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Nigeria-Public Enterprises,Regulatory Capture,Corruption And Privatization

According to the United Nations,a public enterprise is ‘an incorporated or large unincorporated enterprise in which public authorities hold a majority of the shares and/or exercise control over management decisions’.In other words,public enterprises are corporations that are wholly or partly owned,and controlled by the state.The key point here is that management of these organizations is appointed and controlled by the state.In Nigeria,the history of the public enterprise is a tale of woe,inefficiency and corruption.In every sector of the society,state ownership of companies has proved counter-productive.

The main reason is that management appointments are not based on  qualification,competence and integrity.Usually,appointments are based on such considerations as loyalty to government and political heavy-hitters or the need to reflect ethnic or religious balance.This results in a management that owes it’s emergence to it’s political connections,rather than it’s qualifications,and knows it.These managers are likely to be  loyal  to the  individuals who facilitated their appointments, rather than to the public.To demonstrate their loyalty,they are likely to run their companies to promote the special interests of their benefactors,to the detriment of the public.

The other reason is to do with regulatory capture.Regulatory capture refers to a situation where a state regulatory agency created to protect the public interest in a given sector,instead promotes the narrow commercial and special interests of the groups dominating that sector.This is worst when the groups dominating the sector are public enterprises.Think about that.State agencies regulating state companies.The state as both principal and regulator.Imagine Barcelona football club bringing their own referees to football matches.With public enterprises owned by the government,you can see how easy it would be for them to secure the policy outcomes they prefer,from the regulators,usually to the benefit of special interests,and the disadvantage of the public.

It should be clear now,that state ownership of companies fosters waste,inefficiency and corruption.On the other hand,privatization,which is the sale of state-owned organizations or the transfer of public services to private sector interests,eliminates some of the drawbacks plaguing public enterprises.Such considerations as  ethnic,political or religious leaning would not be the basis,for appointing management in private companies,given that the profit incentive is the reason for their existence.Their main interest being the bottom line,these companies would promote efficiency and merit in order to make profit.This should result in better products and services,to the benefit of the public.To privatize successfully,two conditions must be met.

First,fair market price must be asked.When state are sold cheaply,speculators and other opportunists with little technical know-how or experience in the relevant sector can  afford to buy them.A high price is an entry-barrier that eliminates these people,ensuring that only serious and tested investors can purchase these assets.Having paid a steep price for these companies,the owners have to work hard  in order to recoup their expenditure.This means emphasis on new technology,new technique and efficiency,leading to improved products and services.Low prices let in speculators who lack the know-how or the motivation for improving productivity:having paid a pittance for the assets,they can still turn a profit without any improvement in the running of these businesses.

Second,these assets  should not be sold to government officials as this would lead to regulatory capture,as these owners would use their priviledged positions to extract favourable policy-outcomes from those regulating the sector.Once the regulators get into bed the owners,public interest is sure to be sacrificed on the altar of narrow commercial or special interests.With the ability to manipulate policy in it’s favour,these owners can make a lot of money without necessarily improving or changing the business model underpinning their operations.And if there is no improvement in it’s operations,then products and services will not improve.

The point in this rather long post is that enterprises,whether public or private,exist to provide products and services to the public.When they provide these services,the little guy on the street benefits.When they fail to provide them,the little guy loses.By definition,the little guy has no political connections,and so is unlikely to benefit from a culture of patronage or spoils system,as no one is going to appoint him to the board of some public enterprise.His only chance of benefiting from these enterprises,is if products and services are available and affordable.An outcome that is more likely to be secured through privatization than otherwise.

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4 responses to “Nigeria-Public Enterprises,Regulatory Capture,Corruption And Privatization

  1. codliveroil December 12, 2010 at 1:08 pm

    No doubt there are benefits to privitisation.

    Where do checks against abuses come in, market forces can be manipulated and influenced by speculators and well placed individuals. Are there not cases of businessman/women hoarding goods to drive up the price?

    Agreed the the existing regulatory bodies are not working, and should be replaced.

    I’ve recently been reading the Wikileaks reports on Nigeria, which left me feeling somewhat gloomy about Nigeria’s future. Corruption is out of control. The reforms you state are fine in theory and in many other parts of the world. But Nigeria, to date defies convention and always makes a mess of what should be sound and safe practice. You only have to look at how the petroleum industry is being managed in the country to see that Nigerians are champions at messing things up.

    How can privitisation be implemented and made to work when everyone is corrupt and is always looking for short cuts?

    You are advocating the raising of prices for goods and services. Where will the money come from to pay for these goods and services?

    In the case of agriculture the benefits are obvious an increase in food security, and a revival of the rural sector. As for manufacturing, I can’t see how individuals will be convinced to sink billions of dollars into providing infrastructure, that doesn’t lead to a quick return, and requires constant maintenance. The government there, has abandoned it’s responsibilities in the quest of making money at all costs for the individuals in government. So how will this change come about.?

    Forgive me negative tone, but that Wikileaks has revealed how out of control corruption is there.

    Thanks for the post.

    • henryik2009 December 12, 2010 at 2:59 pm

      Hi Codliveroil
      Thanks for your comment.I am happy you now recognize the level of corruption in the country.This is why government cannot be trusted to run companies efficiently.Regulatory bodies,no matter how many times they are changed,will find it an up-hill task to take punitive measures against companies,owned and controlled by the government.In this climate of pervasive corruption,privatization has become imperative,if our people are to get the service they need, to pull themselves out of the clutches of poverty.Private companies provide service,not because they are not corrupt,but because they know that if they want to make profits,they have no choice.The greater the expertise and experience of these companies,the better the service given.Also,private companies are more susceptible to regulatory oversight,because they are not connected to the government or it’s officials.This is why government officials are their cronies should not be allowed to buy government companies.

      A fair market price for government assets does not necessarily lead to high prices.Instead,it tends to attract only experienced,knowledgeable and reputable investors.This is because only these sort of investors have the expertise to run the businesses efficiently enough,to be profitable,having paid so much for them.When businesses are run efficiently,service-delivery will improve.Improved service-delivery translates to fair market prices for goods and services.Contrast this with a situation,where government assets have been sold cheaply to speculators.Because they have paid so little for these assets,the new owners can continue to make profit without adding value to the business.By running the company the way they met it,these can recover their money in no time.There would be no pressure on them to change the business model.As a result,service will not improve.Let us remember,the guy on the street only benefits,when services are available and affordable.If public ownership is not providing these services,then private companies should be given a chance.

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