AN ASSESSMENT OF COST PERFORMANCE AND ACCOUNTABILITY IN PRIVATIZED PUBLIC ENTERPRISES IN NIGERIA. A STUDY OF OANDO (UNIPETROL) PLC IN ENUGU STATE.

CHAPTER ONE 

INTRODUCTION

1.1 Background of the Study

 

Privatization of state-owned enterprises has become an important phenomenon in both developed and developing countries. Over the last decade, state-owned enterprises (SOEs) have been privatized at an increasing rate, particularly in developing countries (DCs). Privatization has become an important phenomenon in both developed and developing countries. Over the past decade, privatization attempts have been occurring at an increasing rate, especially in developing countries. The compound annual average growth rate was around 10% between 1990 and 2000, with global privatization revenues jumping from $25 billion in 1990 to $200 billion in 2000. The number of countries that have implemented privatization policies has exceeded 110, not to mention that privatization has touched almost every aspect of economic activity (Shadeh, 2002).

Privatization of state-owned enterprises (SOEs) has become a key component of the structural reform process and globalization strategy in 13

 

many economies. Several developing and transition economies have embarked on extensive privatization programmes in the last one and a half decades or so, as a means of fostering economic growth, attaining macroeconomic stability, and reducing public sector borrowing requirements arising from corruption, subsidies and subventions to unprofitable SOEs. By the end of 1996, all but five countries in Africa had divested some public enterprises within the framework of macroeconomic reform and liberalization (White and Bhatia, 1998). In line with the trend worldwide, the spate of empirical works on privatization has also increased, albeit with a microeconomic orientation that emphasizes efficiency gains (La Porta and López-de-Silanes, (1997); Boubakri and Cosset, (2001); Dewenter and Malatesta, (2001) D’Souza and Megginson, (2007). Yet, despite the upsurge in research, our empirical knowledge of the privatization programme in Africa is limited. Aside from theoretical predictions, not much is known about the process and outcome of privatization exercises in Africa in spite of the impressive level of activism in its implementation. 14

 

Current research is yet to provide useful insights into the peculiar circumstances of Africa, such as the presence of embryonic financial markets and weak regulatory institution efforts. Most objective observers agree, however, that the high expectations of the 1980s about the “magical power” of privatization bailing Africa out of its quagmire remain unrealized (Adam et al., (1992); World Bank,(1995); Ariyo and Jerome, (1999); Jerome, (2005).

As in most developing countries, Nigeria until recently witnessed the growing involvement of the state in economic activities. The expansion of SOEs into diverse economic activities was viewed as an important strategy for fostering rapid economic growth and development. This view was reinforced by massive foreign exchange earnings from crude oil, which fuelled unbridled Federal Government of Nigeria (FGN) investment in public enterprises. Unfortunately, most of the enterprises were poorly conceived and economically inefficient. They accumulated huge financial losses and absorbed a disproportionate share of domestic credit. By l985, they had become an unsustainable burden on the budget. With the adoption of the structural adjustment programme (SAP) in 1986, privatization of public 15

 

enterprises came to the forefront as a major component of Nigeria’s economic reform process at the behest of the World Bank and other international organizations.

Consequently, a Technical Committee on Privatization and Commercialization (TCPC) was set up in 1988 to oversee the programme. In the course of its operations, the TCPC privatized 55 enterprises. Sufficient time has elapsed since the start of reforms to allow an initial assessment of the extent to which privatization has realized its intended economic and financial benefits, especially with the commencement of the second phase of the programme. This is particularly important in view of the lessons of experience revealing interesting features that may alter earlier notions as to the most appropriate way to implement privatization programmes (Nellis, 1999). Concerns about globalization, in some transition economies (notably the former Soviet Union and Czech Republic) and disappointment with infrastructure privatization in developing countries are spawning new critiques of privatization (Shirley and Walsh, 2000). Among the pertinent issues to be addressed are: What is the extent and pattern of cost performance and accountability of privatized firm? What have been the 16

 

results of these performance? Has privatization improved the cost and accountability of firm? Finally, what policy lessons are to be learned from the privatization experience so far? These are the issues that come into focus in the study.

1.2 Statement of Problem

The issue of cost performance and accountability of privatized public enterprise have been a serious subject of the debate and different interest group that is the “stakeholders”. The post privatization effect this enterprise have been the subject of public scrutiny and criticism by the public and others alike. Majority are of the view that their performance is not different from the way it was when they were under public enterprise.

In response to this in recent national assembly committee, that was set up to look into this enterprise partially supported public concern on their performance. It is against these background that this research is carried out to determine or find out if these view are true as the research is intended to look at this research is intended to look at this privatized firms cost performance and accountability. 17

 

Public enterprise before their recent privatization where perceived to be bedeviled by numerous challenges ranging from political interference, inefficiency in the management of resources, conflict of objectives, overdependence on subvention for survival etc. these over the years have been the main source of criticism of public enterprises and the reason why they are poorly managed . is this issue the same after the privatization o these enterprises? This study is intended to establish it.

1.3 Research question:

Based on the problem statement and the objective of the study stated above the study will answer the following questions;

  1. i) Has privatization improved the cost performance and accountability of this firm as anticipated?
  2. ii) To what extent are privatized firms accountable to shareholders and other relevant stake holders?

iii) To what level has there been effective checks and balances in privatized enterprises in Nigeria.

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1.4 Objectives of the Study.

The overriding objective of this study is to evaluate the second wave of the Nigerian privatization programme spanning 2008-2012. The specific objectives are as follows:

(i) To examine whether privatization has improved the cost performance and accountability of privatized firm.

(ii) To assess the extent to which privatized firms are accountable to shareholders and other relevant stakeholders.

(iii) To determine if there are effective checks and balances in privatized enterprises in Nigeria.

 

1.5 Statement of Hypothesis

Ho: Privatization has not led to efficient and improved cost

Performance.

Hi: Privatization has led to efficient and improved cost

Performance. 19

 

Ho: There have been no effective accountability to share holders and other relevant stake holders.

HI: There have been effective accountability to shareholders and other relevant stakeholders.

Ho: privatization has not led to effective checks and balances in privatized enterprises in Nigeria.

Hi: privatization has led to effective checks and balances in privatized enterprises in Nigeria.

1.6 Significance of the study

Giving the substantial number of enterprises that are yet to be privatized, the study would provide insights into the desirability, feasibility and sustainability of future reforms. It is envisaged that the policy recommendations from the study would assist the National Council on Privatization in correcting the pitfalls embedded in the previous endeavor. 20

 

The study will assist students and fellow researchers generate information on cost performance and accountability of firm particularly if it is relevant to their studies.

In the overall, it is envisaged that the outcome of the study will assist international, multilateral and donor agencies to identify the felt needs, thereby facilitating the design of demand-driven policies and programmes to ensure the success of privatization in Nigeria in particular and sub-Saharan Africa in general.

1.7 Scope of the study

The scope of the study has been narrowed in order to look at the impact of cost performance and accountability in the petroleum industry, particularly in UNIPETROL (now called OANDO plc after privatization). The study will cover a period of five(5) years ranging from (2008-2012).

1.8 Limitation of study

Like many other research study, this research is confronted with the following limitations: 21

 

  1. Finance – The cost of running any research project is quite expensive. It ranges from producing questionnaires to be distributed to respondents, the cost of transporting to the areas where information concerning the project is to be obtained etc, and this research is not an exception.
  2. Time- The time required to complete a research project is often limited judging from the information required to complete a comprehensive research work. This research is also affected by time.
  3. Problem of confidentiality- The challenge of getting respondents to fill the necessary research questionnaires is tasking despite the confidence giving to keep all information obtained from them in utmost confidence.

1.9 Definition of key Terms.

  1. Accountability: It is rendering stewardship. It is also the act of being able to

 

Shoulder responsibilities and carry the correlative burden of performance.

In other words it means answerability, blameworthiness, liability and the 22

 

Expectation of account-giving.

  1. Asset sale: is the transfer of ownership of government assets, commercial-type enterprises, or functions to the private sector. In general, the government has no role in the financial support, management, or oversight of a sold asset. However, if the asset is sold to a company in an industry with monopolistic characteristics, the government may regulate certain aspects of the business, such as utility rates.
  2. Competition: occurs when two or more parties independently attempt to secure the business of a customer by offering the most favorable terms or highest quality service or product. Competition in relation to government activities is usually categorized in three ways: (1) public versus private, in which private-sector to conduct public business; (2) public versus public, in which public-sector organizations compete among themselves to conduct public-sector business; and (3) private versus private, in which private-sector organizations compete among themselves to conduct public-sector business.

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  1. Cost: this is the sacrifice rendered for benefit derived. It is seen in terms of opportunity cost that is the one associated with alternative forgone.
  2. Divestiture: involves the sale of government-owned assets. After divestiture, the government generally has no role in the financial support, management, regulation, or oversight of the divested activity
  3. Privatization: privatization implies permanent transfer of control, as a consequence of transfer of ownership of right, from the public to the private sector. This definition is perhaps the most common usage of the term.
  4. Public enterprise: any corporation or parastatal established by or any enactment in which the government of the federation or it agencies has ownership or equity interest.
  5. Public sector: that portion of an economy whose activities (economic or non economic) are under the control and direction of the state.

 

ACCOUNTANCY PROJECT TOPICS