ABUJA MIRROR: JANUARY 19-25, 2000
DISCOURSE ON PRIVATIZATION
By Mallam Sulayman Ndanusa
WHEN the British government under Mrs. Thatcher embarked in the 1980s on one
of the most extensive and successful privatization programmes in history,
little was it known that privatization would become a world wide phenomenon,
cutting across nations, developed and developing. In Africa, Asia, Europe,
the Americas, Australia and New Zealand, there has been one form of
privatization programme or another. These programmes have also transcended
industrial lines such as power, telecom, water, hydrocarbon, automobile,
steel, banking, insurance, airways, railways, hotels etc. In fact, there is
hardly any sector which has not been touched by privatization.
Privatization has become a major element of economic reform and an important
instrument for advancing the global competitiveness of nations. It has
become a familiar concept among economists, financial experts and policy
makers with several studies on it, and many success stories which have added
to the appeal of privatization. The success stories have shown that
privatization can be a vital tool of turning around inefficient and poorly
managed State-Owned-Enterprises (S0Es) into well managed, competitive and
profitable outfits. Such turn around could have positive impact on the
larger economy by way of output growth, improved quality of goods and
services, as well as easing pressure on the labour market.
The success stories have also shown that privatization can be an important
tool for down- sizing the public sector, reducing its debt and borrowing
while enhancing revenue. Indeed revenue from privatization are sometimes
expended on improving social and economic infrastructure such as roads,
schools, and hospitals which in turn, improves societal well-being and
strengthens the environment or increased private sector involvement in an
economy. Privatization could also serve as a vehicle for attracting foreign
capital, and acquiring skills and technology.
Through privatization, particularly when opened to foreign participation, a
country may gain international visibility and increased interest of foreign
investors in its economy. Privatization also fosters the participation of
the populace in the ownership of the industrial sector, instilling in the
process, a sense of belonging and pride in the citizenry.
There are indeed several benefits of privatization which the paper does not
intend to cover. However, it is clear that as opposed to the 1980s when
there were two strong schools of thought on privatization - one for and
another against, dissenting voices are much fewer these days, perhaps an
indication of the widespread acknowledgement and acceptance that the merits
of privatization far outweigh its demerits. With the failure of SOEs and
heavy burden on government finances, privatization is today, widely
considered as an inevitable exercise if economic growth and development are
to be engendered.
Given its benefits, one can clearly see why privatization has become a must
in many countries. Sub-Saharan African countries according to a World Bank
report' had completed a total of 3,166 privatization sales worth US$6.4
billion as at mid 1999 with Mozambique leading, having privatized 579
enterprises. Angola had completed 33 1, Ghana 217, Kenya 189, Nigeria 81
(excluding state government privatization) and South Africa 7.
Africa has also witnessed some of the most successful enterprise
privatization including the celebrated Ashanti Goldfields Company and
'Privatization in Africa: Past, present and Future; Presented at the Third
African Privatization wit, Accra, Ghana. September 1999.
Kenya Airways, Ashanti Goldfields is today, listed on several stock
exchanges including the London, New York, Toronto, Ghana and Zimbabwe
exchanges. One striking feature of Sub-Saharan African privatization is that
sales value has remained comparatively small relative to the impressive
number of enterprises that has been privatized.
The reason for this may not be far fetched as African companies are by
international standard small. According to the same report South Africa with
only 7 transactions had as at mid 1999, generated US$2.3 billion, Zambia's
253 enterprises fetched US$700 million while Nigeria earned US$207 million
from the sale of 81 companies.
Privatization has been variously defined and has involved different methods
and procedures. But it could be simply defined as the divestment of
government holdings in an SOE or in an enterprise in which it has interest.
In other words, privatization could affect an enterprise which is wholly or
partially owned by government.
What is important is the transfer of ownership or control from the public to
the private sector, that is, from government to individuals and private
concerns.
Transfer of ownership implies the shedding of control. Where divestment of
ownership is total, government control would be zero. But where government
holdings are still substantial the tendency would be to exercise some
element of control in the affected enterprises.
This does not have to be the case as even where government is left with
majority holdings, the divestiture could be such that neutralizes government
control and interference in the enterprises considerably. It is important
that the enterprises are seen as profit making outfits which must be left to
be run as such.
The paper will examine the complements of privatization and capital market
development, the experience of Nigerian market during the first phase and
the challenges of the second phase to the capital market.
Although privatization objectives are essentially similar among countries,
the methods and procedures differ and have been identified to include
outright sale of assets, public flotation, management or employee buy out,
concessions, voucher sale, issuance of new securities to dilute existing
government holdings, liquidation and auction.
For reasons of proper governance and to provide requisite technical and
possibly financial resources, core investors are seen as important and
sought after in privatization of key SOES.
A few countries have applied the golden share principle basically to protect
enterprises considered among other things, to be "national treasure" from
being taken over by foreigners. Golden Shares were most prominently used in
the British privatization but the fear of the misuse of such shares in
developing economies even when their powers are well defined has created
wariness about their use in these countries.
The experience of a number of countries with privatization has shown that
the existence of a formal capital market evidenced by a stock exchange
facilitates privatization of SOEs while the programme has served as an
important impetus to capital market development.
The absence of a stock market would by implication limit the avenues
available for the divestment of SOES. In Nigeria the existence of a fairly
developed capital market made it possible for government to divest its
interest in 34 enterprises during the first phase of the privatization
exercise in the late 1980s - early 1990s.
The Benefits of Capital Market to a Privatization Programme
Credibility and transparency utilizing the capital market gives the
programme credibility as the procedure for divestment is often seen as
transparent, being subjected to the disclosure and listing requirements of
the market.
Indeed, the procedure is usually keenly observed by the populace whose
interests are usually aroused by the publicity which most frequently
accompanies such divestment method.
The populace may thus be less critical and more accepting of the programme
when executed through the capital market. Besides, such a method of
privatization allows full public participation which further strengthens
acceptance and sometimes enthusiasm. By privatizing through the capital
market, the populace as stated earlier, gets to be more involved in the
ownership of the corporate sector of the economy which tends to block the
possibility of any future nationalization of the privatized enterprises.
ii) Attracting Foreign Investment Privatization through the capital market
could provide an important means of attracting foreign portfolio capital
into a country. This may be particularly so when the market is fairly well
developed with good legal, regulatory, institutional and infrastructural
framework. Countries with such markets have in addition to the local capital
market also privatized through the international capital market, usually by
way of a global offering of the shares of the SOES.
Privatisation by way of a global offering has the added advantage of
providing the privatized enterprise with a more sophisticated and
diversified investor base, global visibility of its activities and prestige,
as well as a relatively easy access to short term credit facilities
following a successful launch.
iii) Improved Governance the pre and post privatization disclosure
requirements by the market, board focus, and shareholders scrutiny would
frequently keep management on its toes to perform with positive implications
for shareholders and the economy. After privatization, an enterprise may
access additional funds through the market with relative ease to meet
further expansion and developmental needs.
The fact that the company had previously accessed the market and now better
known by the public could influence investor's participation, enabling the
company raise required capital to meet planned expansion projects.
iv) Better Asset Valuation & Liquidation One other appeal of privatization
through the capital market is the belief that it provides a more accurate
valuation of the assets of enterprises while providing liquidity and ready
price for the assets, post privatization. Investors could with ease, dispose
of their shareholdings in such enterprises after privatization which may not
be the case when other privatization methods are employed.
IMPACT OF PRIVATIZATION ON A CAPITAL MARKET
2.1 We have seen some of the merits of privatizing through the capital
market but how does the capital market benefit from the programme.
Experience in a number of countries has shown that privatization can broaden
the capital market in a number of ways.
i) Improved liquidity and regulatory infrastructure Privatization programmes
have improved liquidity and regulatory environment in some markets with
enhanced legal, regulatory and institutional framework. Privatization has
also been instrumental in kick-starting new, and activating relatively
dormant markets. This is particularly so in the former communist economics
where privatization served as a catalyst for the establishment of capital
markets. In many Latin American countries notably Mexico, Chile and
Argentina, privatization contributed to activating previously small and
illiquid markets while for countries like Ghana and Mexico the programmes
bolstered their international visibility. In Malaysia, Nigeria and Egypt to
mention a few, the programme further deepened the capital markets.
Increased Listings And Market Size Perhaps the most obvious of the impact of
privatization on a capital market, is increased listings and market
capitalization. In some markets, the sheer size of the enterprises even when
one or two are involved, particularly when they are public utilities, could
dwarf the combined market capitalization of other listed securities. In
Nigeria, the 28 companies which got newly listed as a result of the first
phase of the privatization exercise had a combined market capitalization of
N2.7 billion at the time of initial offering of securities to the public.
This figure rose to N23.2 billion in 1995 representing 13.2 per cent of
total equity market size. By year-end 1998, the privatized companies had
registered a market capitalization of N46.8 billion or 18.23 per cent of
total equity market capitalization. By implication, without privatization
the market would have been smaller by about 28 equities and 18.2 per cent in
market capitalization. Many of the privatized companies have been back in
the market after the initial public offering (IPO) for subsequent issues,
some for relatively large amounts.
Improved Awareness And Enlarged Investor Base Privatization through the
capital market usually involves extensive publicity which although intended
to stimulate interest of the populace in the programme, often creates
awareness about the capital market. Some first time investors in the market
(through the programme) could subsequently develop interest in the capital
market, making further investment.
In Nigeria, the 27 existing companies of the original 28, (one went into
liquidation and had to be delisted) which were listed for the first time as
a result of privatization had at the end of 1998, about 603,000
shareholders, many of whom are first timers in the market. Such persons are
also likely to have made further investment in the capital market after
privatization.
The figures show that National Oil and Chemical Plc. had the highest number
of shareholders of the privatized enterprises with 103,848 shareholders. It
was followed by Afribank Plc and Unipetrol Plc with 96,099 and 93,533
shareholders respectively.
It should be noted that in addition to the original 28 companies which were
freshly listed as a result of privatization, the federal government also
divested its interest in 6 companies which were already listed on the Stock
Exchange. At the end of 1998, these companies had a total of 565,361
shareholders, many of whom became shareholders during the exercise. It is
obvious therefore that privatization enlarges both the outstanding shares
and shareholders in a stock market. In the case of Nigeria, the outstanding
shares (paid-up capital) of the freshly listed privatized companies at the
end of 1998 was 4.3 billion. Another important impact of privatization is
the widening of the investor base in the capital market. Local and
institutional investors such as pension funds and insurance companies do
participate actively in the programme while it may also serve as an
opportunity to bring in foreign institutional investors. Privatization thus,
does not only increase the number, but widens the type and quality of
shareholders in the capital market with beneficial effect on the governance
of affected companies.
iv) Expanded Investor Choices
Increased listings arising from privatization expand investment choices and
provide greater risk diversification. Where privatized companies raise
additional capital (post privatization) by way of debt securities
(debentures), investors can further spread their risk between equity and
debt instruments.
PERFORMANCE OF SOME COMPANIES PRIVATIZED DURING THE FIRST PHASE
2.2 Three years after the first phase of the privatization programme, the
Commission conducted a survey on the impact of the exercise on the
performance of the affected enterprises. The survey revealed that the
performance of the enterprises improved markedly compared to their status
before the exercise. For instance, the average turnover of all the companies
increased significantly by 221.2 per cent from N382.43 million at offer time
to NI.2 billion post privatization. Similarly, the average profit before tax
went up remarkably by over 400 per cent.
2.3 A further assessment of profitability of these enterprises using return
on investment showed a positive post privatization growth for most companies
as 19 or 55.9 percent of the companies recorded more earnings after
privatization from funds invested. A look at the investment turnover also
revealed that most of the companies, 61.8 percent experienced increases in
the ratio of turnover to capital employed. The need for expansion post
privatization, refurbishment and replacement of inefficient
pre-privatization facilities, easier access to long term funds, regulatory
requirement as well as inflation, were factors which perhaps contributed to
the observed increase in the level of capital employed by all affected
companies. The rate of increase among companies however, varied
significantly from 3.0 percent to 865.9 percent.
2.4 In terms of dividend payout, the 26 companies on which information were
available showed a post privatization increase of 363.6 per cent with some
of the companies recording as much as 1,500 per cent increase. The average
dividend per share post privatization rose in 27 out of the 30 companies
which had such figures available. In other words, the expansion in
shareholding did not bring about reduction in dividend paid per share.
CHALLENGES OF PRIVATIZATION TO THE NIGERIAN CAPITAL MARKET
2.5 One issue which observers of the Nigerian capital market have been
concerned about, is the preparedness of the market to handle and absorb the
large size of offerings expected from the privatization exercise. It is not
in dispute that the market would experience jumbo issues particularly in
respect of public utilities such as NITEL, NEPA and the refineries. The
privatization of NAFCON may also be of a jumbo size not previously witnessed
in the market. I am however not in doubt that the market is prepared for
these privatization although certain 'safety net' may be desirable to ensure
maximum participation of investors and minimize incidence of
undersubscription.
i) Issue Staggering
If all the issues, given their size, are brought to the market at the same
time, the pressure would be tremendous on the market, with the likely effect
of a high level undersubscription. To avoid such problem, a phased
privatization and issue staggering is strongly recommended. This is usual as
the experiences of other countries have shown. Phased privatization in this
respect implies that only one company would be in the market at any given
time while an issue could be staggered by breaking the shares into tranches
for purposes of sale. In privatizing NITEL for instance, it could be ensured
that only the shares of the company are in the market during the period when
the application list is open. Similarly, the shares could be released to the
public in two or three tranche (batches) over a period of time. For the
utilities, government intends to divest 20 per cent of its holdings to the
public which could be effected in two tranches of 10 per cent per tranche i
the size is considered exceedingly large for the market to absorb at a time.
ii) Appropriate Timing
The privatization programme would also bring to bear the timing function of
the Commission which is principally an advisory service to issuers on the
most appropriate time to access the capital market based on information
available to it. It should be stressed however, that issue timing is a
responsibility of the issuer/issuing house, the Commission's advisory role
is borne out of the need to avoid over stretching the absorptive capacity of
the market which may lead to undersubscription and impact adversely on
investors' and indeed issuers confidence in the market. The Commission would
consider the introduction of shelf registration which would allow certain
issuers to file a master registration statement in respect of an issue to be
offered within a period of time. Such registration would enable the issuer
access the market without recourse to the Commission for a comprehensive
filing during the period.
iii) Already Quoted Companies
The privatization of companies already listed in the market may be less
complex as track records exist, investors are familiar with the company and
secondary trading and price are available. As a matter of fact, existing
shareholders of the company may be interested in increasing their holdings
which may impact positively on the subscription level of the issue. Many of
the enterprises slated for divestment, if disclosure and listing
requirements are met, are likely to be absorbed by the market. It should
borne in mind that the first phase of the privatization programme
successfully absorbed 34 flotation's, 28 of which were new in the market. It
should also be noted that the market was relatively unknown at the time.
Given the quality of companies for privatization in the second phase and
improved awareness of the market, the level of response to the new exercise
may be better than the first phase. Nevertheless, it is very essential that
extensive enlightenment programmes be carried out and efforts made to
financially empower the populace through credit facilities and staff loans
to participate in the programme.
iv) Use of the Internet
In the age of information technology the privatization issues could also be
marketed through the intemet to attract the participation of Nigerians
resident abroad. The prospectuses and application forms could be on the
internet for this purpose. However, this would raise some
interjurisdictional regulatory concerns which would require approvals to be
obtained from the regulatory agencies in countries where the issues would be
marketed Most jurisdictions expect a filing with the regulatory agency
before an issue can be marketed. The possibility of an exemption may be
sought with some jurisdictions in view of the fact that the issues are
targeted only at non- resident Nigerians, and not at other nationals.
The Commission will endeavour to expedite action on entering into memoranda
of understanding with other capital market regulatory agencies. Such
understanding could no doubt facilitate understanding between Nigeria and
the affected countries on the issue of cross-border transactions.
v) Professionalism of Operators
The capital market is better prepared professionally to handle the planned
privatization programme. Operators are more experienced in issue packaging,
have better operational facilities and more exposed to international
standards and practices. The experience and lessons of the first phase may
also be useful in handling the proposed exercise while competition from
international advisers may improve efficiency of the local intermediaries.
However, the size and complexities of the public utilities would pose a
challenge not only to operators but also to regulators. While experts and
consultants would be engaged to evaluate the companies, some knowledge of
the operations and technicalities of the utilities would be inevitable for
operators and regulators.
vi) Pricing and underwriting
Appropriate pricing of the affected securities by issuing houses is
important to the success of the issue. Issuing houses must therefore
endeavour to strike a 'right price' by neither overvaluing nor undervaluing
the securities which either way would be detrimental to the market. Where
the issue is perceived to have been undervalued, the issuer would feel short
changed with the likelihood of not using the same issuing house for further
flotation's. On the other hand, if the issue is perceived to be overvalued,
investors interest would be low, the issue would be undersubscribed and the
competence of issuing house would be in question. It may also dampen
investors' interest in other enterprises stated for privatization.
During the first phase of the exercise, the Commission was saddled with the
valuation of the shares of all the enterprises which were privatized through
public offering of shares. The Commission was however accused of deliberate
over valuation to enhance the proceeds to government. The Commission no
longer values securities, a function now left for issuing houses but
requires that all public offerings be underwritten except where an issuer
objects to underwriting. Many of the enterprises slated for privatization
are unseasoned as they are being brought to the market for the first time.
Such unseasoned issues are usually 'good candidates' for underwriting.
However, section 5(2-4) of the Privatization and Commercialization Act 1999
state that:
i) the shares on offer to Nigerians shall be sold on the basis of equality
of states of the Federation and of the residents of the Federal Capital
Territory, Abuja;
ii) No less than 1 per cent of the shares to be offered for sale to
Nigerians shall be reserved for the staff of the public enterprises to be
privatized and the shares shall be held in trust by the public enterprises
for its employee.
iii) where there is an over-subscription for the purchase of the shares of
privatized public enterprise no individual subscriber shall be entitled to
hold more than 0.1 per cent equity shares in the privatized enterprises.
The provisions (i) and (ii) above would restrict the practice of firm
underwriting which requires the issue proceed to be made available to the
issuer on the opening date of the issue by the underwriter who is
subsequently expected to distribute the securities to the public. With the
provisions of the Privatization and Commercialization Act, mentioned above
the underwriter may be saddled with the securities for longer than expected.
In view of this, the mandatory underwriting provision of the Commission
shall not be applicable to enterprises affected by the privatization
exercise.
v) Issue of Multiple Applications
Multiple applications were unpleasant features of the indigenization and
privatization programmes of the 1970s and late 1980s respectively. These
activities which give a false impression of widespread share ownership have
created some fundamental problems in the market including over bloated and
high maintenance cost of registers of members as well as high level of
unclaimed dividend and certificates. While the market, the Commission and
issuing houses can not completely rid the market of such practices conscious
efforts would be made to minimize the incidence of multiple applications
during the second phase of the exercise.
Privatization through public offerings of shares-regulatory requirements
2.6 The first prerequisite for divestment through the capital market is the
conversion of the enterprises to public companies in accordance with the
provisions of the Companies and Allied Matters Act 1990. A public company
status would entitle the enterprises if they meet the disclosure
requirements of the market to issue securities to the public. Section 32(1)
of the Investments and Securities Act 1999 (ISA) prohibits the transfer,
issue, sale, offer for subscription or sale of securities to the public
without prior approval of the Commission. For the securities to be approved
for issuance, the disclosure requirements of the Commission and the listing
requirements of the stock exchange of choice must be met.
2.7 The issue would also have to be sponsored to the market by a duly
registered adviser (issuing house). Additionally, all other advisers or
parties to the issue must hold valid registration certificate of the
Commission. It is now mandatory by law that professionals such as lawyers,
accountants, auditors, surveyors, engineers etc who may be brought in as
consultants or advisers must be registered by the Commission. Previously
only market operators i.e issuing houses, stockbrokers, registrars,
investment advisers and portfolio managers were affected by the registration
requirements of the Commission. In other words,' all advisers, whether
foreign or local involved in any of the enterprises which would be divested
through the capital market must have to obtain a registration of the
Commission.
2.8 The lead adviser (issuing house) would in addition to performing a host
of functions, prepare the offering memoranda or prospectus in accordance
with the provision of the ISA and the Commission's guidelines. The
prospectus must contain vital information about the issuer and the
securities. The information must cover the financial, share capital history,
auditors and accountants report, history of the issuer, board of directors,
use of proceeds, profit forecast, details relating to the offer, material
contracts, litigation's documents for inspection etc. The essence is to
guide the investing public in making a judgement on whether or not to
participate in the issue.
2.9 The Commission would vet a prospectus on submission by the financial
adviser for completeness. It does not however, take responsibility for the
accuracy of information as the onus of ensuring correctness of information
in the document lies with the issuer. Indeed, the law imposes both criminal
and civil liabilities on directors and parties who lend their names to an
offer document found to contain false or misleading statement. For reasons
of protecting investors and promoting the integrity of the capital market,
the Commission would not clear for release any document which contains a
deficiency.
3.0 Financial advisers for the privatization programme must familiarize
themselves with the requirements of the Commission before submitting an
application with it. Lack of proper understanding of the Commission's
requirements would lead to unnecessary delays which may indeed put the
adviser in a bad light. Once the documentation are correct and complete, 1
can assure you that the Commission would not keep an application a day
longer than is necessary. The adviser would be responsible for determining
the offer price.
3.1 For listing, the enterprises must meet the requirements of the stock
exchange on which listing is sought. If desired on The Nigerian Stock
Exchange, the requirements would be dependent on the choice of market - i.e
the main board or the second-tier securities market. It is very much likely
that all the affected companies given their size would qualify for quotation
on the main board which has more stringent requirements. The conditions for
listing in this market include submission of five years audited accounts, at
least 300 shareholders by the company post listing, and the holding of a
minimum of 25 per cent of the paid-up capital by the public. The second-tier
market requires only 100 shareholders, three years audited accounts and 10
per cent of paid-up capital in public hands.
3.2 Application forms for subscription can only be distributed after the
completion board meeting and the registration of the prospectus. Issues on
public offering are usually open for 21 working days after which returns are
collated (by the lead adviser) and allotment proposal prepared for
submission to the Commission. In clearing the allotment proposal the
Commission would ensure that the provision of the Privatization and
Commercialization Act 1999 as well as the Guidelines on Privatization and
Commercialization of Government Enterprises are strictly followed.
Conclusion
3.3 Distinguished ladies and gentlemen, the Nigerian capital market is
poised. for the privatization programme aware that its successful
implementation through the capital market may be the quantum leap needed to
significantly deepen and broaden the capital market. With the listings of
such public utilities as NEPA and NITEL, the Nigerian capital market may
become the most active and attractive on the African continent. The
Commission will continue to smoothen the playing field for a competitive
transparency and efficient capital market which will be a major investment
destination and the pride of the African continent.
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