Port Privatisation in Nigeria - Essay Example

PORT PRIVATISATION IN NIGERIA By Port Privatisation in Nigeria Economic development and port privatisation Nigeria is endowed with a considerable number of ports. A weak and slow developing economy with a weak structure led to port reforms that brought about port privatisation (Obed & Emeghara, 2012). Port privatisation is a globalised concept that involves the inclusion of the private sector to participate in the business of a government-owned public enterprise. It is a strategy where the government-owned public business functions and management are taken over by the private sector. A privatisation policy shows an outright transfer of sale or the state of ownership of public infrastructure into the private sector (Ogwezzy & Bello, 2013). This however does not necessarily mean that the government stays away from the entity (Obed & Emeghara, 2012). It sticks to its role as a regulator of laws regarding the activities of the body. Port, privatisation in relation to ports, has two degrees of variation (Ogwezzy & Bello, 2013). One is comprehensive privatisation where the successor company becomes the sole owner of the entire ports and all the land and water areas including assets within the port. This is the same as selling the whole port to a private company (Ogwezzy & Bello, 2013). Partial privatisation is a scheme where only part of the assets and activities of a public port are transferred to the private sector. An example of this is where the government sells its existing berths to a private company or where the government concedes with a private company to build and operate a specialised port facility (Ogwezzy & Bello, 2013). Privatisation, therefore, expands the role of the private sector in the ownership and development of existing port facilities, together with developing new services. Economic development is the progress in the economy which usually involves the change of policies, adoption of new technologies and improvement of living standards. It is measured by the level of economic productivity. Economic productivity is the ratio of outputs to a volume measured by inputs to a volume measured by inputs. The growth of productivity of ports means that they can produce more output from the same level of input given before (Ogwezzy & Bello, 2013). History of Nigerian Ports Development and operation of ports in Nigeria started in the middle of the 19th century. Efforts to provide facilities for vessels using the ocean began with the opening of Lagos Lagoon in the early 1990 (Nwanosike, Tipi & Warnock-Smith, 2012). Development of the Apapa Port, which is the South West of Nigeria was allotted in 1913 and started in 1921. In 1913, the discovery of coal at Enugu led conceptualization of the Port of Port Harcourt, and it started the business the same year. The railway line completion in Enugu in 1916 led to the development of four 1920 feet long berths at Port Harcourt to speed up the exploitation and ultimate exportation of coal by Nigeria and importation of coal by other countries. The Ports Act of 1954 led to the establishment of the Nigerian Ports Authority. It was established to address issues of institutional weakness that resulted from the lack of a sound policy framework. Port development before was dependent on the changes of the degree of demand for trade via the sea. In 2003, the Nigerian Federal Government commenced its improvement on ports efficiency by adopting the landlord model for every single port in Nigeria. This resulted in the dispensation of 25 terminals to private terminal operators with lease agreements of around 10 to 25 years. The former eight ports were reduced to six major ports with two ports in Lagos and the other four in the East in a bid to restructure the ports. The ports were: Lagos Port Complex, Tin Can-Island Port Complex, Calabar Port, Rivers Ports, Onne Ports Complex and Delta Ports Complex respectively. In the same year, the private sector got to take over some of the operations, functions and responsibilities of the public sector in line with the ports segment (Nwanosike, Tipi & Warnock-Smith, 2012). Property Rights and Public Choice Theory This method has given many reasons why private ownership is better (Privatisation: A Multi-Theory Perspective). The property rights theory centers on the agency problems and agrees that they are more severe on the public property. Managers mostly perform only when monitored and provided with incentives (Drakić, 2007). This theory states that managers in the public sector lack monitoring and incentives. This results from the diffuse state of ownership and the ill-defined rights to property (Carter, 2013). Most public firms are not publicly traded and, therefore, do not have to worry about takeovers resulting in reduced monitoring levels. Inefficiency in public service units starts from the failure to clearly allow property rights. Another way to view this is to politicians and bureaucrats whose role is to monitor on behalf of the larger public. They are normally not as good in this job as shareholders of a private company would be. This is because most politicians tend to focus on self-interest and their personal growth. Managers in the public sector lack incentive because they do not fear bankruptcy. The ‘soft budget constraint ensures that managers in the public sector are bailed out using public funds (Carter, 2013). Public choice school of thought goes in line with the property rights theory in that they both focus on the inefficiency of the public sector due to the way politicians and bureaucrats behave. Managers in the public sector are more vulnerable to lacking focus because there are expectations that they meet several objectives, of which are not calculated to maximize profits. This is a very different case in the private sector where targets are calculated to keep profits at a maximum (Carter, 2013). The array of targets in the public sector comes from the actuality that managers are answerable to different constituents such as legislators and civil servants. Specifically, politicians who are accountable to sectors such as labour would tend to push managers in this area to pursue objectives, such as increasing employment, which work against profit maximization (Carter, 2013). Agency problems, therefore, happen to be very severe in the public sector while compared to the private sector according to these schools of thought. They, therefore, favour privatisation (Drakić, 2007). Privatisation Regime Privatisation involves concessions under which private entities are given the right to operate the ports for a period of years as stipulated in the contract (Oghojafor, Kuye & Alaneme, 2012). The terms of the concession contract show in detail the investment responsibilities, and financial risks to be shared (Oghojafor, Kuye, & Alaneme, 2012). They also outline the payments to be made to the government for the use of land and pre-existing infrastructure. They also indicate the specific development plans of the terminals in question. Concessions are very common in ports which use the landlord model, such as Nigeria’s ports (Oghojafor, Kuye, & Alaneme, 2012). The process of granting concession is divided into three phases: the pre-bidding phase, selection phase, and post-bidding phase. The pre-bidding stage involves the awarding authority deciding on specific awarding methods and ensuring that this information is accessible to interested applicants. The rules of the concession are defined. These include stating whether the site will be awarded as a whole or split into two or more terminals, whether the terminal will be multifunctional or dedicated to only one type of cargo, and whether the terminal will be for a single user or multiple users. At the pre-concession period, the awarding authority, in this case the Nigerian Ports Authority, decides on how the risks and investments will be divided (New York Geneva, 2011). During the selection phase, the candidates are appraised in detail, the bids assessed, and the most appropriate candidate selected. The main challenge at this stage is selecting the most suitable candidate given the rules set in the pre-bidding phase. Prequalification of bidders is frequently the earliest step that involves the initial selection of candidates from the pool of interested companies. Typical conditions for prequalification include minimum financial capacities of bidders, extensive experience in port operations and their degree of global operations. The final selection is carried out based on direct negotiations or auction-like arrangements where the terminal is awarded to the highest bidder. A number of criteria are used to score the bidders. They include the details of business plan evaluation or the price the private company offers the government for use of the existing assets of the government. There may still need to enter negotiations at this point between the government and the highest bidder. Concession processes usually have a considerable effect on the capacity to draw both foreign and domestic bidders. Through transparency, non-discrimination, and being exclusive government can increase their chances of acquiring high-quality bids. Concession procedures may also introduce entry barriers such as lengthy administrative procedures and the requirement for existing capabilities and historical track records (New York Geneva, 2011). The post-bidding/post-concessionary phase involves signing legally binding contractual agreements with the selected candidate and setting monitoring and enforcement practices during the contract period. Independent monitoring could be started at terminal, port, region or country level. Thus, to ensure that the investors and the government respect the terms of the contract, it essential concession periods be typically very long. Renegotiation of contracts is a common practice and requires an independent body to resolve issues or stalemates between the negotiating parties in the event that they arise. Where performance outcomes are expected to come from the competition between different terminal operators, and then competition oversight is essential. Failing to address follow-up issues can be detrimental to the success of the projects. For the terminals to generate positive outcomes, several priority variables must be assessed. They include the financial performance, waiting time, cargo throughput, user prices, quality of port services and the effects on public finances. A Government may also gauge the terminal based on the impact on employment, supply chain integration, upstream and downstream businesses and transfer of knowledge and technology to the local economy (New York Geneva, 2011). An example of the privatisation matrix is shown below. competition No competition Government funds Starve’ n’ sell Partners in crime Internal Revenue Cherry picking Create-a -crisis Sourced from (Socialistproject.ca, 2014) Cherry picking allows private entities to select the most profitable sectors to invest in. Create-a-crisis is the absolute sale of a public body without primarily unlocking its market to competition. A partner in crime strategy involves a public-private partnership. Starve n sell means creating a profitable market version of a public service, making investors attracted to it (Socialistproject.ca, 2014). Privatisation of ports around the globe has had a number of benefits to the economies of the country. For instance, the privatisation of the port of Brisbane Pty Ltd (PBPL) in Australia under 99 year lease has improved the efficiency of operation of the port and turned around the economy of the Queensland through the provision of the Dedicated Freight Rail Corridor (DFRC) that was established under the new form of privatisation. For example, for the financial year ended 2013, the port’s overall trade capacity improved by 2% to 37.6million tonnes from 36.8million tonnes in 2013 (Smith, 2013, p. 47). This was as a result of increased exports that increased from 18.9-19.4 million tonnes while the exports improved from 17.8-18.1 million tonnes (Smith, 2013, p. 47). Therefore, from this statistics, it is evident that through privatisation of the port, operational efficiency increased, which led to increased demand of exports such as cotton and cereals due to better transportation of agricultural commodities e.g. through the DFRC. Economic Benefit of Port Privatisation in Nigeria Privatisation benefits to Nigeria’s economy are numerous. In order to a port to be competitive, it has to be efficient, reliable and adapt to the changing marketing environment (Tongzon, & Heng, 2005). Privatisation helps in achievement of these requirements. The privatisation of ports has led to the generation of over $900 million in physical capital commitments by private terminal operators (New York Geneva, 2011). The investments realized have resulted in new or improved buildings and equipment, operational improvement and new health and safety training programs for members of staff. Apapa container terminal had by 2010 invested about $180 million to upgrade its facilities and purchase new cargo handling equipment, leading increased terminal capacity (New York Geneva, 2011). These investments in Apapa container terminal have resulted in yard resurfacing and equipment purchase tripling the terminals original size. Investments in facilities and handling equipment have improved the productivity of Nigeria’s ports. Waiting time for vessels dropped from 2.17 days in 2003 to 1.6 in 2010 (New York Geneva, 2011). Vessel turn-around time also improved significantly, from 7.9 hours in 2003 to 5.4 hours in 2010 (New York Geneva, 2011). Apapa Container terminal shows a notable increase in productivity. New equipment and improvement led to doubling of container moves per hour within the first six months resulting in the rise in container throughput in the same proportion (figure II.1). Improvement in port performance has also been linked to reforms within the cargo clearance process. Computerization and training personnel saw clearance time go down for six months in 2004 to one to ten days in 2010 (New York Geneva, 2011). This has reduced congestion. Mostly due the Apapa Container terminal, total container throughput rose from 656000 Twenty-foot Equivalent Units (TEUs) in 2006 to 999000 TEUs in 2009 (New York Geneva, 2011). Table 3 shows Nigerian ports cargo throughput pre and post concession as of 1995 to 2007. FIGURE II.1 Figure II.2 Source of figure II.1 and figure II.2: (New York Geneva, 2011). Other reforms have integrated Nigerian ports into international shipping networks, giving greater access to the international markets. Increased connectivity has simplified and made it cheaper for exporters and products to transport their goods in and out of Nigeria. This has consequently led to the improvement of transport facilities. Public finances have also increased due to privatisation (Eniola, Njoku, Oluwatosin & Okoko, 2014). Private operators committed $1.7 billion to Nigeria Ports Authority on commencement, lease and throughput fees. By the end of the year 2009, the federal government had collected approximately $401 million in fees. Privatisation has improved efficiency in a great way (Table 2) (Adi, Ndukwe, Iheanachor & Dim, 2013). Entry of foreign terminal operators has also led to acquiring of new skills by the workers and partners. This is because they use advanced technologies (Eniola, Njoku, Oluwatosin & Okoko, 2014). For example, introducing sophisticated machines such as state-of-the-art cranes and new management systems requires training of employees. The success of privatisation has also resulted in the Nigerian Government seeking further opportunities for private terminal development. The most significant and critical was the construction of the 1 million TEU capacity Lekki container ports, a Greenfield project worth $850 million. Positive outcomes have given investors’ confidence to pursue more substantial projects as shown by figure below. Source of table 3: (Oghojafor, Kuye & Alaneme, 2012) Table 2 showing Average efficiencies Source of table two: (Tongzon & Heng, 2005). Challenges Faced in Nigeria Port Privatisation Nigeria has allegedly been faced by some terminal operators failing to perform their duties as stipulated in the concession agreement. Another minority of cases show that terminal some terminal operators have not affected their development plans (New York Geneva, 2011). There have also been cases of terminal operators failing to settle their financial obligations to the government. This is linked to the alleged problems and delays of the release of assets and terminal property from the Nigeria Ports Authority (NPA). The growth of Nigerias ports has led to pressure being put on the government to make investments and broaden port infrastructure (New York Geneva, 2011). The NPA has been slow to allocate the funds hence delaying the development of ports. Maintenance at ports also needs to be improved. Most of the time, requesting minor work is hindered by bureaucratic procedures (New York Geneva, 2011). Though some improvements have been noted in cargo clearance, it remains to be a hold-up. There is very little cooperation between terminal operators in streamlining cargo tracking. Resolving of labour issues has also failed. At one point, dockworkers of the Maritime Workers Union of Nigeria engaged in industrial action due to the adverse working environment. They also cited the implementation of anti-labour practices by private-sector operators. If these kinds of disputes were to continue, they would lead continued conflicts and slow down port operations (New York Geneva, 2011). Port privatisation has also resulted in unemployment when the terminal’s ownership is transferred to private ownership (Nwanosike, Tipi & Warnock-Smith, 2012). It results in the poor becoming poorer since unemployment increases while the price of basic commodities increases. Port privatisation has proved to be non-human development oriented. Evidence has been seen through the mass retrenchment that accompanied privatisation. It also leads to economic exploitation (Nwanosike, Tipi & Warnock-Smith, 2012). Since Nigeria decided to embark on port privatisation only to remove its structural imbalances and improve a failing economy, foreign companies could take advantage of this in order to exploit Nigerias economy. Nigeria also depends significantly on international creditors who could easily take advantage of them (Arowolo & Ologunowa, 2012). The private sector cannot provide individual services, in the same way that the government does. This is because private companies only base their developments on their specific terminals and not on the entire ports industries. Most private investors shy away from events that require enormous amounts of money to pick up. The process of selecting the best or right candidate to run the terminals is most of the time highly corrupt and lacks transparency (Arowolo & Ologunowa, 2012). This undermines the sole purpose of privatisation as distinct parties only aim to enrich themselves as opposed to selecting a rightful candidate whose credentials and capability have been tested. Corruption is also present in the private sector whereby shady schemes and conspiracies are made by those operating the terminals. This results in the ports were not realizing their full potential (Arowolo & Ologunowa, 2012). Ways of Tackling These Challenges The Nigerian government should make sure there is an independent regulator to monitor and resolve issues in port privatisation (New York Geneva, 2011). The NPA tries to solve issues by being in constant contact with terminal operators. They try to identify problems through early and frequent communication. This, however, has not resolved the issues at hand since issues keep cropping up (New York Geneva, 2011). There is therefore the need for an independent regulator to regulate prices and competition as well as settle disputes. The government should also commission a review of its port reforms and the performance of terminal operators. This will delve deeper into the challenges faced and provide put in a stable legal and regulatory framework to deal with issues arising from privatisation. The government should also study the implications of privatisation to the economy and most especially its effect on ordinary people and Nigeria’s future (New York Geneva, 2011). This way it will only work with private entities whose policies have a positive impact on the ordinary citizens. The government should also establish mechanisms to monitor and track processes of privatisation (Arowolo & Ologunowa, 2012). This will ensure that shady deals and corrupt practices are eliminated from any transaction. It should also protect consumer rights through government interventions in critical areas such as those which enforce increase in prices of essential commodities. It should also ensure that it promotes worker rights and formulate policies that prevent private companies that control the terminals from carrying out anti-labour practices (Arowolo & Ologunowa, 2012). It should also ensure the welfare of employees in the private-controlled terminals. The Nigerian government should also formulate its reforms other than creating policies influenced by foreign capitals. This will prevent the exploitation of the Nigerian economy by the foreign funds. Strategies that prevent only a few rich individuals from dominating the economy should be established. Profits that are realized through the sale of government assets should be redirected back into the economy in order to develop capital projects. The initial bidding process and picking the best candidate should be made open in such a way that the candidate selection is based solely on merit and to also reduce corruption (Arowolo & Ologunowa, 2012). Bibliography Ogwezzy, M. C., & Bello, S. A., 2013. Appraisal of the Philosophical, Political, and Ideological Concept of Privatisation: A Reflection on the Nigeria Experience. AGORA Intl J. Jurid. Sci., 116. Arowolo, D. E., & Ologunowa, C. S., 2012. Privatisation in Nigeria: A critical analysis of the virtues and vices. Oghojafor, B. E., Kuye, O. L., & Alaneme, G. C., 2012. Concession as a Strategic Tool for Ports Efficiency: An Assessment of the Nigerian Ports. American Journal of Business and Management, 1(4), 214-222. Adi, B., Ndukwe, E., Iheanachor, N., & Dim, C., 2013. Do Privatisation Model, Contractual and Institutional Factors Play Any Role in Infrastructure Post-privatisation Efficiency? Exploring Port Concessions in Nigeria. Journal of Infrastructure Development, 5(2), 121-135. Eniola, O. J., Njoku, I., Oluwatosin, F. A., & Okoko, E., 2014. Performance Evaluation of Nigerian Ports: Pre and Post Concession Eras. Civil and Environmental Research, 6(2), 1-13. Obed, B. C., & Emeghara, G. C., 2012. A critical appraisal of port reform and development policy in Nigeria. Research in Business and Management, 1(1), 13-22. Tongzon, J., & Heng, W., 2005. Port privatisation, efficiency and competitiveness: Some empirical evidence from container ports (terminals). Transportation Research Part A: Policy and Practice, 39(5), 405-424. New York Geneva, U., 2011. How to utilize FDI to improve transport infrastructure. Case Studies in FDI, [online] UNCTAD Investment Advisory Series B(number 9). Available at http://www.unctad.org [Accessed 12 March 2015]. 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