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PUBLIC ENTERPRISE REFORM IN NIGERIA: EVIDENCE FROM THE TELECOMMUNICATIONS INDUSTRY

Abstract

This study examines the qualitative and quantitative evidence relating to allocative and productive efficiency in the publicly owned Nigerian Telecommunications Limited (NITEL) in the wake of its commercialization and the deregulation in 1992. Estimates of changes in internal efficiency using total factor productivity analysis suggest a substantial improvement in efficiency as a result of the regime shift. Furthermore, the reform undertaken resulted in increased profitability, network expansion and modernization of telecommunications services.  However, the momentum generated by reform has proved impossible to sustain. The industry is still characterized by under-investment and large unmet demand. The study recommends greater private sector participation in the delivery of telecommunications services in Nigeria, the introduction of competition in the sector, and the strengthening of ongoing reform efforts to embrace full privatization of NITEL with a view to overcoming protracted constraints on telecommunications performance and growth.

CHAPTER ONE

In recent years, several developing countries have embarked on the reform of public enterprises, including privatization, within the framework of macroeconomic reform and liberalization. More than 100 countries across every continent, most of them developing, have privatized some of their state-owned enterprises (SOEs). Equally striking is the volume of transactions. Between 1988 and 1993, over 26,000 privatization transactions with sales values exceeding US$50,000 each were recorded world-wide, generating a gross receipt of US$271 billion.  Of these transactions, about 900 were conducted in 1993 alone, against only about 60 in 1988. Developing and transition economies accounted for much of this tremendous growth (Sader, 1995). Between 1988 and 1994, developing countries around the world sold about 3,300 SOEs, with sales revenue rising from only US$2.6 billion at the beginning of the period to a peak of US$29 billion in 1992 (Megyery and Sader, 1997).

The resort to privatization/commercialization was informed by several considerations. First, by 1985, the quantum of resources required to sustain the SOEs had become an unbearable burden on the affected nations. Second, it was envisaged that a carefully planned privatization programme would be an effective strategy for improving operational efficiency, broadening share ownership, attracting foreign investment and reducing the role of the state where the private sector has the capabilities to operate more efficiently. Finally, since the beginning of the 1980s, privatization of public enterprises has become a major policy tool in both developed and developing countries following the apparently successful privatization programme in Britain. Privatization gained considerable momentum in developing countries given its endorsement by the multilateral financial institutions as a major plank of adjustment policies. The urge for privatization was further reinforced by the need to reduce government expenditure in the face of burgeoning fiscal deficits, and was also in conformity with the resurgence of “economic liberalism” in the development literature.

Yet despite widespread privatization efforts, empirical evidence indicates that its anticipated benefits are yet to be felt in African countries. Most studies have documented the relatively poor performance of SOE reform efforts in Africa compared with other areas of the world in both relative and absolute terms (World Bank, 1996; Kikeri et al., 1992; Adam et al., 1995). However, only limited efforts have been made to identify the causes and determinants of the uniquely unsatisfactory performance of SOE reform in Africa relative to other environments. As in most developing countries, the Nigerian economy until recently witnessed a growing involvement of the state in economic activities. The expansion of state-owned enterprises (SOEs) into diverse economic activities was viewed as an important strategy for fostering rapid economic growth and development.  Massive foreign exchange earnings from crude oil, which exacerbated unbridled federal government investment in public enterprises, reinforced this view. Thus, by 1990, there were over 1,500 public sector enterprises in Nigeria, 600 of which were owned by the federal government, and the rest by state and local governments (Jerome, 1995). The public enterprise sector excluding petroleum accounted for about 15% of Nigeria’s gross domestic product in 1990. Unfortunately, most of the enterprises were poorly conceived and economically inefficient. They accumulated huge financial losses and absorbed a disproportionate share of domestic credit.1 By 1985, they had become an intolerable burden on the budget, as they were being sustained through budgetary allocations from the treasury.

In the wake of the economic recession that began in 198l, following the collapse of oil prices, the activities of public enterprises attracted more attention and underwent closer scrutiny, much of it centring on their poor performance and the burden they imposed on government finance. The poor financial returns from these enterprises against the background of severe macroeconomic imbalance and public sector crisis precipitated the concern of government towards privatization. With the adoption of the structural adjustment programme (SAP) in 1986, SOEs came into the forefront as a major component of Nigeria’s economic reform process. Consequently, the Technical Committee on Privatization and Commercialization was established in 1988 to implement the SOE reform component of SAP. In what appears to be a uniquely comprehensive initiative, 101 enterprises in virtually all sectors were slated for total or partial privatization and another 35 for commercialization. Subsequently, public utilities such as Nigerian Telecommunications Limited (NITEL), the Nigerian Postal Services, Nigerian Airways and the Nigerian Electric Power Authority, among others, were restructured and reoriented towards higher efficiency.

Nigeria is probably the only country in the world that carried out a hybrid programme of privatization and commercialization simultaneously. The decree defined commercialization as the reorganization of enterprises, wholly or partly owned by the government, into profit making commercial ventures without subvention from the government. The process entails explicit performance-based contracts with managers of SOEs.3  In return for managers’ expanded power over pricing, procurement, production and personnel, the enterprise is subjected to a hard budget, which entails cutting subsidies and transfers. The telecommunications industry in Nigeria also witnessed the deregulation of telecommunications services in 1992 through the promulgation of Nigerian Communications Commission (NCC) Decree, No. 75 of 1992, introducing private participation in the provision of telecommunications services in Nigeria, thus ending the state-owned NITEL’s monopoly of the sector and ushering in competition.

Deregulation is expected to enhance efficiency in two ways. First is through the curtailment of the inefficiency that arises as a result of regulation and isolation of firms from actual and potential competition. Second, rents accruing to rent-seeking groups benefiting from regulation would be dissipated by a more competitive market environment (Winston, 1993). While much has been written about the experience of developed economies with deregulation and privatization of public utilities (Oniki et al., 1992; Imai, 1994; Wellenius and Stern, 1994), there have been few studies on the experience of developing countries especially those in Africa. Yet, these economies are more vulnerable to disruptions associated with grossly inadequate provision of infrastructure services. What is the quantitative and qualitative evidence concerning allocative and productive efficiency? To what extent have ex ante expectations and results been realized?  Have reforms induced more rational and profitable investment?  What lessons are to be learned? These are the issues that form the crux of this study.

In the main, this study examines the impetus for reform, what happened in the wake of commercialization and deregulation, and the changes in the regulatory framework. The study also looks at the institutional details of the economic environment. Our choice of the telecommunications sector arises because the industry presents some of the most difficult issues currently confronting microeconomic policy makers. Furthermore, it is the most rapidly growing and technologically dynamic sector and the pressure to move the sector out of its traditional public utility, monopoly status is being exerted all over the world and is ultimately irresistible. The study comprises eight sections. The structure of the Nigerian telecommunications industry is examined in Section 2, while a review of related literature is undertaken in Section 3. Section 4 details the methodology and Section 5 chronicles the reforms undertaken in NITEL. Section 6 appraises the impact of deregulation on NITEL; the empirical results are presented in Section 7 and Section 8 concludes.

Justification for the study

Telecommunications infrastructure lies at the heart of the information economy. Countries lacking modern telecommunications infrastructure cannot compete effectively in the global economy. Until the early 1980s, the telecommunications sector was viewed as the quintessential public utility. Economies of scale, combined with political sensitivity, created large entry barriers and externalities. Beginning from the 1980s, however, policy makers gradually began to recognize that telecommunications systems are an essential infrastructure for economic development. As the economy broadens and becomes critically dependent on vastly expanded flows of information, telecommunications acquires strategic importance for economic growth and development. Rapid innovations in telecommunications and information technology are lowering costs, creating new services and changing the cost structure of many industries. Driven by unrelenting technological and market forces, telecommunications has become one of the world’s most dynamic sectors (Wellenius and Stern, 1994; Saunders et al., 1994).

In response to the need to overcome persistent shortfalls in telecommunications investments and performance, telecommunications restructuring has assumed a global dimension and the wave of telecommunication reforms that began in the 1980s in a few highly developed economies quickly spread to several developing countries. By 1993, major reforms had been undertaken in at least 15 developing countries and a comparable number were in preparation (Wellenius and Stern, 1994). The impact of these new policy initiatives has been profound, but if the new pragmatism in telecommunications policy is to succeed, policy initiatives will need to be broadened and deepened.

Even though the International Telecommunications Union’s Harare Declaration contained a commitment by several sub-Saharan African countries to increase private sector participation in telecommunications, most governments have been reluctant to put this policy into practice. Six sub-Saharan4 countries have announced plans to privatize their national carriers, but only Guinea has actually implemented such a policy—although several others are believed to be considering this move (Mustafa et al., 1997). Thus, the telecommunications sector in Africa is still predominantly state owned and has yet to show the benefits from the transformation in pattern of ownership, market structure and provision of service that is taking place world-wide. As a strategically important but relatively neglected sector in sub-Saharan Africa, telecommunications is largely characterized by poor performance manifested in low profitability, large unmet demand for services, poor technical and operational quality of service, and absence of new services. Economic studies for the International Telecommunications Union indicate that each new telephone line added in the region contributes approximately $4,500 to gross national product, a far higher contribution than in developed economies.

The future of telecommunications lies with private commercial provision of services under liberal regulatory environments.5 Against this background, a pertinent question today is how can African countries begin to move this new pragmatism from the periphery to the centre of the telecommunications reform agenda?  There is a renewed clamour for a proper investigation of the underlying causes of this unacceptable scenario to enhance the design or redesign of results-oriented telecommunications sector reform programmes in Africa. This study intends to examine how to promote this shift on the basis of the experience of several countries reforming their telecommunications sector. It recognizes, however, that there is no universally acceptable template for implementing telecommunications restructuring. Although fairly universal policy issues and options face governments attempting to reform their telecommunications sectors, their relative importance, the sectoral solutions adopted and especially the strategies to implement them are highly country specific (Saunders et al., 1994).

Objectives of the study

the main objective of the study is to ascertain the quantitative and qualitative evidence concerning the efficiency and welfare improving effects of deregulation of the telecommunications sector in Nigeria. The specific objectives of the study are:

To analyse the production structure of Nigerian telecommunications and estimate the total factor productivity growth.

To decompose total factor productivity growth into scale economies and deregulation effects with a view to estimating efficiency gains due to deregulation.

To assess the regulatory changes in the sector in the wake of commercialization.

To analyse the options for evolving a viable telecommunications sector in Nigeria.