COMMERCIALISATION/PRIVATIZATION AND PUBLIC PRIVATE PARTNERSHIP

J.O. Fabunmi & Co (JOF Solicitors)

Infrastructure is the cornerstone of modern society. The availability and quality of infrastructure determine both standards of living and possibilities for economic growth. Satisfactory provision of those basic structures and facilities that support positive economic performance requires massive financial commitments, ability to work around the difficulty in benefit-split as well as handle the attendant high externalities. Public infrastructure touches on a wide spectrum of basic amenities which enhance the capacity of economic agents to conveniently engage in productive activities with less stress. The absence of these amenities can equally result in complete seizure of production at economic unit levels.

Provision of these amenities can be through a variety of ways which comprises: government ownership with government management, government ownership with private management, public-private ownership and joint management, private ownership and management, community provisioning etc. Oftentimes, in most developing and under-developed countries such as in Nigeria, owing to the established pattern on provision, government has always been called upon to provide these infrastructures. Undoubtedly one of the core duties of a Government in any society is the provision of infrastructural services and economic development for its citizens. The most projected reason is the size of funds required. The result is that infrastructure provision has been largely characterized by government ownership and management.
The Nigerian Constitution further makes it a duty on the government to provide necessary social and economic infrastructure to facilitate the economic development of the country. Chapter 2 of the Constitution which provides for the Fundamental Objectives and Directive Principles of State Policy states that for the purpose of promoting national integration, it shall be the duty of the State to provide adequate facilities for the people.

J.O. Fabunmi & Co (JOF Solicitors)

According to the Constitution, government is required to control the national economy, participate and manage the major sectors of the economy. Further to this, government is expected to direct its policy towards ensuring that the economic system is not operated in such manner as to permit the concentration of wealth or the means of production and exchange in the hands of few individuals. As a result, the government should strive to maintain balance of wealth and ensure that the gap between the rich and poor is reduced to the most practicable minimum. This can only be achieved if the government retains control over the major sector of the economy, which includes the provision of social and economic infrastructure.

In the absence of local enterprises and viable indigenous private sector, the government had to move into the large empty space left by society to take over the building economy. Definitely, the provision of infrastructure by private individuals can only make it difficult for the poor members of the public to have access to these infrastructures. Where private individuals are engaged in the provision of infrastructure, the focus is on profit-making, whereas, government’s focus is primarily on the provision of these services rather than revenue generation. These services are provided by the government through public enterprises.

It is because of social issues like economic inequalities, and unemployment that made the state to interfere in the economy of Nigeria. Government chose public sector as a means or medium for economic and social development which enhanced the zeal to establish various enterprise institutions in Nigeria. The participation of the Nigerian Government in business enterprises and the predominance of state-owned enterprises reflected a desire to control the economy.
Public enterprises, however, began to suffer from fundamental problems of defective capital structures, excessive bureaucratic control and intervention, inappropriate technologies, gross incompetence, and blatant corruption.

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Written by J.O. Fabunmi & Co (JOF Solicitors)

It is against this background that the Structural Adjustment Programmes (SAP) proposed a kind of reform which would affect the goals, administration, and management of most of the public enterprises for purposes of efficiency. One of the main objectives of SAP was, therefore, to pursue deregulation and privatization leading to removal of subsidies, reduction in wage expenses, and retrenchment in the public sector ostensibly to trim the state down to size.

Due to inadequate capital and lack of finance, public enterprises in Nigeria are confronted with many problems by the employees, managers and political interference in affairs of public enterprises. As government could no longer continue to support the monumental waste and inefficiency of the public enterprise sector, the programme of privatisation and commercialisation was developed to address the peculiar socio-economic and political conditions in Nigeria, being part of the Structural Adjustment Programme.

Public enterprises have usually been perceived as drain pipes for government budget, thus creating budgetary strains and avoidable burden on the economy. It became a national policy imperative therefore to disengage the public sector from those areas where the private sector has the comparable advantage to perform, while letting the state concern itself with the provision of infrastructure, security and the enabling environment for business to thrive through enhanced wealth creation.
As a result, the Privatization and Commercialisation Decree of 1988 and the Bureau for Public Enterprises Act 1993 were promulgated. The current legal framework for the privatisation and commercialisation is the Bureau of Public Enterprises (Privatisation and Commercialisation) Act 1999.

In both the Privatisation and Commercialisation Act 1988, and the Bureau of Public Enterprises Act 1993, “privatization” is defined as “the relinquishment of part or all the equity and other interests held by the Federal Government or any of its agencies in enterprises whether wholly or partly owned by the Federal Government”.
With respect to the commercialization component of Privatisation in Nigeria, much unlike in other countries that have embarked upon a programme of public enterprise reform, the Federal Government of Nigeria introduced privatization along with a programme of Commercialisation. Commercialization was conceived as an alternative to the privatization of public enterprises. J.O. Fabunmi & Co (JOF Solicitors)

The Decree of 1988 defined commercialization as “the reorganization of an enterprise wholly or partly owned by the Federal Government in which such Commercialised enterprises shall operate as profit making commercial venture and without subventions from the Federal Military Government”.
Under the current legislation, i.e. the Public Enterprises (Privatisation and Commercialisation) Act, 1999, commercialisation carries two forms; full commercialisation and partial commercialisation. For 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. For Partial commercialisation on the other hand, 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.
Government however got carried away under the policy by shifting away from its focus of ensuring provision of infrastructure and promotion of socio-economic development into generation of revenue through these enterprises.
It is important to observe that for many developing countries like Nigeria it was perhaps unavoidable for the government, to promote the initial investments in the early phase of national development when the private sector was almost non-existent. Unfortunately the government got itself so involved in business that could best be tackled by the private sector, that government could no longer perform her traditional functions i.e. the provision of infrastructure and security through the maintenance of law and order as well as the promotion of an enabling and conducive environment for investments and wealth creation.

This government’s philosophy of commercialisation of public enterprises has gone ahead to influence its policy on Public Private Partnership. PPP is one of the other options embarked upon by the government for infrastructure development and thus addressing the challenges constraining the growth of the Nigerian economy. The Federal Government of Nigerian thus established the Infrastructure concession regulatory commission through the Infrastructure Concession Regulatory Commission (Establishment, Etc) Act of 2005 (The ICRC Act) in this regard.
There are notable differences between Commercialisation and PPP. However, the practice of PPP in Nigeria has hardly projected these differences. Commercialisation as duly noted above is directed towards enterprises operating profitably, using private procedures to generate profits for the investor which is characterised mainly by payment for the use of the services by the users. PPP on the other hand is expected to provide for the participation of the private sector in financing, construction, development, operation, and maintenance of government infrastructure or development projects through concession or contractual arrangements. The cost of providing the services is however to be borne by the government and not the users of the services. J.O. Fabunmi & Co (JOF Solicitors)

The current philosophy on Public Private Partnership is engineered from the present legislation on commercialisation and privatisation of some public enterprises. As a result, PPP transaction is used as revenue generating tool for the government rather than its original aim of supporting the government in achieving social-economic development.
As a direct offshoot of government’s view on PPP as commercially based, the legal framework of PPP as consequently been influenced. The Act and Policy regulating PPP in Nigeria confirm the commercial orientation of the government in PPP transactions. Rather than for capital investment to be made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service to be borne by the government, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer as originally structured.

This legal framework projects the intention of the government to be engaged in PPP as a revenue generating tool for the Government rather than the primary function of providing assistance needed by governments to increase the infrastructural services and economic development for its citizens. While government continues to levy taxes on the citizens for the provision of these infrastructural services, these taxes are not used for the purpose for which they are required for. Rather, the private sector is made to finance these services and bear the risks associated with it. They are expected to recuperate their capital investment and profit through levying costs on the users of these services while the government keeps the taxes generated from tax payers. No wonder the primary consideration of any PPP transaction today is the commercial viability of the project.

Written by J.O. Fabunmi & Co (JOF Solicitors)