be the number one source of government tax revenue; he queried?

Reflecting over the reality of Nigeria’s economy, Atiku rightly argues that there is no way Nigeria should expect any serious economic growth with such moribund state owned enterprises. That is why to finally put Nigeria’s economy on the path of growth will require state-owned companies like the refineries be wholly in private hands.

Atiku was right to wonder how we intend to achieve the high economic growth we intended if we intend to continue keeping the moribund state owned corporations like the refineries on the same life support machines they have been for decades now. So, as far as he is concerned, privatising them remains the most plausible solution to maximise allocation efficiency. Of course, there is no way we should be desirous of big time foreign investors when in reality we continue ensuring that our state owned enterprises should still monopolise the critical sectors of the economy.

With the much needed culture of competition, operational transparency, and profitability replacing the present mind-boggling inefficiencies and imperiousness that have made it almost impossible for these state-owned companies to perform optimally, the refineries will begin to work since privatisation replaces cronyism with competent and professionally sophisticated managers.

That is bizarre to say the least. Or what is the reasoning behind wanting to grow the economy without wanting the private sector participants to lead it? Let us agree that increasing the private sector firms’ participation in the economy will generate millions of jobs along with trillions of naira in taxes, as well as lift millions of Nigerians out of poor. Without having our refineries privatised, big time investors’ money will unlikely come into the oil subsector.

Atiku’s refinery privatisation will come with two clauses. First clause will insist on a ten year review of the performance of the new owners of the refineries to ensure that they have been able to fully transform the refineries into high performing or else the refineries automatically return ownership to government. Second clause will insist on a spread-out local content within all the operation of the refineries, which means Nigerians will have contracts’ first offer of refusal.

Enwegbara, a development economist writes from Abuja  

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