Privatisation: A Global Perspective

Privatization Privatization has spearheaded the moves towards de-regulation that have characterized economic policy in...

Author: V. Ramanadham

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Privatization

Privatization has spearheaded the moves towards de-regulation that have characterized economic policy in the last decade. Privatization: A Global Perspective documents the most recent developments in privatization in more than twenty country-specific studies. It represents the most comprehensive and detailed survey of the privatization phenomenon ever undertaken. Rather than simply repeating the by now well-known arguments for and against privatization, the book focuses on specifics. The main features of each country’s privatization programme are outlined and then particular successes and problems are highlighted. Material from developed, developing and formerly socialist countries is made available in a comparable format; and the distinguishing features of comparison and contrast as well as broad conclusions are presented in the concluding review by the editor. The authors include professors, ministers, public enterprise executives, practising accountants and other eminent specialists. The book will be of interest to all those with a serious interest in the issue of privatization. Professor V.V.Ramanadham is an Associate Fellow of Templeton College, Oxford, and Co-ordinator of the Interregional Network on Privatization, United Nations Development Programme. He has been engaged in research on public enterprise, privatization and industrial economics for over forty-five years and has published extensively in these areas. His recent publications include The Economics of Public Enterprise, Public Enterprise and Income Distribution, Privatization in Developing Countries (edited) and Privatization in the UK (edited).

Privatization A global perspective

Edited by

V.V.Ramanadham

London and New York

First published 1993 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Reprinted in 1998, 2001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 1993 Interregional network on privatization (UNDP) All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0-203-41729-1 Master e-book ISBN

ISBN 0-203-72553-0 (Adobe eReader Format) ISBN 0-415-07566-1 (Print Edition) Library of Congress Cataloging in Publication Data ISBN 0-415-07566-1

To my parents Vemuri Seshayya Sastry and Janakamma

Contents

Figures

vii

Tables

viii

Notes on contributors

xii

Foreword William H.Draper III

xv

Preface

xvi

1

Privatization in the UK: deregulatory reform and public enterprise performance Matthew Bishop and David Thompson

2

Privatization in Greece Spiros K.Lioukas

22

3

Privatization in Turkey N.Bulent Gultekin

39

4

Privatization in the USSR Ekaterina A.Kouprianova

50

5

Privatization in Poland Gregory T.Jedrzejczak

61

6

Privatization in Hungary: regulatory reform and public enterprise performance Zoltán Román

77

7

Privatization in Czechoslovakia Michal Mejstrik

92

8

Privatization in East Germany: regulatory reform and public enterprise performance Volkhart Vincentz

104

9

Privatization in Bulgaria Christo Dalkalachev

115

Privatization in Yugoslavia Matija Skof and Branko Vukmir

132

10

1

vi

11

Privatization in Canada Jan.J.Jörgensen and Taïeb Hafsi

146

12

Privatization in Chile Cristian Larroulet Vignau

168

13

Privatization in Guyana Carl B.Greenidge

184

14

Privatization in Morocco Alfred H.Saulniers

212

15

Privatization in Algeria Rezke Hocine

230

16

Privatization in Egypt Hassan A.W.El-Hayawan and Denis J.Sullivan

244

17

Privatization in Nigeria V.V.Ramanadham

257

18

Privatization in Zambia E.C.Kaunga

272

19

Privatization in Uganda Samuel B.Rutega

290

20

Privatization in Israel Shlomo Ecksiein

307

21

Privatization in Bangladesh Abulmaal A.Muhith

325

22

Privatization in Vietnam Andrew D.Cao

336

23

Privatization in Australasia Anthony Browne

344

24

The privatization processes in Japan in the 1980s Marianna Strzyzewska-Kaminska

359

25

Concluding review V.V.Ramanadham

383

Index

430

Figures

1.1 1.2 1.3 19A.1 25.1 25.2 25.3 25.4

Competitive tendering and efficiency: the case of refuse collection Labour productivity: public enterprises and whole economy Total factor productivity: public enterprises Screening of companies Eastern European debt Polish debt Polish trade Hard currency trade and payments balances in Poland

11 16 18 305 392 392 393 394

Tables

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 3.1 3.2 3.3 3.4 4.1 4.2 4.3 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 6.1

Key legislation-regulation and deregulation Privatizations by share offer Private sales of companies Flotations of government holdings in private sector companies Profitability Turnover and output Profit margins Labour productivity UK utilities Employment The totality of public enterprises Number of public enterprises by sector Total assets of public enterprises by sector Employment of public enterprises by sector Size distribution of public enterprises Holding companies and number of subsidiaries/ participations Public equity ownership Return on equity (RoE) of public enterprises Profits (losses) of public enterprises (1989) Profits (losses) of public enterprises by sector (1989) Reasons for state ownership Competition faced by public enterprises Selected figures on the performance of SEEs in the manufacturing sector in Turkey State Economic Enterprises and their sizes by employment—1985 Public offerings Trading volume and performance of Istanbul Stock Exchange The classification of capital assets by form of ownership Number of people engaged in individual labour in 1989 Assessment of possible de-etatization scale Participation of public and private ownership in the national economy Number of enterprises and average employment in private and public sectors Distribution of public enterprises in industry according to employment Characteristics of public and privately-owned agriculture Number of constructing firms and average employment Services delivered to households Large state-owned enterprises Estimated market value of the state-owned enterprises The share of the ‘social sectors’ in originating NMP

3 5 6 6 12 13 14 17 19 23 24 25 26 27 28 28 29 29 30 31 31 40 41 46 47 52 54 56 61 62 63 64 64 64 65 65 78

ix

6.2 6.3 6.4

Number and distribution of active earners (1 January 1989) Industrial activities in Hungary by type of organizations (1987) Size distribution of the state-owned enterprises and their establishments in Hungarian industry (1987) 7.1 The per cent share of the net material product produced by individual sectors (1948–83) 7.2 Enterprise size distribution of Czechoslovakian manufacturing firms between 1965 and 1988 7.3 Czechoslovakia: financial position of enterprises 7.4 Czechoslovakia: subsidies and taxes for enterprises in the material sector 7.5 Czechoslovakia: subsidies and taxes for enterprises in the non-material sector 7.6 Growth of total factor productivity in Central and East European countries 8A.1 Expected profits 8A.2 Hypothetical costs of alternative actions 9.1 Fixed assets at original cost 9.2 Distribution of the Bulgarian companies by type 9.3 Composition of the gross national product 9.4 Annual capital investments 9.5 Capital investments by types of ownership 9.6 Distribution of annual capital investments 9.7 Capital investment provided but not utilized 9.8 Employment, fixed assets and wages in industry by sub-branches 9.9 State and co-operative industry enterprises 9.10 Size distribution of the state and co-operative industry enterprises 9.11 Size distribution of industrial employment (workers) and gross production 9.12 Size distribution of state and co-operative enterprises 9.13 Profits from sales in state and co-operative industry enterprises 9.14 Gross profit of the state and co-operative enterprises from the productive sector 11.1 Sectorial distribution of federal government public enterprises (1983) 11.2 Sectorial distribution of provincial government public enterprises (1983) 11.3 Sectorial distribution of Quebec provincial public enterprises (1983) 11.4 Return on assets of top 171 public enterprises (1983) 11.5 Debt/assets ratio for top 171 public enterprises (1983) 11.6 Canadian federal government: public sector divestment (1984–90) 11.7 Canada, federal budgetary expenditure on public enterprises (1983–90) 11.8 Quebec provincial government: public sector divestment (1984–8) 12.1 Number of state-owned companies 12.2 State share of business operations 12.3 State ownership of agricultural property 12.4 Prices, dividends and capital contributions 12.5 Stock Exchange data 12.6 Participation of foreign investors 12.7 Breakdown of completed sales (1985–8) 12A.1 Income from sale of public sector companies (1974–84) 12A.2 Balance of stock sales (1988) 12A.3 Accounting results: ten largest privatized companies (1985–9) 13.1 Pre-1989 ownership pattern

79 80 81 92 93 94 95 96 96 114 114 115 117 118 119 120 120 121 122 122 123 123 124 124 125 148 149 150 150 151 160 161 162 168 169 169 173 175 176 177 179 180 181 186

x

13.2 Sectorial composition of gross domestic product— 1970–90 13.3 Public enterprises: employment and annual revenue 13.4 Privatization of public enterprises: 1984–8 and post-1989 14.1 Morocco’s public enterprises by sector of activity (1985) 14.2 Investment by Morocco’s public enterprises by sector of activity: 1983–5 14.3 Public enterprise size structure: public value: equity and reserves (1985) 14.4 Principal holding companies in Morocco (1985) 14.5 Structure of public ownership (1985) 14.6 Percentage return on total equity 14.7 Transfers (1983–5) 14.8 Selected SNI privatizations (1980–89) 14.9 Selected ODI privatizations (1980–9) and selected CDG privatizations (1985) 15.1 Public enterprises at the national level 15.2 Distribution of public enterprise, by type of activity 15.3 Growth of public enterprise 15.4 Public and private enterprise sectors (1973–84) 15.5 Organizational restructuring 15.6 Distribution of national public enterprises by controlling shareholding fund 16.1 Public companies in Egypt 16.2 Public sector deficits as per cent of budgetary deficit, and net rate of return 16.3 Performance evaluation of 356 SOEs in 1989 16.4 Economic indicators 17A.1 Public enterprises to be privatized or commercialized 18.1 The size structure of public enterprises 18.2 Holding company status 18.3 General structure of public ownership 18.4 Profitability structures of the companies as a percentage of capital employed 18.5 Losing/gainful enterprises 18.6 ZIMCO group’s total contributions to government 18.7 Parastatal dividends 18A.1 Data on public ownership 19A.1 Recommended privatization method 20.1 State-owned enterprises (SOEs) in Israel (1969, 1989) 20.2 Leading SOEs in 1989, by industry 20.3 List of SOEs divested since 1986 22.1 Industrial output growth 22.2 Foreign investment projects approved as of June 1989 23.1 Rates of return for Australian GTEs (1989–90) 23.2 Rates of return for Australian GTEs by sector (1987–90) 23.3 New Zealand: public enterprise 24.1 The number of new telecommunications carriers 24.2 New common carriers market share 24.3 Decrease in the rates for telecommunications services after the telecommunications reform 24.4 The NTT’s growth of revenues and profits 24.5 Changes in ownership

188 190 194 213 214 215 215 216 216 216 226 227 233 234 235 237 240 241 244 245 253 254 265 274 274 275 275 275 276 278 286 306 309 311 315 337 340 346 347 350 367 368 369 369 376

xi

24.6 24.7 24.8 24.9 25.1 25.2 25.3 25.4 25.5 25.6 25.7 25.8 25.9

Net profits of JR group companies Operating loss Non-operating profit (in 100 million yen) JNR employees Who makes what in the USSR Key facts about Poland The first privatization programme Scope of privatization Some economic indices Comparison of distributive privatization proposals Long-term financing prospects for Eastern Europe Conflicts in transfer-of-technology agreements Conflicts in joint venture agreements

376 377 378 378 388 390 396 397 404 408 411 425 426

Notes on the contributors

Matthew Bishop specialized in regulatory and privatization issues as well as merger and competition policy in the course of his research at the London Business School. He has published many articles and reports including ‘Does Privatisation Work’ (with John Kay). Currently he is an economics correspondent with the Economist. Anthony Browne is a partner in Price Waterhouse, and is currently head of its Privatization Services in Australasia. Formerly he held a similar position in London. He has a broad range of experience in privatization, having advised countries such as Australia, New Zealand, South Africa, Portugal, Hungary and the UK. Andrew D.Cao is Director of Training and Research, International Privatization Group of Price Waterhouse, in Washington DC, USA. He has varied experience in privatization activities in many developing countries. He has published extensively in the areas of private sector development and privatization. Christo Dalkalachev is a professor at the University for National and World Economics in Sofia, Bulgaria, and head of the Department of Management of Communications. He has been an adviser to the National Agency for Privatization. Shlomo Eckstein is Professor of Economics and President of Bar Ilan University in Israel. He has experience as a member of the board of directors of enterprises such as the United Mizrahi Bank. He was a member of the National Council for Research and Development in Israel. He has published extensively. Hassan A.W.El-Hayawan is an Assistant Professor at the Ain Shams University in Cairo, Egypt. Formerly he was a member of the Human Resources Committee in Egypt and a visiting professor at the University of the Arab Emirates. Carl B.Greenidge is Minister of Finance in Guyana. He has long experience as a professional economist. Formerly he was Economic Adviser. He has represented Guyana and the Caribbean in the international arena and is a former co-President of the Joint ACP-EEC Council of Ministers. He has published several articles on agricultural economics, public policy and structural adjustment. N.Bulent Gultekin is co-director of the Weiss Center for International Financial Research at the Wharton School of the University of Pennsylvania, USA. Earlier he was in charge of the privatization programme of the Turkish Government. He has been an active adviser to Poland in its privatization activities. Taïeb Hafsi is a Professor of Policy at the Ecole des Hautes Etudes Commerciales, University of Montreal, Canada. His research interests include strategic decision-making in large and complex organizations in both the public and private sectors. He recently edited Strategic Issues in StateControlled Enterprises.

xiii

Rezke Hocine is General Manager of Metalsider (a private steel company) and consultant to international agencies like the World Bank and UNDP. Formerly he was Commissaire for Public Enterprises Organization in Algeria and had experience of public enterprise management. Gregory Jedrzejczak is Under-Secretary of State in the Ministry of Ownership Changes in Poland. He has been Adviser to the Ministry of Finance. He is co-author of the Polish programme of privatization, the Bill on Privatization of State-owned Enterprises, and the Polish Securities Law. He has been an Associate Professor of Economics at the School of Management of Warsaw University. He has published several books and articles. Jan Jörgensen is Associate Professor in Policy in the Faculty of Management, McGill University, Montreal, Canada. His research interests include public sector divestment and restructuring, management in developing countries, and management of diversified firms. He is author of Uganda: A Modern History. E.C.Kaunga is Group Executive Director of Zambia Industrial and Mining Corporation Ltd and is responsible for corporate and economic planning. He taught economics and was formerly Permanent Secretary for the National Commission for Development Planning and had served in the Ministry of Finance. Ekaterina A.Kouprianova is an expert on privatization, working at the International Centre for the Development of Small Enterprises, in Moscow. Spyros K.Lioukas is Associate Professor at the Athens School of Economics and Business Sciences, Greece. Formerly he was a lecturer at the London School of Economics. He has experience of being adviser and consultant to government and enterprises. Michal Mejstrick has co-founded the Centre for Economic Research and Graduate Education at Charles University in Prague, Czechoslovakia, where he is Associate Professor of Corporate Finance. He has been consultant to the World Bank and its Economic Development Institute. Abulmaal A.Muhith is a consultant working for international organizations. Formerly he was Minister of Finance and Planning in Bangladesh and worked as Alternate Executive Director in the World Bank and as Executive Director in the Asian Development Bank. V.V.Ramanadham is Co-ordinator of the Interregional Network on Privatization (UNDP). He has been elected as an Associate Fellow of Templeton College, Oxford, UK. He has worked in the United Nations and in the UNDP for many years. His specializations include public enterprise and privatization. Formerly he was Professor and Dean at Osmania University in India and Visiting Fellow at the London Business School. He was Founder-Director of the Institute of Public Enterprise in India. He has published extensively. Zoltán Román is a former director of the Research Institute for Industrial Economics of the Hungarian Academy of Sciences in Budapest, Hungary. He has been chairman of the Committee on Industrial Economics of the Academy of Sciences and Vice-President of the European Council of Small Business. He was President of the European Association of National Productivity Centres. He has published extensively. Samuel B.Rutega is Caretaker Administrator/Acting Chairman of Uganda Development Corporation Ltd. Earlier he held the position of Permanent Secretary in the Government of Uganda in several ministries and was a Consultant for UNCTAD on State Trading Organizations in Developing Countries. Alfred Saulniers is an adviser to the Ministry of Economic Affairs and Privatization in Morocco. He headed the Office for Public Sector Studies at the University of Texas at Austin, USA, and also taught at

xiv

Zaire National University and Catholic University in Peru. He has been a consultant to many international agencies including the International Labour Organization, Economic Commission for Latin America, World Bank, and USAID and the governments of Cameroon, Mexico and Peru. He has publilshed extensively. Matija Skof is president of the international corporation, Slovenijales, in Ljubljana, Slovenia. He is also Associate Professor in the Faculty of Economics at the University of Ljubljana. He occupies high business and public positions such as Chairman of the Executive Committee of Ljubljanska Banka, ViceChairman of the Board of Directors of the Slovene Stock Exchange, Vice-Chairman of the Board of Directors of Austria-Lander Bank, Member of Parliament and Honorary Consul of the Netherlands. Marianna Strzyzewska-Kaminska works at the Institute of Management in Warsaw and is adviser to the Minister of Ownership Changes in Poland. Formerly she was Director of Scientific Affairs in the Institute for Socialist Countries, Polish Academy of Sciences. She spent several months in Japan during 1990–91 studying privatization and deregulation. Denis Sullivan is Assistant Professor of Political Science at North-eastern University. He was a Fulbright Senior Scholar at Cairo University and a visiting lecturer at the American University in Cairo during 1990–91. He is co-editor, with Iliya Harik, of Privatization and Liberalization in the Middle East (Indiana University Press, 1992). David Thompson is Senior Research Fellow at the Centre for Business Strategy, London Business School, London. Formerly he was Economic Adviser at the Department of Transport in the British Government. He also worked for the Monopolies and Mergers Commission and H M Treasury. He has extensive experience in the regulation of public enterprises and has authored several books on privatization and regulation. Christian Larroulet Vignau is Executive Director of the Institute for Liberty and Development, in Santiago, Chile. Formerly he was the Chief of Staff of the Finance Minister, a member of the National Commission for Privatization in Chile, head of the Planning Department at the National Planning Office, and head of the Anti-Trust Commission. He has been a Professor at the Economics Institute, Catholic University of Chile, and a member of the boards of several public enterprises. Volkhart Vincentz is a Senior Researcher at the Osteuropa Institute at Munich, Germany. He has been teaching about socialist economies and done research for the Germany Ministry of Economics on Soviet economic performance and east-west trade. Branko Vukmir is a Consultant to the UN Center on Transnational corporations in New York. He has experience of the legal aspects of privatization and of joint ventures. He is an Honorary Consul of Denmark in Zagreb, Croatia.

Foreword William H.Draper III

The United Nations Development Programme (UNDP) assists developing nations, at their request, to make the transition to market-oriented economies. One of the options that many countries are interested in pursuing is the privatization of nationalized or parastatal enterprises, which may be operating inefficiently and causing a drain on public revenues. This volume reflects the continuing efforts of UNDP’s Interregional Network on Privatization in promoting substantive studies by experts in the field. In doing so, it builds on the important groundwork laid by the 1989 volume, Privatisation in Developing Countries. This book offers a global perspective, drawn from the experiences of 25 countries around the world, with its main focus on Eastern Europe and the developing countries. Enthusiasm for moving from state-managed to market-driven economies is abundant, but lack of experience often impedes rapid implementation. The detailed reviews of country experiences presented here provide numerous perspectives on privatization policies and processes. UNDP recently established a Division for Private Sector in Development (DPSD) and encourages the use of resources under its various programmes to enable the private sector to play an enhanced role as an engine of development. The Interregional Privatization Network established with DGIP support has been utilized by DPSD in helping developing countries in several ways. The 1991 publication of Guidelines on Privatisation has been well received in developing countries. An important contribution of the Network on Privatization has been its assistance in organizing national workshops in collaboration with requesting governments, field offices and DPSD on privatization in Eastern Europe, India, Myanmar, Nepal, Panama, Trinidad and Tobago, and Uganda. UNDP’s assistance in this politically sensitive area seems particularly appropriate, given its impartiality and neutrality. This volume contains a wealth of comparative information from around the world and gives policy makers an excellent opportunity to review the privatization experience in countries similar to their own. Professor V.V.Ramanadham, Co-ordinator of the Interregional Network on Privatization, has edited the text with great professional competence and provided a very useful concluding summary. The support of UNDP’s Division for Global and Interregional Programmes has been quite significant in collecting and disseminating the important information in this book. William H.Draper III Administrator United Nations Development Programme New York

Preface

This is a companion volume following the 1989 publication Privatization in Developing Countries. It contains studies of privatization in twenty-five countries—developed and developing—with a strong focus on Eastern Europe where enthusiastic efforts are being made towards transformation into market economies. The papers provide a review of the thinking on privatization and its implementation in different countries. Those on the Soviet Union and Yugoslavia not only give a good picture of the situation before their disintegration but contain material which, in substance, applies to the successor states. While bringing out the unique features of privatization in the countries covered, the volume gives enough indication of differences among them—in particular, as between developed market economies and the rest, between Eastern European countries and other developing countries, and within any of these categories itself. An important inference that it makes possible is that, though tenaciously contemplated, privatization has been rather slow in most countries and that there is yet neither an expert ex ante estimation of the likely impacts of intended privatization programmes nor a discerning understanding of the precise results of privatization(s) that have occurred. I offer my most sincere thanks to the contributors to this volume, who are eminent experts on the subject and have close experience with the circumstances of the country they have covered. They are all associated with the Interregional Network on Privatization, either as members or associate members. It gives me pleasure, as Co-ordinator of the Network, to present this volume as a co-operative output of the Network. I am grateful to Mr William H.Draper III, Administrator of the United Nations Development Programme, who has kindly written the Foreword to this volume. I place on record the intense interest evinced in the Network activities by Mr Timothy Rothermel, Director, and Mr Philip Reynolds, of the Division for Global and Interregional Programmes of the UNDP. Professor V.V.Ramanadham New York 1 September 1992

1 Privatization in the UK Deregulatory reform and public enterprise performance Matthew Bishop and David Thompson

INTRODUCTION At the end of the 1970s the nationalized industries in the UK accounted for nearly 10 per cent of gross domestic product (GDP) and employed nearly 10 per cent of all workers. Government-owned monopolies dominated transport (buses, rail and aviation), communications (postal services and telecoms) and the energy sector. Services provided by local government (such as refuse collection) and by the National Health Service accounted for a further important slice of enonomic activity. Nor was this picture unique to the UK as other contributions to this volume will show. By the end of the 1980s this picture had been transformed. In the UK, telecoms, gas, electricity, aviation, steel production and water supply had all become largely—or wholly—private sector activities. Privatization of British Rail, British Coal and London Transport were all at various stages of preparation at the turn of the decade; whilst reforms in local government and the health service had started to change the role of these organizations from producers of services to suppliers of services produced by others. The causes, and policy objectives of these reforms, and the policy objectives which they serve, have been both multiple and shifting over time (see Bishop and Kay 1988). They include a concern to limit the power and influence of the public sector trades unions, a concern to reduce the role of government, to promote a wider spread of shareownership amongst the population at large and to realize the proceeds from the sale of state assets for the government’s finances. Perhaps the most important factor, however, has been a concern to improve the efficiency of the public enterprise sector. Thus, outlining his objectives for the (then) new policy, in 1983, the Treasury Minister responsible concluded that: ‘our main objective is to promote competition and improve efficiency’. Our purpose in this paper is to examine whether performance has indeed improved following the reforms of the 1980s. The plan of the paper is as follows. In the second section we outline the main features of the regulatory reforms. Whilst popularly associated with privatization, these reforms have also included important changes to the regulation of enterprises which have remained in public ownership as well as policies to increase competition both through the deregulation of state monopoly activities and through the competitive tendering of publicly-provided services. In the third section we look at the consequences of these policies to increase competition. We examine several sectors—in particular buses and aviation—where deregulation of state monopoly has been followed by significant changes to prices and product quality. We also consider some of the issues for competition policy which have arisen. Our assessment of tendering shows that this has been an effective policy instrument in some sectors but we also identify transitional problems which have been encountered in others.

2

MATTHEW BISHOP AND DAVID THOMPSON

In the fourth section we look at sectors where the introduction of competition is more problematic—that is, industries which have elements of natural monopoly. We examine measures of financial performance— in particular profitability. But for firms holding significant market power, such financial ratios are likely to give only an imperfect measure of efficiency. For this reason, we also examine measures of productivity and we show that a significant upturn has taken place during the 1980s. In the final section we draw together some concluding thoughts. REGULATORY REFORM IN THE UK To understand how the reforms of the 1980s changed the incentives and controls faced by the (then) public enterprises, we first need to examine how these enterprises were regulated beforehand. The control framework was established in a government White Paper, introduced in 1967, which specified guidelines for the setting of prices and investment levels. These guidelines were drawn from the standard allocative rules suggested by economic theory; prices were to be set in relation to marginal cost and investment was to be undertaken in projects whose discounted benefits exceeded the discounted present value of their costs. In addition the non-commercial responsibilities of the enterprises—for example, operating lightly-trafficked, unprofitable railway lines—were to be accounted for separately and subsidized by government. Industries were also required to achieve a targeted level of financial performance, usually specified as a rate of return on assets, after crediting any grants from government. One observation frequently made by economists on this framework of control related to the potential inconsistency between the various rules. In practice, questions of consistency proved to be hypothetical; the pricing and investment rules proved to be unenforceable in the face of significant information asymmetries between the monopoly enter prises and government regulators. A government review in 1976 commented that it is doubtful whether (the pricing and investment rules) have made a material contribution to improving the allocation and effective use of resources. (National Economic Development Office 1976) Furthermore, the financial targets were largely abandoned in the early 1970s as industries were required to hold down the overall level of their prices as part of the then government’s counter-inflation strategy. Although problems of internal consistency between the various controls were not, therefore, a practical concern, a number of serious weaknesses with the control framework have been identified. As we have already noted, the guidelines on pricing and investment proved to be unmonitorable. More seriously, the control framework proved equally weak in securing the achievement of productive efficiency. Measures of financial performance, which could be monitored, were always of second order importance to the pricing and investment rules and were, in any event, rapidly abandoned. And the rather loosely-defined relationship between industries and the ministries responsible for their control provided opportunities for piecemeal intervention by politicians in enterprises’ affairs when the conduct of these impinged on politically sensitive issues (the closure of a rural railway line, for example). The performance of the nationalized industries reflected this pessimistic assessment. In a memorable phrase the performance of the nationalized industries in the 1970s has been described as ‘generally third rate with one or two exceptions of first rate performance’ (Pryke 1981). The upshot was a change to the framework of control in a White Paper introduced in 1978. This asserted the primacy of profit targets over pricing and investment rules and introduced cost performance targets to ensure that profits were not boosted

PRIVATIZATION IN THE UK

3

by the exercise of market power in setting prices. The financial controls were underpinned by the introduction of external financing limits—EFLs— which constrained the total cash inflow/outflow to the enterprise. Thus, by the end of the 1970s, a set of regulatory controls had been devised which appeared to reflect a view that publicly-owned enterprises would only follow policies which served the public interest when a framework of incentives and constraints was established to make this happen. However, this approach to publicly-owned firms—what might be called ‘public enterprise’ regulation—bears many similarities to an approach in which regulatory constraints are imposed on private markets with the intention of bringing private and social objectives into alignment with one another. Looked at from this perspective, the privatization of these enterprises appears a less radical change than at first sight. It is to the implementation of the regulatory reforms of the 1980s to which we now turn. In the early 1980s, the emphasis in reform was the removal of legislation that maintained artificial public sector monopoly. This affected industries ranging from telecommunications to energy to transport, the trade unions, and in the late 1980s, the health service and television. Similarly, several private sector industries were deregulated, including financial services (the ‘Big Bang’), conveyancing, and optical services (see Table 1.1). In 1979 the public sector also contained numerous government functions which did not generate a positive income. These activities did not, however, escape reform. The 1980s saw the growing use of competitive tendering or ‘contracting out’. Many activities, although remaining publicly organized and financed, were carried out by private sector suppliers. Various services were put out to competitive tender, particularly within the local government and health authority sector but, as the 1980s progressed, more pervasively throughout the public sector. For many people, however, the 1980s public sector reforms are synonymous with privatization. Although mooted from time to time by post-war Conservative politicians, privatization had not been a significant policy concern of the consensus governments of the 1950s and 1960s. Indeed, privatization did not feature as a major plank in the election manifesto of the first Thatcher administration (1979–83). However, the policy was first seriously discussed in the UK in the late 1970s by the Conservative opposition. For them, the key objective of ownership change was the reduction of the power of public sector trade unions. But in the early years of Conservative government following the 1979 election, privatization was not an important policy. Some public sector assets were sold, as were some enterprises, but the companies sold —such as Cable and Wireless in October 1981 and Amersham International in February 1982—were small, operated in competitive markets, and played no Table 1.1 Key legislation—regulation and deregulation Act

Date

Broadcasting Act Competition Act Transport Act Fisheries Act Telecommunications Act

1980 1980 1980 1981 1981

Main regulatory provisions

allows IBA second television service provided new procedures for dealing with anti-competitive practices liberalized express coaching and increased access to other road services established Sea Fish Industry Authority to regulate sea fishing in the UK began liberalization of telecommunications; deregulated high value, courier and postal services Oil and Gas (Enterprise) Act 1982 liberalized gas supply Energy Act 1983 increased access to entrants to electricity generation Telecommunications Act 1984 set up Office of Telecommunications; abolished BT’s exclusive privileges in telecommunications; allowed privatization

4


Act

Date

Main regulatory provisions

Cable and Broadcasting Act Civil Aviation Act Transport Act Airports Act

1984 1980 1985 1986

Gas Act

1986

Wages Act Building Societies Act

1986 1986

Financial Services Act

1986

Banking Act

1987

Local Government Act Water Act

1988 1989

Electricity Act

1989

established Cable Authority liberalized domestic aviation, and international aviation where possible deregulated local bus services allowed privatization of BAA; regulation of use and economic controls of airports established OFGAS; ends monopoly privileges of British Gas; allowed privatization abolition of Wages Councils set up Building Societies Commission, gave building societies new powers, gave statutory basis to compensation scheme gave authority to the Securities and Investments Board to regulate a wide range of investment business new provisions for regulating the acceptance of deposits; protecting of depositors, and regulating the use of banking names and descriptions required competitive tendering of various local government services set up National Rivers Authority; set up Office of Water Services; allowed privatization of the ten regional water authorities set up Office of Electricity Supply; separated the electricity industry into grid, distribution and generation companies; allowed privatization

Source: Bishop and Thompson (1991)

role in broader public policy objectives. Trade union influence was not an issue in either case—indeed, Cable and Wireless traded mostly overseas. At this stage, the sale of publicly-owned property assets was more significant than the sale of shares. Between 1979 and 1988, over one million publicly-owned houses— mainly under local authority control—were sold through the ‘right to buy’ scheme. The value of these properties was more than £20 billion (though because of discounts offered to tenants, total receipts were only £15 billion). The sale of motorway service areas to buyers such as Granada and Trust House Forte who had previously enjoyed operating franchises, generated £28 million during 1980 and 1981. Similarly, the government gradually disposed of the assets of the New Town Development Corporations and Commission. The Commission for New Towns, established to implement the sale of such assets, raised more than £700 million. The growth of privatization into a central feature of the government’s political programme had rather different origins. British Telecom—the state-owned telecommunications utility—planned a substantial investment programme to implement the introduction of electronic switching. Although the government broadly supported the programme, there were implications for the goverment’s macroeconomic policies which were based on the Medium Term Financial Strategy in which targets for public sector borrowing played a central role. There was much discussion of mechanisms by which the funding of telecommunications investment could be excluded from calculations of the public sector borrowing requirement (PSBR). The radical decision to transform British Telecom into a private company provided a solution to the problem by taking the financing of BT’s investment outside of the PSBR. This is, of course, a presentational issue; it is likely that the macroeconomic consequences—upon interest rates and inflation— of private borrowing are much the same as those of public borrowing for the same project.


5

In November 1984 some 51 per cent of the shares of British Telecom were sold, raising a total of £3.9 billion—six times larger than any previous issue on the UK stock market. Despite initial scepticism about the capital market’s willingness to absorb so large a flotation, the offer was massively oversubscribed. Two and a quarter million applicants received shares, but no allocations were made to UK institutions. Instead, they turned to the secondary market, with the result that shares opened at a premium of more than 90 per cent to their partly paid price. The unexpected popularity of the British Telecom privatization Table 1.2 Privatizations by share offer Date

Company

% of equity

Price (£m)

Oct. 1981 Feb. 1982 Nov. 1982 Feb. 1983 June 1984 July 1984 Nov. 1984 Dec. 1986 Feb. 1987 May 1987 July 1987 Dec. 1988 Dec. 1989 Total

Cable and Wireless Amersham International Britoil Associated British Ports Enterprise Oil Jaguar British Telecom British Gas British Airways Rolls-Royce British Airports Authority British Steel Water Authorities

49 100 51 52 100 100 51 100 100 100 100 100 100

224 71 549 22 392 294 3,916 5,434 900 1,363 1,225 2,420 2,183 18,993

created the opportunity for further sales. In December 1986, 100 per cent of the shares of British Gas were sold for £5.4 billion. This was followed by British Airways in 1987 (£0.9 billion), Rolls-Royce in May 1987 (£1.4 billion) and, in July 1987, the British Airports Authority (£1.2 billion). In November 1988 British Steel was sold for £2.4 billion, and in December 1989, the flotation of the ten regional water authorities generated £2.2 billion. The privatization of the electricity supply industry began in December 1990. Details of public sector companies sold by public flotation are contained in Table 1.2. Not all privatized companies were offered for sale to the general public. Table 1.3 lists the companies that have been transferred by private sale rather than through stock market flotation. These include subsidiaries of British Steel, British Shipbuilders and British Rail (notably Sealink and the railways hotels). In addition, the National Freight Consortium was sold directly to its employees, and a number of regional bus companies were the subject of management buy-outs. Some of these sales formed part of the process of preparing the parent corporation for privatization. Others took place because the parent was considered too difficult to float as a whole. The disposal of such assets yielded more than £1.25 billion. The policy of the government was not only to relinquish control of industrial companies, but also to dispose of its equity stakes in

6


Table 1.3 Private sales of companies Date

Company

June 1980 Fairley Engineering June 1980 Ferranti Feb. 1982 National Freight Consortium Mar. 1983 International Aeradio Mar. 1983* BR Hotels Mar. 1984 Scott Lithgow May 1984 Wytch Farm July 1984 Sealink Aug. 1984 Inmos June 1985 Yarrow Shipbuilders Nov. 1985 Vosper Thorneycroft Jan. 1986 Swan Hunter Mar. 1986 Vickers Shipbuilding July 1986* Royal Ordnance Aug. 1986 National Bus Company Sept. 1986 BA Helicopters Jan. 1987 Unipart Jan. 1987 Leyland Bus Company May 1987 DAB June 1987 Istel July 1987 Rover Group Total *includes subsequent sales

Proceeds (£m) 22 54 7 60 45 20 80 66 95 34 18.5 7 60 201 250 13.5 30 4 7 26 150 1,250

companies where it did not exert management influence or control. These are set out in Table 1.4, which also includes second and third flotations of shares in some companies where a majority stake had previously been privatized. The shift in policy which resulted in the privatization of large state enterprises with significant monopoly power—commencing with British Telecom in November 1984—prompted a requirement for new regulatory institutions. The existence of naturally monopolistic distribution networks in telecoms, gas, electricity and water, led the government to develop new, semi-autonomous and industry-specific regulatory bodies to oversee the activities of the newly-privatized companies. These were, respectively, OFTEL, OFGAS, OFFER and OFWAT. In the case of airports, regulation has been taken on by an existing body— the Civil Aviation Authority. The public policy concerns which prompted the creation of these bodies are aptly summarized in a speech made in 1983 by the then Secretary of State on the proposed privatization of British Telecom: Table 1.4 Flotations of government holdings in private sector companies Date

Company

Proceeds (£m)

Nov. 1979

BP

290


Date

Company

Proceeds (£m)

Feb. 1981 June 1981 Sept. 1983 Dec. 1983 April 1984 May 1985 Aug. 1985 Dec. 1985 Oct. 1987 Total

British Aerospace BP BP Cable and Wireless Associated British Ports British Aerospace Britoil Cable and Wireless BP

50 15 566 275 52 363 449 602 5,727 8,389

7

BT plc will nevertheless dominate the British market for telecommunications for some years yet. The Government considers therefore that there will be a need for regulatory arrangements for the industry to balance the interests of those supplying telecommunications services, their customers, their competitors, their employees, their investors and their suppliers. These various concerns can be categorized into three groups of regulatory issues: (a) how to meet social objectives; (b) how to develop competition; and (c) how to prevent monopolistic pricing behaviour. The main instrument of regulatory policy was typically an operating licence with which the former state enterprise was required to comply. Thus social objectives were generally handled by specifying conditions in the licence which required the privatized company to carry out certain activities. For example, British Telecom are not allowed to close telephone booths—even if they are loss-making—unless their annual income falls below a prespecified sum. This licence condition means that BT must continue to operate call boxes in sparselypopulated areas, even though it might be more profitable to the company to close these down. Similarly, monopolistic pricing is constrained by a licence condition which puts a ceiling on the level of the privatized company’s prices (or at least the prices of those of its products where it is able to exercise market power). The ceiling is typically set by reference to a formula which permits the company to increase its prices by no more than a specified amount below the increase in the consumer price index (the so-called RPI-X formula). The value of X in the formula—which acts to incentivize productivity improvement—is reset at prespecified intervals, typically every five years (for further discussion of the incentive properties of this method of regulation see Littlechild 1983 or Vickers and Yarrow 1988). Perhaps the most difficult regulatory task is that of promoting competition. Whilst these enterprises typically have a significant degree of market power, there is often scope for competition in some of their activities. But potential entrants face a powerful incumbent and recognition of this means that the licence conditions usually contain provisions which are more specific than the provisions of competition policy which apply to ‘ordinary’private sector companies. Thus licences usually require the utilities not to price discriminate; cross-subsidy between specified activities is often explicitly prohibited; and separate profit and loss accounts are sometimes required for individual products.

8


Implementation of the new regulatory regimes is in the hands of the newly-created regulatory offices who monitor and enforce compliance with the licences and seek to alter licences in circumstances where the initial provisions turn out not to be appropriate (see Beesley and Littlechild 1987 for a more detailed discussion). LIBERALIZATION, COMPETITIVE STRATEGY AND PERFORMANCE In many cases, the reforms which opened former state monopolies to competition have been followed by significant changes in prices and product quality. For example, the first deregulation of a state monopoly— express coach services in 1980—was followed by price cuts of up to a third on the main trunk routes. Prior to deregulation, companies wanting to operate an express coach service had to obtain a licence from a regulatory authority—the Traffic Commissioners. However, the authorities would generally reject an applicant if companies already operating on the proposed route—or British Rail— objected to the entrant’s service. The result was that each route was an effective monopoly with rights to most routes being held by two public sector companies—National Express or the Scottish Bus Group. Deregulation was followed by significant cross-entry from the highly competitive market in contract coach services. The result was rapid product innovation—coach services with in-journey videos and meals were brought in—and by changes to the level and structure of prices. On average prices are now lower by 20 per cent, in real terms, than prior to deregulation (see Thompson and Whitfield 1991). Local bus services were subject to the same regulatory system prior to their deregulation in 1986 (except in London). Deregulation has been followed by a significant reduction in costs (between 25 per cent and 30 per cent) and substantial increases in service frequency; it is not yet clear that there has been any systematic reduction in prices, however (see Gwilliam 1989). The regulation of scheduled air services followed a similar pattern— a licence is required to operate a route but new licences were rarely granted—and the liberalizations implemented during the 1980s have resulted in lower prices, particularly for leisure travellers, both on the main UK trunk routes (see CAA 1988) and on those international routes where it has been politically feasible to negotiate liberalization with overseas governments; familiar examples are routes to Amsterdam, Dublin (see Abbott and Thompson 1991) and to Hong Kong and North America. Outside the transport sector the former state monopoly which has experienced the most significant increase in competition is British Telecom. The competitive supply of terminal apparatus has been associated with a wider product range and lower real prices (see Gist and Meadowcroft 1986). The licensing of Mercury Communications to supply trunk services in competition with BT has been followed both by a rebalancing of BT’s tariffs—so that these now more closely reflect the underlying costs of supply—and by perceived improvement in the quality of service which BT offers to its largest business customers. The licensing of new mobile phone services—of various types—in the years since 1985 has lead to a thriving market. However, whilst deregulation has lead to significant changes in market performance—that is, in products and prices—changes to market structure (that is, the numbers of firms in the market and their market shares) have been less marked. Indeed, one of the surprises of deregulation has been the success of the incumbents from the regulatory era in defending their high market share. Thus in coaching most routes are now served by either National Express or Scottish Express (and in a few cases both). In the case of local bus services attempts at network entry have generally failed; most airline markets remain highly concentrated and Mercury’s share of the phone market remains marginal.


9

Of course the failure of entry—and incumbents’ success—does not necessarily mean that deregulation policies have failed. The theory of contestable markets tells us that even in a highly-concentrated market firms may need to be efficient to survive. It is clear that the deregulated markets have some of the features of contestability; and the changes in performance which have followed deregulation are consistent with this view. But this is not the whole story. To examine why incumbents have been so successful—and whether their high market shares mean that they are still able to exercise market power—we need to look at the barriers to market entry. It is useful to make a distinction first suggested by Salop (1979) between: ‘innocent barriers to entry’: these result from the nature of technology and demand in the market; and ‘strategic barriers to entry’: these result from actions taken by incumbent firms to deter entry by new firms or to enourage the exit of existing rivals. Incumbents in the deregulated market benefited from several ‘innocent’ barriers to entry—a wellestablished brand name, established marketing networks and expertise specific to the product in question. In many cases these innocent barriers were used as a foundation for strategic actions; these included the use of revenues gained in non-competitive markets to cross-subsidize lower prices in competitive markets and the exploitation of vertical linkages. Both phenomena are illustrated in the case of express coaches. The main incumbent—National Express—was a part of the far larger National Bus Group whose main business lay in local bus markets where—until 1986—competition was precluded. The result was that National Express was able to operate at low levels of profitability—because financially it was underpinned by the National Bus Group—and pursue an aggressive pricing policy against its rivals. The second point is slightly more subtle. National Bus not only supplied express coach services, through National Express it also supplied coach terminal services. The important point here is that whilst the coaching business is one with low entry costs, it is immediately apparent that coach terminal operation is a business with very high entry costs. National Bus was able to exploit this vertical linkage by denying rival coach companies access to its terminals. Competitors were thus faced with the unsatisfactory options of either incurring the significant costs of entering the coach terminal business or, alternatively, of using inferior terminal facilities. Following the recognition of these problems—that simply removing legislative restrictions on entry did not produce the wished-for competitive results—the government’s liberalization strategy has become more sophisticated. However, tackling innocent advantages is inherently problematic, as the advantage—for example, a reputation for high quality service—may often yield an economic benefit to the consumer. There was, however, a marked increase in examples of the separation of genuine natural monopoly activities from those where competition was possible. For example, to tackle the continuing dominance of National Express, the government passed a new Transport Act (1985) splitting the company from the rest of the public sector National Bus Group, divesting ownership of main coach terminals and requiring that access to these be open to all coach operators on equal terms. The deregulation of local bus services has also followed this pattern. The importance of vertical linkages between competitive and monopoly activities has been highlighted by the limited success of the first attempts to liberalize the electricity and gas industries. The integrated electricity supply industry (ESI) combined three vertically-linked activities— distribution (natural monopoly), transmission (natural monopoly) and generation (potentially competitive). The Energy Act of 1983 allowed competition in generation; however, little emerged because the public sector’s ownership of the distribution network led to the possibility of distortion of the terms of competition in its favour. Because the distribution system is a natural monopoly, a liberalization strategy is needed to secure even-handed terms of access for competing suppliers. As we have seen, where vertical linkages or cross-subsidies occur, these can be attacked by separating the vertically-linked activities, or the profitable from the unprofitable. The 1980s saw the increasing use of such

10


‘break-ups’. Notably, in preparing the ESI for privatization, distribution was separated from transmission, which was in turn separated from generation. Generation itself was split into three competing companies. There have been a number of cases where the break-up option has not been followed, however, notably in British Gas and British Telecom. British Gas survived the decade virtually unaltered, whilst BT, although subject to some new entry in the supply of apparatus, and the establishment of Mercury as a competitor network, retained a dominant share of all its main markets. In 1991, however, the government announced its intention to license additional entrants. Turning to the introduction of competitive tendering, the consequences have been investigated in a number of studies. A study of refuse collection services by the Audit Commission in 1984 concluded that whilst private contractors were more efficient than the average public sector supplier, they were only on a par with the best of the public sector suppliers. The Commission concluded that the quality of management was the most important factor in securing efficient performance: ‘privatisation does not appear necessary to securing competitive performance provided that the organization is well managed and the workforce suitably motivated’. A study carried out two years later in 1986—by which time a considerable number of authorities had put their refuse collection services out to tender—provided some further insights into the factors determining performance. The results are shown in Figure 1.1. Each authority’s efficiency is measured against a standard which makes allowance for topography, the type of service which is provided and the mix of areas served (for example, business and residential, rural and urban, and so on). The results show that the tendered services generally achieve a higher efficiency rating than non-tendered services. The study concluded that ‘where services have been tendered costs are significantly lower (by broadly 20 per cent) than where they have not been’. The study was also able to compare the efficiency achieved where contracts had been awarded to private companies with the outcome where, following a tendering exercise, the service had been retained ‘in-house’ by the public sector. The former case showed cost savings of 22 per cent on average, whilst the latter showed 17 per cent (see Domberger, Meadowcroft and Thompson 1986). An important question is whether these measured cost savings have been associated with any deterioration in service quality. The results shown in Figure 1.1 are standardized for two important dimensions of quality—frequency of collection and the type of service provided. The study found no evidence of systematic deterioration in other, less tangible, dimensions of quality. An investigation into the sources of the cost savings arising from tendering found that the bulk of the savings could be attributed to improvements in the physical productivity of labour and vehicles. This was less true in the case of contracts won by ‘in-house’ teams— suggesting the possibility that competitiveness with the private sector was being achieved at the expense of pay and conditions of employment. In the case of the National Health Service, a study by the National Audit Office found that 76 per cent of contracts had been won by public sector ‘in-house’ suppliers and 24 per cent by private contractors. The NAO estimated that the cost of contracts awarded after tendering were 20 per cent below the level of costs previously incurred. Similar results were found by a study which compared the costs of hospital cleaning services which had been tendered with those which had not. The study concluded that ‘the introduction of competition, through the tendering process, has resulted in substantial savings. Our estimates suggest that the achievable cost reductions are likely to be of the order of 20 per cent’ (Domberger, Meadowcroft and Thompson 1987). The study noted, however, that the introduction of tendering had been subject to ‘teething’ problems. In the early years of implementation there was a significant incidence of ‘contractors’ failure’—that is, situations ‘where contractors have been sacked or have pulled out of contracts, or where there have been substantial complaints about the standard of the service they provided’ (Joint NHS Privatisation Research


11

Figure 1.1 Competitive tendering and efficiency: the case of refuse collection Source: Domberger, Meadowcroft and Thompson (1987) Note: Authorities with efficiency measures below zero are more efficient than average, and vice versa.

Unit, 1987). However, the incidence of contractors’ failure has declined in more recent years. What seems to have happened is that contracts were initially won by companies who underestimated the cost of providing the service. This ‘winners curse’ resulted from information imperfections which stem from the nature of the service; it is intrinsically difficult to define in a contract what the supplier is meant to deliver (that is, what is meant by a ‘clean’ hospital) and how contract performance will be monitored. In this case, however, the information imperfections seem to have been transitory, affecting the period when few bidders had much actual experience of performing this type of contract.

12


PERFORMANCE OF THE PUBLIC UTILITIES We have seen that the central aim of the policies of reform outlined in the second section was to improve the performance of the companies making up the ‘1979 public sector’. In the previous section we considered reforms which introduced competition into activities which were formerly state monopolies. However, such liberalization measures could not be expected to be effective in all parts of the public enterprise sector. In many public sector industries the high sunk costs of market entry meant that competition was either impossible or likely to be highly imperfect. For such ‘natural monopoly’ activities continued regulation—whether in public or private ownership—was inevitable; the key determinant of performance was thus the nature and characteristic of the regulatory regime. It is this aspect of the 1980s reforms that we consider now. This is a far from simple task, as ‘performance’ can be viewed in a number of different ways, and different measures and indicators of performance can be appropriate to different companies. Any narrow definition of ‘performance’ is inevitably unsatisfactory. For instance, focusing on profitability may fail to reflect the presence of monopoly; a concentration on costs may underplay the role of technological change; whilst changes in the level of output may indicate inefficient pricing rather than effective use of resources. We thus build up a broad, and more balanced, picture of performance by Table 1.5 Profitability PBIT (£m) Nominal (£m) 1979

Real (1987 prices) Priv

1990

1979

Priv

1990

Privatized Amersham 6 9 29 11 11 24 ABP 27 17 54 50 20 44 BAA 11 91 256 20 91 209 BA 111 234 433 206 244 353 B Gas 443 1,244 1,095 823 1,244 894 B Steel −452 472 784 −839 458 640 B Telecom 785 1,531 3,244 1,459 1,749 2,647 C and W 52 56 527 97 79 430 Ent Oil n/a 139 82 n/a 159 67 NFC 10 23 109 19 29 89 R-Royce −47 141 222 −87 141 181 Public sector B Coal 137 133 254 109 B Rail −122 113*** −227 110*** Post Office 34 116 63 95 Source: Company accounts Note: Britoil and Jaguar are excluded because they have been acquired since privatization; water and electricity supply because their accounts were substantially restructured during the period, making comparison unreliable.


13

setting out a range of performance measures. We begin with profitability and turnover. These are particularly useful indicators of performance in competitive markets where alternative suppliers are available should the consumer be dissatisfied with a company’s performance. There are two main measures of profitability—profit before interest and tax (PBIT), which is the operating profit, indicating the short-run effectiveness of the company; and profit after interest and tax (PAIT), which indicates the company’s longterm effectiveness, not only in production and supply, but in its interactions with the capital market and tax regime. Here we show the PBIT figures for the 1979 public sector (see Table 1.5). We have also considered two output measures—turnover and physical output. Turnover (see Table 1.6) is the money value of the products sold by the company during the year; physical output is a weighted measure of the units of each product supplied by the company during the year (see discussion of total factor productivity, below). Having a large turnover or profitability does not of itself indicate good performance, however. Larger companies tend to have Table 1.6 Turnover and output Turnover Real prices (1987) 1979

Priv

Growth of output Real (%) 1990

1979-Priv

Priv-1990

Privatized Amersham 71 79 170 11 115 ABP 243 185 174 −24 −6 BAA 301 439 610 46 39 BA 3,046 3,278 3,948 8 20 B Gas 5,519 7,610 6,514 38 −14 B Steel 6,106 3,993 4,172 −35 4 BT 6,024 7,853 10,049 30 28 C and W 499 519 1,890 4 264 Ent Oil n/a 288 275 n/a −5 NFC 774 614 1,328 −21 116 R-Royce 1,575 1,802 2,417 14 34 Public sector (1979–90) B Coal 5,551 3,373 −39 B Rail 4,280 2,594* −39** P Office 2,721 3,639 34 Source: Company accounts Note: Britoil and Jaguar are excluded because they have been acquired since privatization; water and electricity supply because their accounts were substantially restructured during the period, making comparison unreliable.

larger profits. Rather, it is the economic rent generated by each unit of output sold that is crucial. Thus we divide profit by turnover to show the margin earned on each pound of revenue—the return on sales (RoS). The profits earned in the product market should also be seen in the context of the investment required to generate them. We thus divide profits by capital employed (fixed assets plus stocks) to show the return on capital employed (RoCE). Table 1.7 shows these margins. We would expect, over an extended period, the effectiveness of a company’s investment activity to also be reflected, where the company is a public stock company, in the stock market price of its shares. However,

14


whilst RoCE demonstrates the actual performance of the company in the past, the share price reflects the anticipated performance of the company in the future (the discounted present value of the expected future cash flows). Thus, whilst we would generally expect the stock market’s expectation of future performance to closely reflect recent actual performance, this by no means need be so. Although we do not set out share price information here, privatized companies have generally performed better than the stock market average. Table 1.7 Profit margins RoCE (%) 1979

Priv

RoS (%) 1990

1979

Priv

1990

Privatized Amersham n/a 22.5 22.3 16.7 13.6 12.6 ABP 16.1 8.9 18.8 20.4 11.0 25.4 BAA 2.1 6.9 9.8 6.9 20.7 34.3 BA 13.7 25.3 16.6 6.7 7.4 8.9 B Gas 20.3 16.9 17.3 14.9 16.4 13.8 B Steel −ve 13.0 20.0 −ve 11.5 15.3 B Telecom 10.7 16.7 21.0 10.4 22.3 26.3 C and W 24.1 16.6 17.9 19.3 14.7 22.8 Ent Oil n/a 80.6 9.1 n/a 48.6 24.3 N Freight 1.10 15.7 21.2 2.4 4.6 6.7 R-Royce −ve 27.0 16.8 -ve 7.8 7.5 Public sector B Coal 7.9 6.6 4.6 3.2 B Rail −ve 5.9*** −ve 4.4*** Post Office 7.6 4.0 2.4 2.6 Source: Company accounts Note: Britoil and Jaguar are excluded because they have been acquired since privatization; water and electricity supply because their accounts were substantially restructured during the period, making comparison unreliable.

However, where a company enjoys a degree of monopoly power financial and stock market results are unreliable indicators of the efficiency—both productive and allocative—with which that company employs its resources. There are, however, a number of more indirect measures of internal efficiency which we can utilize. A commonly used indicator is labour productivity (output divided by labour input). However, labour productivity is an unsatisfactory measure, though easily understood, as it fails to take into account the productivity of the other resources used in production. Increased labour productivity may simply reflect a shift to more capital intensive production, rather than movement toward more efficient production. The most effective performance indicator is total factor productivity. This measures changes in the amount of physical resources required to produce one unit of output (or, to put it another way, the number of units of output produced by a given number of inputs). To calculate total factor productivity we need to determine an output index and an input index. Total factor productivity is measured by dividing the output index by the input index. We have calculated an output index by taking measures of physical outputs associated with the major revenue sources of each company. These are weighted by the proportion of the company’s total revenue


15

earned on the relevant product in any one year thus enabling us to take account of the changing contributions of particular products to the company’s total output over time. The input index is a weighted average of labour inputs, capital inputs and ‘other materials’. The labour index was calculated by deflating employee costs by an appropriate labour price index. The index for other materials was derived by summing all items of expenditure not allocated in the company accounts to either labour or capital, and deflating by the retail price index (RPI). The calculation of the capital index presented particular problems because expenditures on capital reported in companies accounts measure accounting costs rather than economic costs. There are two elements in the measurement of the economic cost of capital input—the amount of capital actually used up during the year (or depreciation) and the rental cost or opportunity cost of deploying the assets in the firms’ activities. Both elements have been estimated (on an inflation adjusted basis) from accounting data in companies’ annual reports. So, how did the performance of the 1979 public sector change during the 1980s? First, most companies grew significantly—that is, increased their turnover—after 1979, even allowing for inflation. Profits, too, rose across most of the sector. The most rapid growth was in the two large utilities—Telecom and Gas. As these companies are so much larger than other 1979 public sector companies, it is perhaps more instructive to look at RoCE and RoS. Margins tended to increase: the low margin industries by more than those which were already substantially profitable. Turnover growth was, to some degree, at the expense of margins. It is interesting to note that this growth had more to do with the nature of the industries concerned than with their ownership. Privatized companies tended to grow faster than those remaining in public ownership. However, the privatized firms which grew rapidly after privatization (Amersham, Telecom, Cable and Wireless) were also growing rapidly before privatization, while Associated British Ports experienced slow growth throughout much of both periods. The poor market prospects faced by coal, rail and, until the mid-1980s, steel made those industries hard to sell, and were an important part of the reason why they were late candidates for privatization. Britoil and Enterprise Oil did not prosper after privatization—indeed, Britoil was acquired by BP—but that largely reflected the fall in world oil prices in the 1980s. Privatized firms began with higher profitability, but there is little to suggest that they increased it relative to those which remained in public ownership. As we have seen, for companies in competitive markets, at least, the effects of public sector reform on performance are largely revealed by their output and profitability and by the price and quality of the products which they supply. This is not so, however, for those companies which enjoyed either natural or statutory monopoly/ monopsony power. Such companies could determine prices in either product or input markets, subject to some regulatory influence. For these companies, our total factor productivity results are invaluable in determining whether performance has improved. The pattern to emerge is both clear and remarkable. Figure 1.2 (taken from Bishop and Thompson 1991) shows the aggregated trend in labour productivity for nine of the largest enterprises in public ownership at the end of the 1970s; the underlying figures are in Table 1.8. These findings suggest three observations; first it can be seen that during the 1970s the public enterprises showed slower growth in labour productivity than did the rest of the UK economy. This is particularly true in the late 1970s—prompting Pryke’s ‘third rate’ remark which we noted earlier. Second, it can be seen that during the 1980s productivity growth in the economy as a whole was faster than during the 1970s; the size and significance of the Thatcher productivity miracle’ has been much debated (see, for example, Kay and Haskell 1990). But the most striking observation is the far greater upturn in the labour productivity of the public enterprises. In part, this upturn is a result of factor substitution. This becomes clear when we look at Figure 1.3 which sets out corresponding results for total factor productivity (t.f.p.). During the 1970s t.f.p. growth was slow but, as in the case of labour productivity, there is a sharp acceleration which starts as the UK economy

Figure 1.2 Labour productivity: public enterprises and the whole economy

16 MATTHEW BISHOP AND DAVID THOMPSON


17

moved out of recession in the mid-1980s. Comparison between the two graphs shows, however, that the growth in t.f.p. has been less than that for labour productivity reflecting the substitution of other factors of production; Table 1.9 sets out details of changes to employment (see Haskell and Szymanski 1990 for discussion of the impact of privatization upon bargaining in the labour market). Of course productivity growth can be shaped by a number of factors in addition to—or in combination with—changes in efficiency. Particularly relevant are underlying changes in technology, in the opportunities to exploit scale economies and the short-term disequilibria which arise when there are unanticipated developments in the macroeconomy and firms are left with temporary excess capacity. The Table 1.8 Labour productivity UK utilities Rate of change p.a (%)

British Airways BAA British Coal British Gas British Rail British Steel British Telecom Electricity Supply Post Office

1979–80

1980–90

7.4 0.6 −2.4 4.9 −2.0 −1.7 4.3 3.7 −0.1

6.0 2.7 8.1 4.9 3.2 13.7 7.1 2.5 3.4

relevance of this last is particularly clear at the beginning of the 1980s as the UK economy moved into recession and productivity performance was correspondingly flat. Similarly, it seems clear that the other factors have been important in explaining developments in individual industries (see Bishop and Thompson 1992b). Thus, for example, the rapid growth in demand for gas during the 1970s, as low cost sources were accessed in the North Sea, enabled scale economies in distribution to be exploited more rapidly than during the 1980s. In the case of postal services exactly the opposite is true with greater opportunities for scale effects during the 1980s. Similarly, rapid change in aircraft technology enabled BA to secure rapid productivity growth in the 1970s even though its efficiency was generally perceived to be poor (see Ashworth and Forsyth 1984). In the 1980s the pace of technical change was slower but there are other industries where the opposite is true (for example, coal production). Overall, therefore, there appears little systematic difference between the two decades in the opportunities offered by technology or by scale effects. The conclusion which this suggests is that an important part of the observed upturn in productivity is explained by improved efficiency, although how large that part is we cannot say with certainty. It should be noted that the measure of output which we have constructed from company accounts is not sufficiently sophisticated to reflect changes in product quality. It is possible, therefore, that improvements in total factor productivity may reflect reduction in the quality of products supplied by a monopolistic producer, rather than

Figure 1.3 Total factor productivity: public enterprises

18 MATTHEW BISHOP AND DAVID THOMPSON


19

Table 1.9 Employment 1979

Priv

1990

Privatized Amersham n/a 2,088 3,213 ABP n/a 8,956 4,471 BAA 7,070 7,462 9,521 BA 57,741 40,271 52,054 B Gas 104,424 88,469 75,597 B Steel 186,000 53,720 54,400 B Telecom 233,447 238,384 247,971 C and W n/a 10,750 37,681 Ent Oil n/a 47 374 NFC 34,549 24,305 33,761 Rolls-Royce 57,000 42,000 55,475 Public sector B Coal 297,400 91,500 B Rail 244,084 154,748 Post Office 178,397 210,284 Source: Company accounts Note: Britoil and Jaguar are excluded because they have been acquired since privatization; water and electricity supply because their accounts were substantially restructured during the period, making comparison unreliable.

greater efficiency. However Bishop and Kay (1988) find that fears about reduced quality—though not unreasonable—have not been realized. The utilities faced three different quality of service issues. In the fuel industries—British Gas and the electricity supply industry— the major concern of the consumer is whether or not the product is available at the times when it is demanded—the so-called ‘security of supply’ requirement. In the other utilities, such as transport or telecommunications, quality forms an integral part of the product itself. For all companies, customers are also concerned with how accurate and informative their bills are, how the industries deal with repairs and servicing, and how they respond to customer enquiries and grievances. Only in British Rail—within the public sector throughout the 1980s —is there some reason to think that a more commercial approach may have adversely affected product quality. In British Rail, the number of passenger vehicles fell by 22 per cent between 1979 and 1988, but passenger-miles travelled rose by 6 per cent. Thus passenger-miles per passenger vehicle increased from 1.15 million in 1979 to 1.58 million in 1988, up by 37 per cent. These figures present us with a dilemma. They may either indicate greater efficiency, or reduced quality. For instance, if there are five seats for each passenger, a reduction in the number of seats per passenger is an improvement in efficiency: if there are five passengers for each seat, fewer seats mean a serious fall in service quality. Published evidence and popular sentiment suggest that by the end of the 1980s these figures probably reflect a combination of both greater efficiency and reduced quality.

20


THE FUTURE OF REGULATION In this chapter we have set out a picture of the reform of the 1979 public sector that took place during the 1980s. We draw the paper to a close with a number of comments, by way of an overview, and some speculations on issues for the future. First, it is clear that economic performance improved during the decade across the 1979 public sector. If you accept that the central goal of the reforms was to increase the efficiency of the public sector, then the reforms must be judged a success. Second, improvements in performance were more significant in companies operating in competitive markets or where the introduction of greater competition—through deregulation or tendering - was feasible. Performance improvement, although positive, was less impressive in the natural monopolies. Ownership change, too, cannot be easily linked to changes in performance. Indeed, the many reforms to companies whilst still under public ownership, by replicating the conditions and pressures observed in the private sector, inevitably reduced the scope for a clear connection between privatization and performance. Thus, the effects of ownership remained under debate throughout the decade—and will doubtless remain so in future. In terms of equity, the major casualty of the 1980s public sector reforms was in employment—and that predominantly in certain traditional industries undergoing fundamental structural reform, in particular coal, steel and rail. The costs borne by those made redundant were clearly substantial—many of middle age and above did not work again. However, the costs of pumping money into a declining industry to covertly preserve jobs for which there is no longer demand are huge, as is shown, for example, by the demoralization of British Steel at the end of the 1970s. Other policies for easing the costs to employees of structural change may thus be preferable. However, perhaps the most striking observation is how far the regulatory reforms of the 1980s have proved to be essentially neutral in equity terms. Thus, licence conditions have preserved unprofitable rural phone boxes; route subsidies have retained unprofitable, but desirable, bus routes and provisions through the benefit system have supported expenditure on energy by low income households. Nevertheless, there have been losers from the process, and whether, and how, they should best be compensated will be an issue of continuing debate. Indeed it is clear that substantial regulatory challenges lie ahead in the utility industries. To date quality has not apparently been widely sacrificed in pursuit of narrowly-defined economic efficiency. However, there remain legitimate fears that quality may be eroded, and regulators will need to be alert. The (RPI-X) formula, too, although at first seeming to offer a better set of incentives than traditional methods of regulation, may not, in fact, do so in the long run unless this system can be used to generate better information about potential performance. The initial impact of an independent regulator with a clearly-defined role, which was so effective during the 1980s, may be dissipated unless regulatory independence from both the regulated company and from government is rigorously pursued. Finally, potential changes of government, and the continued existence of both natural and artificial monopoly will keep these debates alive. The 1980s have seen a fundamental shift towards the market in activities, which, in the UK, had traditionally been pursued monopolistically by the public sector. The uncertainty as to whether these changes will survive under governments of different complexions, and the different weight which might be given to equity and efficiency objectives, suggest that these issues will continue to hold a central place in public debate as they have over the last forty years.


21

REFERENCES Abbot, K. and Thompson, D.J. (1991) ‘Deregulating European aviation: the impact of bilateral liberalisation’, International Journal of Industrial Organisation 9: 125–40. Ashworth, M. and Forsyth, P.S. (1984) Civil Aviation Policy and the Privatization of British Airways, IFS Report Series no. 12, London. Beesley, M.E. and Littlechild, S.C. (1989) ‘The regulation of privatised monopolies in the United Kingdom’, Rand Journal of Economics, 20(3): 454–72. Bishop, M. and Kay, J.A. (1988) Does Privatisation Work? Lessons from the UK, Centre for Business Strategy, London Business School. Bishop, M. and Thompson D.J. (1991) Privatisation in the UK: Internal Organisation and Firm Performance, Centre for Business Strategy Working Paper, London Business School. Civil Aviation Authority (CAA) (1988) Airline Statistics, London, Civil Aviation Authority. Domberger, S., Meadowcroft, S.A. and Thompson, D.J. (1986) ‘Competitive tendering and efficiency: the case of refuse collection’ Fiscal Studies 7(4): 69–87. Domberger, S., Meadowcroft, S.A. and Thompson, D.J. (1987) ‘The impact of competitive tendering on the costs of hospital domestic services’, Fiscal Studies 8 (4): 39–54. Gist, P. and Meadowcroft, S.A. (1986) ‘Regulating for competition: the newly liberalised market for private branch exchanges’, Fiscal Studies 7(3): 41–66. Gwilliam, K. (1989) ‘Setting the market free: de-regulation of the bus industry’, Journal of Transport Economics and Policy XXIII(1): 29–44. Haskell, J. and Szymanski, S. (1990) What Happens to Wages and Employment after Privatisation: Theory and Evidence from the UK, Centre for Business Strategy Working Paper, London Business School. Kay, J.A. and Haskel, J. (1990) Mrs Thatcher’s Economic Experiment: Lessons from the UK, Centre for Business Strategy Working Paper, London Business School. National Economic Development Office (1976) A Study of UK Nationalised Industries: Their Role in the Economy and Control in the Future, London, HMSO. Pryke, R. (1981) The Nationalised Industries: Policies and Performance since 1968, Oxford, Martin Robertson. Salop, S. (1979) ‘Strategic entry deterrence’ American Economic Review 69: 335–8. Thompson, D.J. and Whitfield, A. (1991) Express Coaching: Privatisation, Incumbent Advantage and the Competitive Process, Centre for Business Strategy Working Paper, London Business School.

2 Privatization in Greece Spiros K.Lioukas

This paper provides an outline of the public enterprises situation in Greece and assesses the progress achieved towards their privatization. The first section defines the public enterprises population, presents information on the totality of public enterprises, their distribution and presence in various sectors of the economy, their size, ownership structure, competition faced and profitability. It also provides information about public enterprise holdings and about divestitures and privatizations. The second section deals with the thinking about privatization and its evolution, as well as on forms of privatization emerging in Greece. An assessment is made of the main problems encountered in implementing privatizations and conclusions are drawn about progress to date and future prospects. THE PUBLIC ENTERPRISE SITUATION The totality of public enterprises The exact extent of state presence in the various sectors of the Greek economy is not known. This may partly be due to the complex network of ownership relationships developed by holding organizations and enterprises wholly or partly owned by the state at large, which participate in the capital of other enterprises. ‘Interlocking ownership’ also appears, as more than one holding or state institution participates in the capital of the same enterprise in minority or majority proportions. The unclear picture of the boundaries of the public enterprise sector may also be due to the fragmentation of supervision and control. The existence of many supervisory bodies, for example, ministries, and holdings, has traditionally been an obstacle to formulating an integrated and comprehensive view of public enterprises in Greece. In public administration and politics the term ‘public enterprises and organizations’ has been used to describe only a fraction of state-owned enterprises—those directly controlled by ministries which are financially supervised by the Ministry of National Economy (known as DEKO in Greek). More recently, however, and particularly in the context of privatization policy, the extent of state ownership is emerging as an important area to define. In order to present a total picture of the state’s presence in the corporate economy, it is convenient to consider as ‘public enterprises’ all organizations with state majority and ‘commercial’ orientation. More exactly this definition includes enterprises in which the state, directly or indirectly through other organizations with state majority, owns more than 50 per cent of the capital and which are engaged in business-type activities, having their own balance sheets and profit and loss accounts. Our data exclude local authority and municipal enterprises, health organizations such as hospitals and social security organizations, institutions with not-for-profit orientation such as research and developmental or promotional institutions, small enterprises with advisory roles, legal bodies which have not been activated and other organizations under public law which operate as extensions of public administration. Certain holding organizations,

PRIVATIZATION IN GREECE

23

however, are included, namely banking institutions (for example, National Bank, Commercial Bank) whose majority capital is owned by social security funds, local authorities, state deposits and loan funds, church institutions and other non-profit making organizations; these have been traditionally controlled by government rather than by their institutional shareholders. It should be noted, of course, that majority ownership may not exactly coincide with ‘publicness’ or state control. Some minority ownerships may permit tight government control; or even enterprises without state ownership but with intense dependence on the state for resources—for example, funds, market rights, sales to public sector and other forms of dependence—may be subject to tighter controls than enterprises with state majority. ‘Publicness’ defined as state control is a continuum on which most or all of enterprises of the economy can be placed. This view is particularly important for Greece where the state’s presence has traditionally been sought by various interest groups in most sectors of economic activity. However, data on state control is difficult to obtain and therefore the criterion of majority ownership is hereafter used. Following this definition, 204 enterprises have been identified. Most of these were developed after the Second World War. A sample of 120 enterprises, taken from this population, suggests that 74 per cent were created after the Second World War. About 21 per cent were created Table 2.1 The totality of public enterprises Public enterprises

Total of business sectors

%

Number of enterprises 204 10,431 2.0 Total assets 17.01 23.2 73.3 (trillion Dr.) Total employment 265.7 654.7 40.6 (’000 of people) (7.2)2 Sources: ICAP Financial Directory (1991); Ministry of National Economy, General Secretariat of Public Enterprises Notes: 1 Data on 173 public enterprises were available. 2 As percentage of total employment in the whole country.

more recently, in the period 1970–85, mainly by state investment banks or commercial banks controlled by the state. These reflected the state’s effort for industrialization and economic development, which prevailed during this period. The presence of the state appears large when we consider the total assets. As shown in Table 2.1 the state holds about 73 per cent of total assets in all sectors, although by number it controls less than 2 per cent of the enterprises. In terms of employment, public enterprises provide jobs for about 265,700 people, accounting for about 41 per cent of the total employment in all business sectors and 7.2 per cent of total employment in the country (see Table 2.1). Sectoral distribution of public enterprises Table 2.2 shows the sectoral distribution of public enterprises by number. It can be seen that in terms of number of undertakings the state’s presence is strong in utilities, but overall not very large in the sectors of manufacturing and commerce. In the utilities sector all enterprises are state-owned. The state has also a strong presence in banking, petroleum and paper, where more than 5 per cent of the number of enterprises is state-owned. Also considerable is the absolute number of public enterprises in food, textiles, metallic and non-metallic products and business services and construction. The state holding is very weak in wood,

24

SPIROS K.LIOUKAS

printing and publishing, plastics, commercial enterprises and tourism. It also appears absent in the tobacco, clothing and footwear, furniture and leather sectors. We should also note the category of ‘other public enterprises’ in Table 2.2 Number of public enterprises by sector Enterprises controlled ministries Manufacturing Food products and beverages Textiles Wood and cork Paper Printing and publishing Plastics and rubber Chemicals Petroleum and coal Non-metallic minerals and mining Basic metals and metal products Machinery and appliances and electrical equipment Transportation equipment Commerce Commercial enterprises Business services etc.1 Banking, insurance Tourism Utilities Other public enterpr.2 Miscellaneous3 Total

directly Enterprises Total of by controlled by holdings enterprises

public Total of sector

–

26

26

622

– – – –

14 1 5 1

14 1 5 1

490 77 97 225

– 1 2 –

1 3 – 12

1 4 2 12

233 282 14 351

1

10

11

318

–

6

6

348

1

6

7

104

–

4

4

3,802

1 1 – 13 31 1 52

23 26 6 – – 8 152

24 27 6 13 31 9 204

849 193 1,220 13 – – 9,238

Notes: Data were taken from the ICAP Financial Directory (1991) and from the Annual Reports of Banks. 1 It includes three sectors according to the ICAP grouping, notably, business services, transport-shipping, and engineering-constructing. 2 It includes organizations which are financially supervised by the Ministry of National Economy—General Secretariat of Public Enterprises—and cannot be classified in the sectors above. Those together with utilities constitute the so-called ‘public enterprises and organizations’ (DEKO in Greek). 3 It includes nine small enterprises involved in various activities for which data are incomplete.


25

Table 2.2, which include various organizations wholly owned by the state and financially supervised by the Ministry of National Economy. This category includes: port and sewage authorities, television, duty free, catering, public estate, materials and stores organizations, tobacco and cotton organizations, national tourist and betting organizations, and others. It also includes Olympic Airways and airport authorities. More revealing of the state’s domination is the size of assets owned by public enterprises in these sectors (Table 2.3). Public enterprises in manufacturing, although representing less than 3 per cent of the total number of undertakings in the sector, control about 29 per cent of total assets. Very large ownership of assets exists in transportation equipment (aerospace industry, military vehicles, and shipbuilding)— in total 85 per cent of assets. Relatively large ownership is found in petroleum (refineries), non-metallic minerals (cement), paper, and in basic metals and metallic products (defence industry, alumina, and so on). Smaller but significant proportions exist in textiles (22 per cent) and in chemicals (15 per cent). In the banking sector, the state controls about 86 per cent of total assets. The three largest banks are directly owned by the state, or indirectly through government-controlled pension funds. These three institutions control about 80 per cent of total lending and hold about 75 per cent of total deposits. Statecontrolled commercial and investment banks have a large number of subsidiaries or minority participations in other enterprises. The utilities sector includes thirteen relatively large enterprises directly controlled by ministries. The largest are the electricity utility, telecommunications, railways and Athens buses and water authorities. All utilities, together with the thirty-one ‘other public enterprises’ controlled by ministries, account for about 21 per cent of gross fixed capital investment in the economy as a whole. Table 2.4 gives an analysis of employment by sector. It appears from this table that public enterprises account for about 76 per cent of employment in banking, and 71 per cent in transportation equipment. Large proportions exist in paper, petroleum, non-metallic minerals, and basic metals and metallic products. The same sectors are found with high ownership of assets. Size distribution of public enterprises In terms of international standards, Greek public enterprises are relatively small. The largest enterprise employs about 31,000 people (electricity utility), followed by: telecommunications (28,500), National Bank of Greece (16,000), railways (14,000), Olympic Airways (13,000), post office (11,500), Athens buses (10, 250), Commercial Table 2.3 Total assets of public enterprises by sector Sector

Enterprises with state Total assets of majority (billion drachmas) (billion drachmas)

Manufacturing Food products and 46 beverages1 (14/26) Textiles2 (12/14) 98 Wood and cork 4 Paper (4/5) 39 Printing and publishing 1 Plastics and rubber 0.3 Chemicals 42

sector % of the state majority enterprises

559

8.2

443 49 89 56 110 277

22.1 8.2 43.9 1.8 0.2 15.2

26

SPIROS K.LIOUKAS

Sector

Enterprises with state Total assets of majority (billion drachmas) (billion drachmas)

sector % of the state majority enterprises

Petroleum and coal 97 215 45.1 Non-metallic minerals and 97.5 216 45.1 mining (11/12) Basic metals and metal 165 439 37.6 products (7/11) Machinery and appliances 14.5 175 8.3 and electrical equipment (3/ 6) Transportation equipment 240 283 84.8 (6/7) Commerce Commercial enterprises (2/ 5 999 0.5 4) Business services etc. (14/ 50 301 16.6 24) Banking, insurance 13,502 15,736 85.8 Tourism (4/6) 17.5 314 5.6 Utilities 2,606 2,606 100 Other public enterprises – – – Miscellaneous (3/9) 7.6 – – Total 17,032.4 22,867 74.5 Sources: ICAP Financial Directory (1991); IRO data Notes: 1 The first number denotes enterprises included in the table: the second denotes the total number of enterprises with state majority. 2 For one company the data used were the ‘net assets’.

Bank (7,150) and Agricultural Bank (6,800). All others employ less than 5,000 people each. Most enterprises are small-to-medium size; 63 per cent employ less than 500 people. Small enterprises are found mainly in manufacturing and business services. The size distribution of public enterprises in terms of employment and total assets is given in Table 2.5. As indicated above, the larger enterprises are utilities and banks. Table 2.4 Employment of public enterprises by sector Enterprises majority Manufacturing Food products and 4,363 beverages1 (14/26) Textiles (12/1 4) 6,068 Wood and cork 250 Paper (4/5) 3,834 Printing and publishing 120

with

state Total employment of sector % of the state majority enterprises 57,209

7.6

48,313 4,735 9,398 9,846

12.6 5.3 40.8 1.2


Enterprises majority

with

27

state Total employment of sector % of the state majority enterprises

Plastics and rubber 25 11,186 0.2 Chemicals 2,694 25,017 10.8 Petroleum and coal 1,535 4,079 37.6 Non-metallic minerals and 8,666 22,501 38.5 mining (11/12) Basic metals and metal 9,224 28,884 32.0 products (7/11) Machinery and appliances 1,003 17,390 5.8 and electrical equipment (3/ 6) Transportation equipment 11,985 16,933 70.8 (6/7) Commerce Commercial enterprises (2/ 785 76,298 1.0 4) Business services etc. (13/ 1,654 39,698 4.2 24) Banking, insurance 44,719 58,608 76.3 Tourism2 – 4,560 – Utilities 104,500 104,500 100.0 Other public enterprises 63,551 – – Miscellaneous (3/9) 716 – – TOTAL 265,692 539,155 49.3 Sources: ICAP Financial Directory (1991); Ministry of National Economy, General Secretariat for Public Enterprises Notes: 1 The first number denotes enterprises included in the table; the second denotes the total number of enterprises with state majority. 2 Data on employment by company were not available

Holding companies and general ownership structure of public enterprises Most of the enterprises which have been identified as ‘public’ are indirectly controlled by government, through state-holding organizations. The major state-owned holdings are banks and the ‘Industrial Reconstruction Organization’ (IRQ). As shown in Table 2.6, these Table 2.5 Size distribution of public enterprises Employment

5000

% of enterprises1

25

38

18

12

7

Total assets (bn Dr.) 0–1 1–5 5–20 20–100 2 % of enterprises 22 24 24 19 Notes: 1 It is based on 120 enterprises for which employment data were available from ICAP (1991) 2 Based on 125 enterprises for which data were available from ICAP (1991)

>100 11

28

SPIROS K.LIOUKAS

Table 2.6 Holding companies and number of subsidiaries/participations Holding company

Percentage of Equity

100%

50–100%

25–50%

0–5% 14 8.2 No debt reported 33 19.3 Total 171 100.0 Source: Calculated from data in Economic Council of Canada (1986: Table B-1, Statistical Summary, 157–64).

At the federal level the key holding companies were the Canada Development Corporation (CDC) with more than a dozen key subsidiaries and the Canada Development Investment Corporation (CDIC) with six different holdings in 1984, including the government’s shares in the mixed enterprise CDC. Other enterprises such as PETRO-CANADA and Canadian National Railways (CNR) had many subsidiary firms; CNR had holdings in hotels, trucking, real estate, ferries, and telecommunications. Mixed enterprises included CDC and TELESAT CANADA. At the provincial level Development Corporations were often holding companies. In Quebec the key holding company was the government pension fund for all private and public employees in the province: the Caisse de dépôt et placement du Québec. Unlike the Canada Pension Plan or Social Security in the United States, the funds in the Quebec plan are invested in shares of private firms as well as in conventional treasury bills and interest-bearing deposits. Hence the Caisse de dépôt operates like a private pension fund, with two major differences. First, it has aggressively used its status as government-owned enterprise to bypass security exchange regulations on trading and ownership. This has led to conflict with the Ontario securities regulatory body, when the Quebec fund acquired a large stake in firms listed on the Toronto Stock Exchange without notifying Ontario regulatory authorities. Second, although it seeks to maximize returns and enjoys operational autonomy from government intervention, it pursues socio-political as well as financial goals in its private investments, often in collaboration with Société générale de financement du Québec (SGF), the government’s industrial holding group. The Caisse de dépôt had a stake in forty-two private and public firms in 1984, and fifty-three firms in 1990, while SGF had a stake in eleven firms in both 1984 and 1990. Overall, the return on assets for sixty-two federal public enterprises was −1.4 per cent, largely because of losses in transport and communications, while the return on assets for 198 provincial enterprises was 2.8 per cent, thanks to positive returns for electrical utilities, and high profits for alcoholic beverage and lottery monopolies (see Tables11.1 and 11.2).5 Returns in the federal enterprises for large firms such as the Canadian National Railways and the Canadian Wheat Board were highly cyclical, depending on world wheat markets and general economic conditions. For Quebec’s public enterprises, the overall return on assets was 3.9 per cent (see Table 11.3). The Quebec government owned few Crown corporations prior to the 1960s. Moral as well as fiscal concerns led to government control of wine and liquor sales in 1921. During the Second World War, the government established a beet sugar refinery and, more significantly, HYDRO-QUEBEC to produce and distribute electricity.

152

JAN J.JÖRGENSEN AND TAÏEB HAFSI

Crown corporations proliferated during the ‘Quiet Revolution’ of the 1960s and 1970s, when Quebec nationalists strove to become political and economic ‘masters in their own house’. Under the Liberal government, major private electric utilities were nationalized in 1963 and incorporated into HYDROQUEBEC. The government established new government enterprises in key sectors: integrated iron and steel complex, SIDBEC, 1964; pension funds, Caisse de dépôt et placement du Québec, 1969; mining, SOQUEM, 1969; petroleum, SOQUIP, 1969; forestry, REXFOR, 1969; industrial development financing, SDI, 1971, and SGF, 1973; housing, SHQ, 1971; and broadcasting, Radio-Québec, 1969. Additional Crown corporations were created in the 1970s for energy, transport, agri-business, asbestos mining and fishing. Under the nationalist Parti Québécois (PQ) elected in 1976, Crown corporation investment accounted for as much as a quarter of total investment in the province (1978), yet most investment continued to be in the hydro-electric sector. Although Crown corporations and agencies eventually totalled more than sixty, the significant ones numbered fifteen. Meanwhile, a rapidly-growing Francophone business elite filled much of the void created by Anglophone private firms moving to Toronto. Against this background, we turn to a comparison of the privatization programmes undertaken by the federal government and by the government of Quebec. Studies of other provincial divestment programmes exist, including the pioneering privatization programme in British Columbia in 1979 (Vining and Botterell 1983; Spindler 1980; Pitsula and Rasmussen 1990; Molot 1988; Maule 1987; Fotheringham 1989). PERSPECTIVES ON PRIVATIZATION There have been striking differences in goals, structures, and processes of privatization between the federal government of Canada and the provincial government of Quebec. Divestment through privatization became a solution to somewhat different problems on each government’s agenda, as each undertook multiple divestments from 1984 onward. Canada: problems of control and accountability Public confidence and pride in Crown corporations had been generally high, but their reputation was shaken in the mid-1970s. First, there were allegations of mismanagement at AIR CANADA (Estey 1975) and of improper payments by POLYSAR and ATOMIC ENERGY CANADA (Economic Council of Canada 1986). Second, the Auditor-General issued a scathing report in 1976 on the government’s financial management and the weak accountability framework for Crown corporations. Combined with the Trudeau government’s passion for rational centralization, these events ultimately led to a tighter control and accountability framework for Crown corporations and to a review of holdings for possible rationalization. The control strengthening solution proceeded more swiftly, smoothly and deliberately than the portfolio review solution. The important point is that divestment of Crown corporations and holdings eventually became linked to the problem of control and accountability that was on the federal government agenda. The Privy Council Office issued a report on control of Crown corporations in 1977, followed by recommendations on Crown corporations by the Lambert Royal Commission in 1979 (Canada Privy Council 1977; Canada Royal Commission 1979). Amendments to the Financial Administration Act (FAA) in 1984 altered the control framework by requiring Crown corporations to submit annual business plans to Treasury Board, to seek government approval for new subsidiaries, and to undergo a ‘value for money’ audit every five years to determine whether the firm had carried out operations effectively and managed its resources economically and efficiently. As of 1987, the number of parent corporations had been pared to

PRIVATIZATION IN CANADA

153

54, of which 46 were subject to the new rules (Hanna 1987; Ryan 1987). Mixed ownership firms such as TELESAT CANADA were exempt from the more stringent FAA reporting requirements. Even though more centralized control rather than divestment was the initial government response, there was agreement, at least among economists and the Liberal and Progressive Conservative parties, if not the New Democratic Party, that the number of Crown corporations was unwieldy, that some had outmoded or fuzzy mandates, and that policy goals might be achieved by other means: regulation, incentives, or increased competition. During the 1979 Conservative minority government, Sinclair Stevens emerged as a strong privatization advocate. In targeting PETRO-CANADA as the key privatization candidate, the government encountered unexpected financial, legal and political problems that led to its downfall. Under the following Liberal government, privatization remained on the government agenda but its ranking slipped during the 1981–2 recession. Still, the founding of CDIC was a form of divestment: a restructuring that reduced direct government control over certain Crown corporations and holdings. On 30 October 1984, Sinclair Stevens, as minister responsible for CDIC in the new Conservative government, unilaterally resolved CDICs goal ambiguity by announcing that all CDIC holdings were to be privatized by sale to the British Columbia Resources Investment Corporation (BCRIC), which had itself been privatized by its provincial owner earlier (Schultz 1988). Stevens forecast completion of the deal within six to twelve months. But rival buyers emerged demanding open bidding, especially for TELEGLOBE. Stevens’s proposed solution preceded the formal statement of the problem. The policy statement underpinning Steven’s proposal arrived a full month later in Finance Minister Wilson’s manifesto (Wilson 1984). The primary theme was better management of the government’s C$50 billion assets in Crown corporations rather than privatization itself. By May 1985 the criterion for divestment broadened, when the ministerial task force on privatization recommended that the government divest any corporation for which there was no strong policy argument for retention. The ebb and flow of careers of individuals was thus a major factor in the expansion and contraction of Crown Corporations. Just as C.D. Howe’s presence guided the post-Second World War establishment of Crown corporations, it was Sinclair Stevens who championed the cause of privatization, first as President of the Treasury Board in 1979, and later in 1984 as the Minister for Regional Industrial Expansion. When his career tumbled amid charges of impropriety, the Department of Regional Industrial Expansion (DRIE) lost its leadership role on the privatization issue. Quebec: changing goals and mounting losses Near the end of its mandate, the PQ government became involved on an ad hoc basis in several divestment initiatives: SIDBEC NORMINES, SAQ, QUEBECAIR, plus a strategic retrenchment at HYDROQUEBEC (Hafsi and Demers 1989). As Premier René Lévesque stated: The state apparatus’ legitimacy is now based on its ability to abstain, to disengage itself from social responsibilities, to reduce its ‘non-productive’ expenses, to model its operations on private sector practices, to renew with the principles of productivity, profitability and competitiveness, to prefer market mechanisms for a more automatic regulation of social exchanges. (Lévesque 1981)

154


The 1985 return of a Liberal provincial government signalled that the nationalists’ success in commerce momentarily overshadowed the political dream of sovereignty for Quebec. The new government outlined its motives for privatization in 1986 (Quebec Minister of Finance 1986). First, the original need for state firms to fill an entrepreneurial void had been met. Quebec had developed a dynamic managerial class, many of whom first served in the Crown corporations. Second, increasing global competition weakened some Crown corporations, and the government could no longer afford to sustain their losses. Thus divestment by Quebec was linked to mounting losses of some Crown corporations and the desire of private entrepreneurs for new areas of investment. ACTIONS ON PRIVATIZATION Federal divestment strategy and structure: learning over time Decentralized divestment Initially divestment was handled by the parent organization: the relevant governmental department or the parent Crown corporation in the case of subsidiaries. Thus, the sale of Northern Transportation, begun under the Liberal government, was handled by the Department of Transportation. The Canada Development Corporation handled the sale of AES Data; Canadian National (CN) handled the sale of its trucking, hotel, and telecommunications subsidiaries; and the Post Office the franchising of new postal outlets. The largest of these decentralized divestment programmes was at CN, which had been pressured by the government-owner to shed non-rail subsidiaries in order to become more focused. These included its hotels, its trucking arm (CN Route), its half of CNCP, and two regional telecommunications subsidiaries. Here the government’s role in the divestment process was minimal; these divestments were handled by CN. As ultimate shareholder, the government was the catalyst for divestment, and the divested CN entities were included in the government’s tally of privatization achievements published by the Office of Privatization and Regulatory Affairs (OPRA).6 Contracting out the management of divestment A new pattern emerged from Sinclair Steven’s push to divest CDIC holdings. He appointed businessmen such as Paul Marshall from Westmin Resources to head CDIC and alter the tone of CDIC’s board and management. There was a deliberate effort by divestment champions to keep management of the process out of the hands of public servants.7 For example, although DRIE retained a formal leadership role for privatization, it was CDIC which hired the financial advisers to do the preparatory work on each firm: TELEGLOBE CANADA, CANADAIR, DE HAVILLAND, Canadian Arsenals and Eldorado Nuclear. Quebec: divestment strategy and structure: learning from others To determine a method for privatization, the Quebec government compared the British and Canadian experiences, concluding that public support was a key element for success and that the public was more interested in the ‘why’ of the process and the consequences of divestment than in technical and financial details. In its policy statement, the government stressed that privatization was not an end in itself and that privatization would be carried out pragmatically on a case-by-case basis. The structural objectives of


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strengthening the economy and ensuring a continued Quebec presence in key sectors would take precedence over maximizing financial returns from sale of Crown corporations (Quebec Minister of Finance 1986). Management of the divestment process was entrusted to a Ministry for Privatization within the Ministry of Finance. The ministry reviewed the role of Crown corporations within a socio-political climate where the state sought a reduced economic role because of deficits and general confidence in a viable Francophone private sector. The new formally structured process was as follows (Quebec Minister of Finance 1986): 1 Review of the Crown corporation’s dossier by the Standing Cabinet Committee on Economic Development (CMPDE); 2 Analysis of four options—total or partial privatization, reorganization followed by later privatization, reorientation or turnaround, and the status quo—for the firm by a joint committee consisting of (a) the minister responsible for the firm; (b) the Minister of State for Privatization; (c) one or more representatives from the firm; and (d) representatives from other departments. 3 Development of consensus and plan for realization of the chosen alternative; 4 Joint submission of the plan by the Minister for Privatization and the responsible minister for the firm to the CMPDE and then the whole Cabinet for review and approval; 5 Implementation by the Ministry for Privatization assisted by an operational task force, with legislative scrutiny and approval where needed; 6 Formal review of the programme as a whole by the Minister for Privatization. PROBLEMS ENCOUNTERED In this section we are mainly concerned with general problems faced by the two governments in privatization, but occasional reference is made to individual cases. Elsewhere we have examined the challenges faced in seven individual cases (Hafsi and Jörgensen 1991). The first case is an example of retrenchment through closure, SIDBEC-DOSCO’s divestment of its mining affiliate, SIDBEC-NORMINES, in Quebec. Two cases involved the sale of the firm through a public share offering. These were AIR CANADA, the large national airline owned by the federal government, and CAMBIOR, a company formed out of selected assets of SOQUEM, a Quebec-owned mining company. Finally, four cases were divestments through the private sale of the firm or subsidiary units: the sale of CANADAIR to Bombardier, the sale of TELEGLOBE CANADA to Memotec, the sale of QUEBECAIR to Nordair-Metro and the abortive attempt by the SOCIETE DES ALCOOLS DU QUEBEC (SAQ) to sell its retail outlets. Problems encountered by the federal government The structural problem with contracting out the process to CDIC and its advisers was that it side-stepped industry policy issues that had to be resolved before divestment could proceed. As Doern and Atherton (1987) point out, these are not free-standing firms but are enmeshed in layers of sectorial policy commitments, regulatory frameworks, subsidies, community obligations and expectations, contractural commitments with domestic and foreign suppliers and buyers and, in the case of CANADIAN ARSENALS and TELEGLOBE CANADA, the baggage of indexed public service pension plans (Doern and Atherton 1987). When it became clear that buyers were reluctant to bid until policy issues were resolved, coordination of the privatization process shifted back to joint management by CDIC and responsible departments.

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Centralization and the coming of OPRA When the divestment process became embroiled in interdepartmental policy disputes (Schultz 1988), a central authority for privatization was established in August 1986 under the Cabinet Committee on Privatization, Regulatory Affairs and Operations, with Barbara McDougall as minister. This led, in December 1986, to a new central agency responsible for privatization to resolve conflicting departmental goals and to act as a repository for learning about the privatization process: the Office of Privatization and Regulatory Affairs (OPRA), with Janet Smith as Deputy Minister, under McDougall. Despite centralization, the reporting authority of OPRA itself was diffuse, coming at times and in varying degrees under Finance, Treasury Board, and the Prime Minister’s Office, depending on changes in the minister responsible for OPRA. The federal process for privatization has five formal stages (Canada OPRA 1990; McDermid 1989): 1 Preliminary analysis co-ordinated by OPRA to determine the candidate’s commercial viability, public policy role, feasibility of privatization, and approval by Cabinet; 2 In-depth review by a team consisting of government and Crown corporation managers and private sector advisers, reporting to the Minister of State for Privatization and Regulatory Affairs to examine the mode of sale, participation by foreign buyers, bilingual policy issues, and decision by Cabinet; 3 Passage of legislation including review of the sale by Parliament and drafting of covenants to meet policy goals; 4 Preparation for sale including the managerial, legal and financial steps required for divestment; and 5 Implementation of sale according to the mode of sale: share offering, employee buy-out, or third party sale. These stages are weighted toward the mechanics of divestment as a goal in itself rather than viewing divestment as one of several means to solve problems. Although the formal process omits commitmentbuilding, OPRA has come to recognize that ‘soft’ implementation aspects such as public communications and employee morale can be more challenging than ‘hard’ issues such as valuation (Canada OPRA 1988). In practice, privatization cases have varied considerably in the extent to which managers of the divestment candidate are consulted in the stage two review. Moreover, the privatization process is not formally linked to the extensive Crown corporation assessment procedures laid out in the 1984 amendments to the Financial Administration Act, which remain the responsibility of the Treasury Board Secretariat. Participants in the Canadian divestment process often pointed to organizational learning. ‘In retrospect the 1985 bidding process [which was aborted] was not useless. For the 1986 round we merely had to update documents. Moreover in the 1985 round we were able to see what government saw as feasible and likely’ (TELEGLOBE) ‘We were able to apply much of what we had learned from the de Havilland sale directly to Canadair’. (DRIE) ‘We owe a debt to Teleglobe for sorting out the government policy on privatization’. (AIR CANADA) The aborted 1987 privatization effort was a good dress rehearsal for the real thing’. (AIR CANADA)


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But as OPRA became more like a central agency and less like a co-ordinating task force, what was learned became orthodoxy. Boasts by OPRA officials that Canada could become the first country to sell its postal corporation suggest that the spillover effects from previous divestments have become very strong. Problems encountered by the Quebec government In most cases the divestment proceeded quickly and relatively smoothly with little public controversy, other than charges by the opposition that the sale price of some firms was too low. The exceptions were the abortive SAQ outlet sale and the turbulent QUEBECAIR SAGA. Some firms like DOMTAR (construction materials) failed to attract buyers. To assuage concerns that privatization might extend to key assets such as HYDRO-QUEBEC, the government announced in October 1988 that the main goals in privatization had been attained and that the future pace would be slower. It did suggest that there might be privatization of government services including some areas of health care. CONCLUSION Across the cases studied, we found processes similar to those identified by Gilmour (1973) and Kingdon (1984): Problem recognition: perception of an anomalous condition or a discrepancy. Proposal formation: development and examination of solutions. Political processes: support gathering, bargaining, commitment building. Implementation processes: packaging, valuation, enabling legislation [unique to public sector], marketing assets and handling bids, and coping with stakeholder obligations. 5 Learning processes: perceived lessons, spillover effects, and consequences for other cases.

1 2 3 4

From a ‘rational’ decision-making perspective, there is a natural sequence from (1) to (5). In practice the processes are independent and may not follow the ‘natural’ order. Processes overlap; and processes may be protracted, compressed or intermittent. In addition, cases are interdependent; so processes interact across cases. Taking AIR CANADA as an example, the problem recognition process identified management problems and lack of autonomy as anomalies in the 1970s. The proposal formation process led to the 1977 Air Canada Act, with autonomy from CN plus a profit goal. Meanwhile, generic recommendations for Crown corporations went in two directions: increased oversight and control by Treasury Board (1977–84) and privatization (1979 and 1984). The generic privatization solution and the problem of AIR CANADA’S autonomy did not get linked until an appropriate window of opportunity arose in the mid-1980s: the juncture of industry deregulation and fleet renewal on AIR CANADA’S side, and mounting deficits and a commitment to privatize on the government side. In the absence of rational process sequences, what does it mean to manage the divestment process other than in the technically-narrow implementation sense? For AIR CANADA’S management, it entailed being a political broker. Rather than simply going from its problems to seek government solutions, management matched its preferred solution—privatization—to government problems. For example, it commissioned opinion polls to demonstrate how privatization could enhance the government’s popularity prior to an election. It performed the legwork for government: commissioning feasibility studies, identifying key

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political issues, drafting answers from the legislative process, and designing the employee shareownership plan. It placed a key official in Ottawa to monitor and facilitate the co-ordination efforts of the Office of Privatization and Regulatory Affairs. Management engaged in background work when windows of opportunity were closed, as after the Prime Minister’s 1985 ‘no sale’ pledge (Langford and Huffman 1988), and seized open windows of opportunity, as prior to the 1988 election. In other cases, managing the divestment process meant being alert to the importance of all the processes, particularly the problem recognition and political processes. Managers of public enterprises can advise on the appropriateness of divestment for the organization and on the options available for such a divestment, that is, what form the divestment would or should take to be acceptable to the key stakeholders. Managers who want more autonomy must emphasize how divestment through privatization would enable the government to achieve its social goals by other means. Managers who are comfortable with existing government ownership must mobilize stakeholders to focus government’s attention on the continuted public policy role of the firm. At AIR CANADA, CANADAIR, CAMBIOR, QUEBECAIR and SIDBEC, the problem recognition process led to a widely-shared perception of the nature of the discrepancy between actual and desired performance. At TELEGLOBE CANADA and SAQ the nature and magnitude of the discrepancy was debatable. Both companies were very profitable. They were generally well perceived (or almost unknown in the TELEGLOBE case) by the public. Criticism levelled at the SAQ related to its fiscal role rather than the quality of its service or management. In the case of TELEGLOBE, minor criticism was levelled at its monopoly status rather than its performance. Because of disagreement over the existence of a discrepancy, there was no shared rationale for divesting either SAQ or TELEGLOBE. By contrast, in the QUEBECAIR, CAMBIOR and CANADAIR cases, divestment was not the first solution proposed. At SIDBEC, closing the mine was an emergent solution; initially the plan was to sell the entire firm. For SIDBEC and CANADAIR the problem-solving process was lengthy and open. In the CAMBIOR, SIDBEC and AIR CANADA cases, the government had no preconceived solution or at least did not push for divestment at the outset. Generally, it identified the key stakeholders, and pushed them to find a solution. Their solution finally became the government’s. The political process and proposal formation processes were intertwined. The political process involved significant negotiation and commitment-building in all cases except SAQ. Even at TELEGLOBE there was an effort in the second round to allay concerns of managers and employees. The compressed problem-solving process leading to the abortive first round of bidding gave way to an extended process with more participants, from which emerged the policy framework for the successful second round a year later. In most cases commitmentbuilding was linked to shared recognition of the problem and how divestment could help. In the SIDBEC, CAMBIOR, QUEBECAIR, CANADAIR, and AIR CANADA cases, consensus emerged from the problem recognition process: (a) the need to stop SIDBEC’s financial losses; (b) the need to reduce the firm’s debt burden in the case of CAMBIOR and CANADAIR (Austin 1983); (c) AIR CANADA’S need to finance fleet renewal and compete under deregulation; and (d) the eventual recognition that fleet renewal was not enough to solve QUEBECAIR’s competitive problems. Political processes often overlap with both proposal formation (SIDBEC-NORMINES, QUEBECAIR, CANADAIR, AIR CANADA) and implementation (TELEGLOBE CANADA). Proposal formation can reemerge during the implementation process. At SAQ, counter-proposals by employees continued during the bidding process; at TELEGLOBE CANADA abortive implementation in the first round was followed by renewed problem recognition, proposal formation and political processes. CANADAIR and DE HAVILLAND illustrate cases that are interdependent across all processes.


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Evaluating outcomes at the federal level The primary goals of any government programme are often revealed in the way results are reported. No study of British privatization is complete without totalling the returns realized by the Treasury from the selloff. For the Canadian government, what appears to be most important is the number of firms divested. Between 1984 and mid-1990 the Canadian government divested its holdings in five mixed ownership corporations, privatized thirteen parent Crown corporations, divested at least seven subsidiaries of parent corporations (see Table 11.6). Another eight Crown corporations (five inactive, one start-up and two lotteries) were wound up (Doern and Atherton 1987). Simplifying government management through divestment appears to be a major goal. When OPRA officials were asked in 1988 if they monitored the performance of divested firms, they seemed surprised. Getting out of the monitoring task was central to the goal of reducing managerial complexity. Despite occasional ideological statements by members of the Conservative government, divestment goals have continued to be rationalization of holdings and better management of resources. Canadian Crown corporations, unlike the British, did not suffer from significant operational inefficiencies, especially those in competitive environments (Borins and Boothman 1985). CN’s trucking subsidiary, CN Route, was possibly an exception, going into bankruptcy shortly after its privatization.8 Thanks to privatization, the government has reversed the previous trend of expanding loan commitments to Crown corporations. Yet some of the privatized firms continue to be dependent on government contracts and support, notably DE HAVILLAND (Boeing) and CANADAIR (Bombardier). One can point to examples where divestment has increased industry concentration. Canada’s largest polyethylene producer, Nova Corporation, won control of POLYS AR, also a major polyethylene producer, after POLYSAR-CDC was privatized. A big winner in Canada’s telecommunications deregulation and privatization is BCE (Bell Canada). On the one hand, it has thwarted potential competitors, by vigorously fighting deregulation of entry into long distance services; on the other hand, it has aggressively taken advantage of privatization, taking a controlling interest in TELEGLOBE CANADA (through Memotec) and buying CN’s regional telecommunications subsidiaries (Jörgensen 1990:407). The Federal government’s budgetary funding of public enterprise has levelled off in nominal terms at below $C5 billion annually. Because of inflation, this represents a real decline. In relative terms, funding for public enterprise has dropped from 5.3 per cent to 3.2 per cent of the total budget between 1983 and 1990 (see Table 11.7). Privatization has not resulted in overall improvement in the performance of remaining public enterprises, but overall performance is weighted by firms in transportation and agricultural marketing with cyclical results. Outcomes at the Quebec level In its published assessment of the privatization programme, the Quebec government emphasized the stemming of losses by state corporations, the general retention of control of divested units in Quebec, the use of funds from the divestment exercise, and the restored ability of slimmed-down parent Crown corporations to undertake new socio-economic initiatives (Québec Ministre délégué 1988). Quebec divested completely its holdings in QUEBEC AIR, la Raffinerie du sucre du Québec in sugar refining and Madelipêche in fisheries. It sold off three subsidiaries of SOQUEM, four holdings of SOQUIA in food processing and distribution, three of REXFOR in forestry, four of SNA in asbestos, and one each of SGF and SOQUIP

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Table 11.6 Canadian federal government: public sector divestment (1984–90) Crown corporation or Crown status Employees Divestment date holding

Buyer or divestment Proceeds ($ mill.) mode

AES Air Canada

Kinburn Technology Public share issue (43%) 473.8

14.0* 233.8*

Public share issue

246.0

Private placement Public share issue 23 12 86 09 05 86

15.8 99.0 Bombardier Inc. SNC Group

120.0 87.5

00 07 87

Caisse de dépôt (20%) Canadian Pacific Hotels Route Canada Holdings Canadian Pacific Boeing Company (US) Public share issue

+CDC +Canada

1,400 22,640

01 09 87 13 10 88

19 07 89

Public share issue (57%) 16 09 86

Canada Development Canada 47% 17,808 Corp. 12 06 87 27 10 87 Canadair Ltd. +CDIC 5,431 Canadian Arsenals +Canada 924 Ltd. CDC Life Sciences CDC (67%) 1,136 CN Hotels

+CNR

3,400

29 01 88

CN Route

+CNR

2,227

05 12 86

CNCP de Havilland Aircraft

CNR (50%) +CDIC

3,120 4,405

16 12 88 31 01 86

Fisheries Products Canada 63% 8,650 Int. Nanisivik Mines Canada 18% 195

15 04 87 28 10 86

Nordair +Air Canada Northern Canada +Canada Power Northern +Canada Transportation

1,317 34

01 12 84 31 03 87

389

15 07 85

NorthwestTel Pêcheries Canada Inc. Teleglobe Canada Terra Nova Tel

+CNR +Canada

450 575

08 08 88 18 04 86

+Canada +CNR

1,110 400

03 04 87 08 08 88

Varity [M-F warrants] VIA RAIL

CDIC

16,330

31 1287

+Canada

7,300

15 01 90

Mineral Int.

n.a.* 260.0* 29.0* 235.0* -60.0 177.0

Resources 6.0

Innocan Yukon government Inuvialuit & Nunasi Dev. Corps. BCE Purdel Cooperative Memotec Data Newfoundland Tel (BCE) Sale of purchase warrants Retrenchment cuts 2,761 jobs

34.0* 35.5 27.0

195.0* 5.0 488.3 170.0* 3.2 –


161

Adjusted total (excludes Varity and 77,236 Total proceeds 2,894.9 double counting) of which, federal 1,724.1 government Sources: Office of Privatization and Regulatory Affairs (OPRA); and W.T.Stanbury (1989:286). Notes: Divestments in progress (August 1990): ELDORADO NUCLEAR (1,013 employees; merged in 1988 with Saskatchewan Mining Development Corporation to form CAMECO [Saskatchewan govt. 62%, Canada govt. 38%], which is to be privatized within seven years); NORDION (ex-Atomic Energy Canada Ltd. [AECL] division); PETRO-CANADA (7, 373 employees; public shares to be issued in stages); TELESAT CANADA (675 employees; 50% government-owned); and THERATRONICS (320 employees; ex-AECL division). + Crown corporation or wholly-owned subsidiary. * All or majority of proceeds kept by Crown corporation, n.a. Not available. Table 11.7 Canada, federal budgetary expenditure on public enterprises (1983–90) 31 March Year ended Budgetary expend, pub. Total budget ent. ($Cmill). ($Cmill). (a)

(b)

(c)

1983 4,259.5 79,797 1984 4,847.0 96,482 1985 5,497.4 109,215 1986 5,500.0 111,237 1987 4,692.9 116,389 1988 5,089.8 135,535 1989 4,933.4 132,715 1990 4,545.8 142,703 Sources: Canada. Public Accounts of Canada, Part III; Canada. Main Estimates, Part I.

expend. Total programme (a)/(b) (a)/(c) expend, (excl. debt) (%)

(%)

62,826 78,404 86,659 85,796 89,731 96,507 99,532 103,883

5.3 5.0 5.0 4.9 4.0 3.8 3.7 3.2

6.8 6.2 6.3 6.4 5.2 5.3 5.0 4.4

(see Table 11.8). Proceeds were largely used to reduce the debt of parent corporations. SAQ, LOTOQUEBEC and HYDRO-QUEBEC were explicitly excluded from the divestment exercise. Despite privatization and claims that the new managerial class tilted the state-market boundaries to the private sector, the Quebec government continues to have a major indirect role in key economic sectors through the Caisse de dépôt et placement du Québec and SGF, its own alternative policy instruments. The Quebec government divested in order to intervene more effectively and at a lower cost. Slimmed-down Crown corporations have been given redefined mandates, as illustrated by SOQUEM. Comparing the federal and provincial divestment programmes Divestment illustrates the challenge of designing administrative structures for non-routine policy implementation. Three troublesome cases, TELEGLOBE, SAQ and QUEBECAIR, occurred near the start of a programme of multiple public sector divestments by their respective governments.

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Apart from the SAQ false start and the QUEBECAIR saga, the Quebec experience with divestment has gone relatively smoothly. Facing overextended resources, the province divested or slimmed down key Crown corporations. In the privatization process it included Table 11.8 Quebec provincial government: public sector divestment (1984-8) Crown corporation or Crown status holding

Employees Transfer date Buyer mode

Cambior Inc.

+SOQUEM

412

14 08 86

Crustacés-des-Iles Inc. Distex-SNA Donohue Filaq-SNA Grande-Entrée Industries 3-R Inc.

+Madelipêche SNA (50%) +SGF SNA (66.7%) +Madelipêche SNA (30%)

1,045 470 2,025 n.a. 320 n.a.

31 12 87 17 07 86 07 07 87 10 02 88 14 08 87 10 02 88

J.E.Landry Inc. La société minière Louvem Lupel-SNA Madelipêche Inc. Mines Seleine Inc.

SOQUIA (42%) SOQUEM (22%)

n.a. 110

19 01 87 05 1 1 87

+SNA + Québec + SOQUEM

n.a. 1,000 200

30 07 86 19 11 87 29 04 88

Ministry of Works Panofor Inc. Papier Cabano

Public Govt. Department n.a.

01 10 84

REXFOR (33%)

n.a.

29 10 87

Cascades REXFOR (30%)

n.a.

31 08 87

or

divestment Proceeds ($ mill.)

Public share offering (69%) Groupe Delaney Echlin inc. Mircor(51%) Industries 3-R Inc. Groupe Hubert Industries 3-R share repurchase Provigo Ressources SainteGeneviève Cascades Inc. Groupe Delaney Société canadienne de sel Ltée Transformed into Crown corporation Normick-Perron (assets only) Cascades Inc.

170.0* 3.1 3.2 320.0 .1* .5 .1* 2.9* 8.4* 5.6* 1.1 35.0 — 14.0* 11.0*

Crown corporation Crown status or holding

Employees

Transfer date Buyer or Proceeds ($ mill.) divestment mode

Pêches Nordiques SOQUIA (92%) Inc. Provigo SOQUIA (6.7%) Québecair Québec

n.a.

04 03 87

23,000 827

17 03 86 01 08 86

Raffinerie du sucre +Québec 94 Scierie des REXFOR (60%) n.a. Outardes Enr. Sidbec-Normines Sidbec-Dosco (50. 940 1%)

18 09 86 31 03 88

Soc. des Alcools du Québec

(1985)

+Quebec

(2,459)

31 12 84

Fruits de mer d l’Est du Québec Unigesco (26%) Nordair-Metro (CP Air 35%) Sucre Lantic Ltée Cie. de papier Québec & Ontario Mine closed; pellet plant leased to QC Privatization of outlets aborted

2.5* 48.4 21.0 43.2 11.0* −67.5

—


163

Crown corporation Crown status or holding

Employees

Transfer date Buyer or Proceeds ($ mill.) divestment mode

Soc. des pêches de SOQUIA (39%) Newport SOQUIP-Alberta +SOQUIP

600

08 02 88

Fishermen

n.a.

23 12 87

Sceptre Resources 188.8 Ltd. Total proceeds 825.9

3.5*

Total (excludes SAQ and double 31,043 counting) Of which, 102.9 provincial treasury Sources: Québec, Privatisation des sociétés d’état; rapport d’étape, 1986-88; Les Affaires 500, 11 Juin 1988. + Crown corporation or wholly-owned subsiduary. * All or majority of proceeds kept by Crown corporation, n.a. Not available

representatives from the divestment candidate, espoused clearly understood goals, and kept socio-political goals in the forefront. Despite the emphasis on rational management of government assets and letting managers manage, the federal government’s divestment programme has proceeded less smoothly, illustrated by repeated changes in structure and by uneven participation of Crown corporation representatives in the process. Finally, the emphasis on quick exit has on occasion overshadowed socio-political goals such as fostering competition. Despite attempts at formal process design, the Canadian divestment programme continues to be characterized by an individual case-by-case approach. There has been an unwillingness to exclude any Crown corporation from consideration for divestment on a priori grounds. The emphasis on the mechanics of divestment rather than the post-divestment policy framework for each sector appears to be a consequence of both the focus on reducing managerial complexity and the challenge of achieving consensus on sectorial policy goals. Conversely, notwithstanding messy cases such as SAQ and QUEBECAIR, the Quebec divestment programme has been characterized by greater consensus on what to do, supplemented by individual case-bycase consideration of how to do it. The programme has emphasized continuing government policy goals for each sector rather than maximizing the number of firms to be divested. The Quebec government retains an economic role even as it divests. The Quebec government’s exit from a number of firms has been facilitated by its satisfaction with a more powerful economic tool than direct ownership of commercial crown corporations, namely the Caisse de dépôt. Management of divestment as a complex issue demonstrates the importance of having an obvious problem to resolve, the desirability of having clearly understood goals in the process, the importance of commitment building, the need to involve stakeholders in the problem-solution, and the risks of imposing preconceived strategy in complex organizations. NOTES 1 The research has been supported by funding from the Canadian Centre for Management Development and the Social Sciences and Humanities Research Council. The authors gratefully acknowledge the contributions of Christiane Demers, Ecole des Hautes Etudes Commerciales, to the research for this paper which is based on

164


2

3

4 5 6 7

8

Hafsi and Jörgensen (1991). The research is part of a larger study of managing divestment that is comparative across the public and private sectors and across countries, including Canada (federal and Quebec), France, Malaysia, the Netherlands, the United Kingdom, the United States, Senegal and Mexico. Thanks are due to other current and former members of the HEC-McGill, Public Sector Divestment Research Project: Ameur Boujenoui, Joelle Piffault, Pascal Beaudoin, Fang He, Roch Ouellet, Roberto Fachin, Michel Labelle and Loralie Barker for their assistance and intellectual support. For example, in 1984 the Quebec government dismantled a department, the Ministry of Public Works (MPW), and transferred its activities to a new Crown corporation, Société Immobilière du Quebec (SIQ) to promote efficiency, effectiveness and accountability (Dumas 1986). The increasing importance of divestment is illustrated in a sample of fifty United States firms covering the period 1960–86 (Taylor 1988). The total divestments undertaken by these firms numbered 41 for 1960–69, 141 for 1970–79 and 219 for 1980–86. Even more striking, the ratio of divestments to acquisitions rose from 0.09 in the era of conglomerates (1960–69), to 0.28 in the more turbulent 1970s and 0.59 in 1980–86. The trend in Canada is less pronounced. In 1988 there were 310 divestments and 1,301 acquisitions reported in Canada, for a ratio of 0. 24 (see Venture Economics Canada 1989:2.1 and 2.42). The return on assets was calculated by dividing the difference between gross revenues and expenses averaged over 1980–83 by the adjusted assets in 1983, as found in Economic Council of Canada (1986:157–64). The federal government’s attempt to enter the lottery business was beaten back by provincial protests in the 1980s. OPRA information kits include material on CNCP, Terra Nova, Northwestel, CN Route, and CN Hotels, although OPRA had no role in their sale, which was handled by the parent CN. A similar desire to relieve the public service of as much of the detail of the divestment process as possible can be seen in the AIR CANADA privatization, where management feared that leaving implementation details to the public service would cause unwanted delays. The bankruptcy itself is under criminal investigation by the Royal Canadian Mounted Police (RCMP).

REFERENCES Austin, Jack (1983) ‘Canadiar Ltd.’ Report to the Standing Committee on Public Accounts of the House of Commons, Ottawa, 7 June. Berkowtiz, M.K. and Kotowitz, Y (1985) The Organization and Control of Crown Corporations, Ottawa, Economic Council of Canada, Discussion Paper 285, July. Boothman, Barry E.C. (1987) ‘Strategy formation in Canadian government corporations in business’, in Frank Hoy (ed.) Academy of Management Best Papers Proceedings, 1987, New Orleans Academy of Management, 302–6. Borins, Sandford, F. (1983) ‘World War II Crown corporations: their functions and their fate’, in R.Robert and S.Prichard (eds.) Crown Corporations in Canada: The Calculus of the Instrument of Choice, Toronto, Butterworth & Co. 447–75. Borins, Sandford F. and Boothman, Barry E.C. (1985) ‘Crown corporations and economic efficiency’, in D.G.McFetridge (ed.) Canadian Industrial Policy in Action, Toronto, University of Toronto Press in co-operation with the Royal Commission on Economic Union and Development Prospects for Canada, 75–129. Brooks, Stephen (1983) ‘The state as entrepreneur: from CDC to CDIC’, Canadian Public Administration 26, 525–43. Canada—Office of Privatization and Regulatory Affairs (OPRA) (1988) Privatized Corporations: Performance and Process Ottawa, Privatization and Regulatory Affairs, January. Canada—Office of Privatization and Regulatory Affairs (OPRA) (1990) Information [Folder], Ottawa, Privatization and Regulatory Affairs, Department of Communications. Canada—Privy Council (1977) Crown Corporations: Direction Control Accountability, Ottawa, Minister of Supply & Services.


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Canada—Royal Commission on Financial Management and Accountability: Final Report [Lambert Commission], Minister of Supply and Services, 1979. Coyne, John and Wright, Mike (1986) ‘An introduction to divestment: the conceptual issues’, in J.Coyne and M.Wright (eds.) Divestment and Strategic Change Oxford, Philip Allan, 1–26. Doern, G.Bruce and Atherton, John (1987) ‘The Tories and the Crowns: restraining and privatizing in a political minefield’, in Michael J.Prince (ed.). How Ottawa Spends, 1987–88: Restraining the State, Toronto, Methuen, 129–75. Duhaime, Irene M. and Grant, John H. (1984) ‘Factors influencing divestment decision-making: evidence from a field study’, Strategic Management Journal 5, 301–18. Dumas, Pierre (1986) ‘Nouvelle stratégie de l’administration publique québécoise: le cas de la création de la SIQ’, Master’s thesis, Montreal, Ecole des Hautes Etudes Commerciales. Economic Council of Canada (1986) Minding the Public’s Business, Ottawa, Minister of Supply and Services. Ellsworth, Richard (1979) ‘A note on the decision to divest’, Boston, Harvard Business School, Case no. 9–379–167. Estey, Willard Z. (1975) Air Canada Inquiry Report, Ottawa, Information Canada, October. Fotheringham, Allan (1989) ‘Failed BCRIC has become a fallen brick’, Financial Post, 23–25 December, 6. Gilmour, S.C. (1973) ‘The divestment decision process’, doctoral dissertation, Harvard University. Hafsi, Taïeb and Demers, Christiane (1989) Le Changement Radical dans les Organisations Complexes: le Cas d’Hydro-Québec , Montreal, Gaëtan Morin. Hafsi, Taïeb and Demers, Christiane (1990) ‘Strategic divestments by government: a management process perspective’ Canadian Journal of Administrative Sciences 7 (3), 37–46. Hafsi, Taïeb, and Jörgensen, Jan J. (1990) ‘L’Etat en mutation: désinvestir pour mieux agir’, Gestion 15(3), 111–20. Hafsi, Taïeb and Jörgensen, Jan J. (1991) ‘Managing public sector divestment’, Ottawa, Canadian Centre for Management Development. Hafsi, Taïeb, Kiggundu, Moses N. and Jörgensen, Jan J. (1987) ‘Strategic apex configurations in state-owned enterprises’, Academy of Management Review 12, 714–30. Hamermesh, Richard, G. (1975) ‘Fuqua Industries (A)’, Boston, Harvard Graduate School of Business Administration, Case no. 9–375–189. Hamermesh, Richard G. (1976) ‘The corporate response to divisional profit crises’, doctoral dissertation, Harvard University. Hanna, John A. (1987) ‘Bill C-24 and Crown corporations’ CGA Magazine I, February , 18–23; II, March, 24–9. Hardin, Herschel (1989) The Privatization Putsch, Halifax, Institute for Research on Public Policy. Harrigan, Kathryn R. (1982) ‘Exit decisions in mature industries’, Academy of Management Journal 25, 707–32. Hart, John W. (1985) ‘The process of privatization’, in W.T.Stanbury and T. E.Kierans (eds.) Papers on Privatization, Montreal, Institute for Research on Public Policy, 131–9. Hayes, Robert H. (1972) ‘New emphasis on divestment opportunities’, Harvard Business Review 50, 58–67. Jörgensen, Jan J. (1990) ‘Managing privatization and deregulation: the telecommunications sector in Canada’ in Dennis J.Gayle and Jonathan N. Goodrich (eds.) Privatization and Deregulation in Global Perspective, New York, Quorum Books, 394–412. Jörgensen, Jan J. and Hafsi, Taïeb (1990) ‘Managing divestment: bridging private and public sector strategies’, Strategic Management Society Conference, Stockholm, Sweden, 24–27 September. Kingdon, John W. (1984) Agenda, Alternatives and Policy Choices, Boston, Little, Brown. Kirsch, Elaine (1985) Crown Corporations as Instruments of Public Policy: A Legal and Institutional Perspective, Ottawa, Economic Council of Canada, Discussion Paper 295, December. Knubley, John (1987) The Origins of Government Enterprise in Canada, Ottawa, Economic Council of Canada, Discussion Paper 329. Langford, John, and Huffman, Ken (1988) ‘Air Canada’, in Alan Tupper and G.B.Doern (eds.) Privatization, Public Policy and Public Corporations in Canada, Halifax, Institute for Research on Public Policy, 93–150. Laux, Kirk Jeanne and Molot, Appel Maureen (1988) State Capitalism: Public Enterprise in Canada, Ithaca, NY, Cornell University Press.

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Lévesque, René (1981) ‘Le Québec economique dans un deuxième mandat’, Colloque 1981, l’Ecole des Hautes Etudes Commerciales, 31 October. Maule, Christopher J. (1987) ‘Privatization—the case of the Urban Transportation Development Corporation Ltd’, Business Quarterly 52, 26–32. McDermid, John (1989) ‘Privatization: the purpose, the process’, Canadian Business Review 16 (winter), 16–18. Miller, Danny (1990) The Icarus Paradox: How Exceptional Companies Bring About Their Own Downfall, New York, Harper Business. Molot, Appel Maureen (1988) ‘The provinces and privatization: are the provinces really getting out of business?’, in Allan Tupper and G.Bruce Doern (eds.) Privatization, Public Policy and Public Corporations in Canada, Halifax, Institute for Research on Public Policy, 399–425. Montgomery, Cynthia and Thomas, Ann R. (1988) ‘Divestment: motives and gains’, Strategic Management Journal 9, 93–7. Nees, Danielle (1981) ‘Increase your divestment effectiveness’, Strategic Management Journal 2, 119–30. Ostry, Sylvia (1990) Governments and Corporations in a Shrinking World: Trade and Innovation Policies in the United States, Europe and Japan, New York,Council on Foreign Relations Press. Pitsula, James and Rasmussen, Ken (1990) Privatizing a Province: The New Right in Saskatchewan, Vancouver, New Star Books. Porter, Michael (1976) ‘Please note location of nearest exit: exit barriers and planning’, California Management Review 19(2), 21–33. Quebec, Minister of Finance, Minister Responsible for Privatizaton (1986) Privatization of Crown Corporations. Orientation and Prospects, Quebec, Communications Department, Ministry of Finance, February. Québec, Ministre délégué aux Finances et à la Privatisation (1988) Privatisation des sociétés d’état: rapport d’étape, 1986–88, Québec, Cabinet du Ministre délégué aux Finances et à la Privatisation, Octobre. Ramanadham, V.V. (1988) ‘The concept and rationale of privatization’, inV. V.Ramanadham (ed.) Privatisation in the United Kingdom, London, Routledge, 2–25. Ryan, Michael G. (1987) ‘Crown corporations: is the fog clearing?’, Canadian Business Review 14 (summer), 31–4. Schultz, Richard (1988) ‘Teleglobe Canada: selling the jewel in the crowns’, in Alan Tupper and G.B.Doern (eds.) Privatization, Public Policy and Public Corporations in Canada Halifax, Institute for Research on Public Policy, 329–62. Sexty, Robert W. (1980) ‘Autonomy strategies of government-owned business corporations in Canada’, Strategic Management Journal 1, 371–84. Sexty, Robert W. (1987) ‘The commercialization process in public enterprises’ Academy of Management Association Meeting, New Orleans. Spindler, Zane A. (1980) ‘Bricking up government bureaus and Crown corporations’ in T.M.Ohashi and T.P.Roth (eds.) Privatization: Theory & Practice Vancouver, Fraser Institute. Stanbury, W.T. (1989) ‘Privatization in Canada: ideology, symbolism or substance?’ in Paul W.MacAvoy, W.T.Stanbury, George Yarrow, and Richard J.Zeckhauser (eds.) Privatization and State-Owned Enterprises, Boston, Kulwer Academic Publishers, Rochester Studies in Managerial Economics and Policy, 273–329. Taylor, Marilyn L. (1988) Divesting Business Units: Making the Decision and Making It Work, Lexington, Mass., Lexington Books. Trebilcock, Michael J., Hartle, Douglas G., Prichard, J., Robert S. and Dewees, Donald N. (1982) The Choice of Governing Instrument, Ottawa, Minister of Supply and Services for the Economic Council of Canada. Tupper, Allan and Doern, G.Bruce (eds.) (1989) Privatization, Public Policy and Public Corporations in Canada, Halifax, Institute for Research on Public Policy. Tuzzolino, Frank Anthony (1988) ‘A contingency model of exit choice behavior of divesting firms’, Tempe, Arizona State University, doctoral dissertation. Venture Economics Candada (1989) Mergers and Acquisitions in Canada: 1989 Edition, Toronto, Venture Economics Canada Limited.


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Vining, Aidan R. and Botterell, Robert (1983) ‘An overview of the origins, growth, size and functions of provincial Crown corporations’ in R.Robert, S.Prichard (eds.) Crown Corporations in Canada; The Calculus of the Instrument of Choice, Toronto, Butterworth & Co., 303–67. Wilson, Michael H. (1984) A New Direction for Canada: An Agenda for Economic Renewal, Ottawa, Department of Finance, November.

12 Privatization in Chile Cristian Larroulet Vignau

The object of this paper is to describe and examine the privatization process conducted in Chile in the period 1974–89. The structure is as follows: the next section will deal with privatization in the 1970s, with a description of the initial position followed by the privatizing strategy observed at that time. The section after that will discuss privatization in the 1980s, its objectives, transfer procedures, and outcome. Lastly, major conclusions arising from the privatization experience in Chile will be drawn. A number of exhibits containing supplementary information are appended. The government had to provide public-sector subsidies amounting to more than US $500 million in 1973, while the fiscal deficit rose to 24.7 per cent of gross domestic product (GDP) and inflation bore down on consumers at a rate of more than 500 per cent per annum. It was clear then that the inefficiency of state-owned firms meant a high cost to the economy, to the detriment of economic growth and prospects of development. This was particularly serious when the world economy, characterized by interdependence, speedy change, and transfer of information, forced firms to operate in highly-competitive environments, in the face of protectionist barriers all too often raised by the more industrialized countries. These circumstances led the military government to decide to transfer to the private sector all state-owned firms playing other than subsidiary roles, and to set forth clear and stable management policies for publicsector companies, so that those which retained that nature would generate profits consonant with the investment. The priviatization process began in 1974, as part of an overall institutional reform process focused on placing the private sector at the hub of economic activity and reducing the government’s growing role of the previous decade. Table 12.1 Number of state-owned companies Company Total CORFO (1) Subsidiaries (2) Under intervention (3) Banks Created by law Other financial institutions CODELCO Source: Hachette and Luders (1987)

1970

1973

46 46 – 16 2

479 277 19 16 2 1

PRIVATIZATION IN CHILE

169

PRIVATIZATION IN THE 1970s By the end of 1973 the size of government business operations in Chile was considerable, as a result of the nationalization processes conducted by earlier administrations, particularly the socialist administration of 1971–3. A process had begun in 1970 to replace private ownership of the means of production by state ownership. The state had to be the principal economic agent, whether by governing and guiding development or by undertaking activities designed to produce the goods and services required by the nation, according to the plan’s objectives. It is worth noting that it did not prove necessary to enact additional legislation to transform the country’s economic structure; juridical instruments drawn up under earlier administrations were utilized for this purpose. Table 12.1 shows the speed of the above process. At the same time, the deficit of public-sector companies in 1973, as a percentage of GDP, was 10.4 per cent while transfers from the central government to such companies amounted to 2.5 per cent of GDP.1 Government business operations had covered the major economic sectors, including not only large- or medium-scale companies but also spreading to the purchase, management, marketing of small concerns. The speed of the operation was such that within only three years the government had taken majority control of all productive processes, as shown in Table 12.2. The process of building socialism also involved—even more radically—the rural sector. All landholdings larger than 80 base irrigated hectares were practically suppressed, so that by September 1973 about 48 per cent of the total arable area of the country was in Table 12.2 State share of business operations (percentage share of stateowned companies in gross value of sectorial production) Sector

1965

Mining Manufacturing Utilities Transport Communications Financial Sources: For 1965, based on National on Arturo Guzmán, 1982.

13.0 3.0 25.0 1 24.3 11.1

1973

85.0 40.0 00.0 70.0 70.0 85.0 Accounts Dept., Banco Central de Chile (provisional figures). For 1973, based

Table 12.3 State ownership of agricultural property (’000ha) 1965–70

1971–73

Total area expropriated 4,093.0 5,872.9 No. landholdings 1,415.0 4,394.0 Total allocated 601.7 385.0 Total under state control 4,491.3 5,487.9 % of arable area Sources: Rafael Irarràzabal, La Politica Agraria y el Comportamiento Económico del 1973. EC. Agraria U.C.; Guzrmán, 1982, Instituto de Economía, U.C.

Total 1973 9,965.9 5,809.0 986.7 8,979.2 48.0 Sector Agrícola entre 1970 y

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CRISTIAN LARROULET VIGNAU

the hands of government managers. Table 12.3 illustrates the evolution of state ownership of rural property. The above situation came to head in September 1973 and a radical change in political and economic direction began, together with a new administration led by the armed forces. One of the first reforms undertaken was to restore to the private sector the property taken over by the state under the previous administration. Description of the process The privatization process of the 1970s may be divided into two stages: 1 1973–5 Return of 360 concerns under government intervention, confiscated from their legitimate owners; the latter took up most of the liabilities generated during the period of intervention or confiscation. The assets of these companies was estimated at US $1 billion (see Appendix 1: ‘Income from sale of public-sector companies’). 2 1975–80 Sale by public tender of ninety companies and sixteen commercial banks. The value collected amounted to about US$1 billion, now fully paid in. The central object of the first stage was to check the inflationary pressures that had resulted partly from the gigantic deficits of public-sector business. In the second stage the government pursued an additional objective in the sense of increasing fiscal revenues, and therefore did not limit the degree of ownership concentration regarding the companies being sold. Once the sale was agreed CORFO2 granted the purchaser a direct loan for a term of eight to fifteen years, at a real interest rate of 8–12 per cent per annum. The company assets were given as security for the loan. The privatization policy was accompanied by a set of reforms designed to improve allocation of resources. The economy was opened to foreign trade while various privileges that applied to certain sectors were suppressed. In addition, the rules of the game as applied to public (or private) sector concerns were made the same. Government agencies and state-owned companies were forbidden to hire additional staff and denied further fiscal contributions. Simultaneously, the rates of public utilities were adjusted according to economic efficiency criteria. This regulation contemplated a tariff mechanism based on marginal production cost for an efficient company and was applied irrespective of the nature of company ownership. A policy was applied to most state-owned concerns binding them to publish quarterly balance sheets to show the general public how they were doing. In addition, a mechanism was established whereby all investments by public-sector companies had to pass a technical and economic screening test based on social evaluation methods. The state-owned holding company, Corporación Nacional del Cobre de Chile (CODELCO) the major producer of copper, which was nationalized in early 1970 by means of a constitutional reform, was not included in the reprivatization process. The majority opinion of the various sectors has not been in favour of privatizing this concern, because of its strategic importance. In the case of the return of land previously taken over by the state, privatization took the form of immediate and definitive termination of land reform, which gave assurance to, and respect for, ownership of the land restored to producers. A process was started to normalize tenure, whereby part of the land irregularly expropriated was returned to its legitimate owners, up to the equivalent of 28 per cent of the land originally held by the state; the remaining land was distributed to the rural population in family units that later came to be known as ‘CORA plots’, the total area of which was equivalent to 52 per cent of the land


171

that had been held by CORA3. In the allocation process a total of 53,603 holdings were sold with long-term government financing to rural workers and employees, ranked according to a system of points. The remaining land was sold by public tender or transferred to CONAF4if the land was suitable for forestry. The transfer of wealth resulting from the sale of family units to the beneficiaries of the land reform allocation process amounted to more than US$800 million. Nation-wide estimates suggest that 40 per cent of the original beneficiaries of the plot system have sold or assigned 50 per cent of their rights to previous owners of rural property and 10 per cent to other beneficiaries who thus expanded their property. The remainder were persons not directly connected with agriculture, who joined the sector as a new entrepreneurial group often possessing significant capital. All of this was made possible by the development of a market for land with no restrictions other than hindering the formation of unproductive minifundia, suppressing existing regulations and red tape. It is a fact that without this policy of assured tenure and free land market, the modernizing dynamics observed in the Chilean rural sector since 1974 would not have been possible. Evaluation At this stage privatization was a necessary condition to achieve a social market economy. The market could not be said to be the main allocator of resources while the state had control over a major portion of the country’s productive activities. The main difficulty of the sale process conducted during this period was that no regulations were issued to prevent purchases without sufficient backing, which encouraged the formation of conglomerates, which were also fostered by the banking laws in effect at that time. When an acute economic crisis5 set in, in 1981, the weak asset position of certain conglomerates aggravated the crisis. A drop in terms of trade, and rising interest rates, together with the sudden drying up of the flow of external credit, brought about the failure of productive companies and a widespread crisis in the banking system. An ‘implicit’ government insurance on deposits then in effect encouraged the financial sector to disregard investment risk and only pursue maximum profitability. The crisis had highly negative fiscal implications, for the state had to intervene in a substantial portion of Chilean banks, while the Central Bank had to take up the past debts portfolio of these banks, to keep the recession from becoming even more acute. Intervention in banks to some extent meant reversing a major part of the privatization process described above, for the government now held indirect control over a significant part of domestic productive activities. PRIVATIZATION IN THE 1980s The crisis described above checked the privatization process begun in the previous decade; moreover, by intervening in the banking community, the government increased its corporate power. When the emergency was over, the privatization process resumed, involving not only banks and concerns that had come under intervention during the crisis, but other state-owned companies of major economic significance. Return of concerns under intervention The return to the private sector of banks and companies that had come under intervention during the crisis came to be known as ‘normalizing the peculiar area’, the sale mechanisms applied being broad-based capitalism and a direct call for bids, after screening prospective purchasers.

172


Broad-based capitalism This procedure, which calls for selling taxpayers stock in the companies under intervention, was used to reprivatize the banking community. Its purpose was to resolve three problems simultaneously, the first of which was to regulate ownership of large banks and certain large corporations. Other objects pursued with this procedure were to complete capitalization of the financial sector as a way to normalize the capital market, and lastly to spread the ownership of some of the major banks. Broad-based capitalism gave taxpayers with no back taxes pending a chance to buy stock on credit under favourable terms. The cash payment was 20 per cent of the price, the credit was adjusted for inflation, bore no interest and had a twelve-year term. Furthermore, anyone making payments when due would pay only 70 per cent thereof. The price fixed was the book value, substantially higher than the economic value. The two banks (Banco de Chile and Banco de Santiago) that were sold under the broad-based capitalism procedure had been the two largest private banks in Chile. The mechanism of broad-based capitalism was also applied to the sale of other stocks. In addition to stock in the above banks shares in Pension Funds (AFPs)6 were also put up for sale. This would give social security contributors the possibility of sharing directly in managing their funds. The AFPs involved in this process were Santa María and Provida, which, because of creditor agreements in which the financial institutions under intervention shared, had remained in the hands of such institutions. Bids The other sale mechanism applied to concerns formerly under intervention was exercised through private investors, each of which was duly screened to ensure solvency. The following companies were put up for bids: AFP Unión, Isapre7 Luis Pasteur, Isapre Cruz Blanca, Isapre Colmena, Banco de Concepción, Banco Internacional, Banco Osorno y la Unión, Banco Hipotecario y de Fomento, Consorcio Nacional de Seguros, Inforsa (forestry sector), Indus (food industry), Cervecerías Unidas (CCU), Compañía de Petróleos de Chile (COPEC), Línea Aérea del Cobre (LADECO), Panal (textiles), and Hucke-McKay (food). Criticism during this stage was aimed at the procedure rather than the sale itself. The opposition argued that benefits for broad-based capitalists had been excessive and available only to a reduced number of taxpayers. It should be noted here that profit should be counted ex ante rather than ex post. These companies were sold when the crisis was barely over and a substantial number of taxpayers, though given the opportunity, abstained from running the risk that such stock purchase then involved.

Privatization of CORFO companies The most important stage in the entire privatization process in Chile began in 1985, when large-scale companies—for the most part created by the state—which belonged to Corporación de Fomento de la Producción (CORFO), were transferred to the private sector. The signficance of this process lies in the fact that political and philosophical notions were involved regarding the role that the state ought to play in a social market economy. Many of these companies were natural monopolies that delivered basic services to the population. Some sectors of opinion held that such companies ought to pursue redistributive objectives, which would be disregarded if under private management. Besides, given the size of the companies concerned, a large number of civil servants feared that privatization would entail massive layoffs. The government, however, felt that income redistribution, through subsidized utility prices, was inefficient and


173

that while some adjustment costs might arise in the process, the improved efficiency to be achieved by the companies would benefit the community at large. The central objectives stated by CORFO at this stage were as follows: (a) Elimination (or reduction) of frequent fiscal deficits resulting from operational deficits of companies where the state has a share. (b) Spreading ownership (sale to workers and small-scale investors). Broad-based capitalism. Correlation between individuals and entrepreneurial activity. (c) Long-term company efficiency. (d) Diversification of pension fund investments in solid instruments, ensuring a satisfactory pension level. Correlation between pensioners and company growth. (e) Strengthening the capital market. (f) Company expansion and modernization (capital increases instead of state debts). (g) Additional revenues for the Treasury and CORFO to finance both socially profitable projects in the macroeconomic programme and development credits for the private sector. The strategy followed to achieve these objectives was an effort to ensure that the sale price of stock was satisfactory and in fiscal interest, that ownership spread included workers, and that the process was fully transparent. Table 12.4 Prices, dividends and capital contributions (pesos, December 1987)9 Company

Prices

Dividends

Capital contributions

1985

1987

1986

1987

1986

ENTEL CHILGENER CHILQUINTA CAP CHILMETRO SOQUIMICH CHILE SANTIAGO SANTA MARIA PROVIDA Source: Vatter (1988)

171.0 741.2 969.2 59.9 1,311.3 126.1 1.6 1.1 4,524.9 166.7

405.0 866.0 1,670.0 172.0 2,130.0 347.0 2.4 1.0 4,000.0

42.9 155.6 199.0 3.4 350.6 57.0 0.1 0.04 468.0 240.0

77.12 114.5 330.0 11.8 211.6 56.9 0.1 0.1 472.5 29.2

32.4 155.6 316.5

49.8

State-owned companies participating in the process as of December 1989 are listed below: 1 Electric power: CHILGENER, CHILMETRO, CHILQUINTA, ENDESA, EDELMAG, EMERC, EMEL, EMELAT, PILMAIQUEN, PULLINQUE, EDELNOR, and PEHUENCHE. 2 Chemicals and mining: CAP, ENAEX (explosives), SOQUIMICH, ENACAR (coal), SCHWAGER. 3 Communications: TELEX, CTC, ENTEL. 4 Others: CHILE FILMS (cinema), ECOM (computer science), IANSA (sugar), ISE (insurance), LAN CHILE (airline) and LABORATORIOS CHILE (health).

174


The initial process meant placing on the market a small volume of shares while offering stock packages to workers and disseminating through the media the results and prospects of the companies being sold. The market became aware of investment opportunities and realized that the process was a long-term one. In the course of the process the price of these companies’ shares rose, partly because the process began to gain credibility,8 and because privatized companies were in a better position to improve efficiency. Table 12.4 shows the trend of share prices. To prevent concentration of ownership in the companies being sold, a number of sale mechanisms were implemented, each with an individual aim. Sales to pension funds Legislation was enacted to allow AFPs to invest pension funds in open corporations, upon approval thereof by the Risk Rating Commission. Simultaneously, limitations were set on the ownership of participating companies: not more than 50 per cent of their equity may be in the hands of a single shareholder, while at least 10 per cent of equity must be held by minority shareholders. AFPs may not purchase more than 5 per cent of any company’s equity, while not more than 10 per cent of the funds managed by them may be invested in shares. Laws 18,398, 18,420 and 18,646 amendment DL 3,500 for these purposes. One significant point of the law was that once the Risk Rating Commission had approved a pension fund purchase in a company under privatization, the state was bound to sell more than 50 per cent of the equity thereof, thus lending the process more transparency and credibility. One of the focal objectives of this law was to achieve a positive effect on the ownership and wealth of nearly three million Chilean workers contributing to pension funds, for they would thus indirectly own the stocks purchased. Another aim was to develop the capital market in Chile, by allowing the substantial funds managed by AFPs to be invested in stocks. As of December 1988, privatized companies eligible for equity purchase by AFPs are CHILGENER, CHILMETRO, CHILQUINTA, ENDESA, ENTEL, SOQUIMICH, LAB CHILE, CTC, and SCHWAGER. Sales to workers The sale of stocks to workers in privatized companies and in the public sector generally, is one of the most outstanding features of privatization at this stage. There was considerable opposition to the prevailing privatization scheme, even from people in government, who since the 1981 crisis had lost faith in the market as an allocator of resources.10 Stock sales to workers had considerable ‘political’ benefits, which lent the process greater credibility; the workers themselves would oppose any future return of the company to state ownership. Notwithstanding, though undoubtedly beneficial, the sale to workers posed the problem of funds to make the purchase. A law was enacted (Law 18,372) to seek financing for worker purchases; the provisions made by companies for compensation for years in service were utilized to this end. The legal amendment allowed workers and companies to agree on advance payment of compensation. Another way to finance sales was to give bonuses in shares rather than money, under an agreement reached in the collective bargaining process; a law to this effect had been enacted earlier (DFL 2,758 of 1979). CORFO also encouraged the organization of workers’ associations, which resorted to the financial system to obtain more shares; these shares remained with the banks as security until the debt expired.


175

Lastly, in exceptional cases, deferred payment operations have been allowed, that is, operations on the instalment plan. In the case of ECOM and ENDESA, payments are made over four to six years. Companies eligible for this form of ‘worker capitalism’ are CAP, CHILGENER, CHILMETRO, CHILQUINTA, EDELMAG, IANSA, LAB CHILE, SOQUIMICH, CTC, ENDESA, ENTEL, PEHUENCHE, SCHWAGER, ECOM, EMEL and EMELAT; the last three named were purchased 100 per cent. The number of worker shareholders increased as follows: 1985 1986 1987 1988

4,176 13,869 25,473 28,163 Stock Exchange Sales

At first it was decided that the majority of state-owned concerns would become stock companies. Then it was resolved to sell 2.5 per cent of stock each year to achieve market price and presence on the Stock Exchange. When the desired price level had been reached, the number of shares offered for sale increased until the demand of institutional investors such as pension funds, insurance companies, mutual funds, and so on was satisfied. The effect of privatization on the Stock Exchange has been considerable, as shown in Table 12.5. Reimbursable contributions Under this system contributions in new shares are given to users requiring expansions, extensions, and other electric power services, to Table 12.5 Stock Exchange data Year

1984

1985

1986

1987

1988

Stock Exchange assets (million US $ Dec. 1988) Real IGPA* variation Real IPSA** variation Stock transactions (million US $) Privatized company stock transactions (million US $) Priv. co. stock transactions (total transaction) (%) AFP stock portfolio (million US $ Dec. 1988) Source: Santiago Stock Exchange Notes: * General Shares Prices Index ** Selective Shares Prices Index

2,237.0 −9.0 +12.4 41.9 2.6 6.2 87.9

2,419.0 +37.8 +61.8 59.7 18.7 31.2 131.2

4,625.0 +102.6 +139.4 337.1 187.2 55.5 213.1

5,686.0 +7.9 +31.1 542.8 368.7 67.9 298.9

7,079.0 +18.8 +35.7 654.4 448.2 68.5 330.6

some extent implying privatizing flow instead of stock. It has been used in the privatization of power and telephone companies.

176


Sales to foreign investors In all the bids participation of foreign investment was permitted. Table 12.6 lists the participation of foreign investors in privatized companies, as of June 1989. Capital reduction The capital of one company—CAP—was reduced so that the share of private stockholders would rise from 13 per cent to 49 per cent, and the CORFO share would diminish from 87 per cent to 51 per cent.11 For CORFO the operation entailed a return amounting to US $72 million. It was a special case allowed because of substantial cash surplus. This was one of the most heavily criticized operations and it was argued that transparency was less than total. The difficulty, however, may have been due to lack of information in the capital market rather than problems in the operation itself. Appendix 2 contains the balance of stock sales for these companies for 1988. Table 12.6 Participation of foreign investors Company

Stockholder

% Share

1 2

Bond Corp. Chile S.A. Cia. de Inversiones Suiza Andina S.A. 2.9 1.4 0.6 24.9 Capricorn Holding Inc. y Cia. Ltda. 2.1 22.0 Continental International Finance Corp. 19.8 1.3 41.1 Continental Int. Finance Corp. II Ltda. 2.1 21.5 Continental Int. Finance Corp. IV 2.0 19.6 I.M. Trust Austin Powder

48.8 20.0

CTC CAP Inversiones Citicorp Chile S.A. Tanner y Continental Illinois S.A.C. The Chile Investment Co. S.A. Total 3 SOQUIMICH Inversiones ICC Chile Ltda. Total 4 CHILGENER Inversiones Financieras SP Chile Ltda. The Chile Investment Company Total 5 IANSA Tanner Continental Illinois S.A. Total 6 LAB CHILE The Chile Investment Co. S.A. Total 7 PILMAIQUEN 8 ENAEX Source: Santiago Stock Exchange

19.9

20.0

18.4

17.6

100.0 67.0


177

Result of the Sale of CORFO Companies Widespread ownership In terms of spreading equity ownership, the results may be observed in Table 12.7. Accounting results In terms of profitability, privatized company results are positive, most of the companies having increased their profits (see Appendix 3). This outcome is partly due to increased operational efficiency, which is one social benefit of privatization. It is also due, however, to general improvement in domestic economic activity and the ‘legal advantages of privatization’. An instance of the latter is the fact that upon becoming privatized, companies may diversify their operations into other areas, something they could not do while in the public sector.12 Under explicit Odeplan (National Planning Office) regulations, public-sector concerns are bound to concentrate on the object for which Table 12.7 Breakdown of completed sales (1985–8) (per cent) Company

AFPs

Stock Exchange

Workers

Bids

Total

CAP CHILGENER CHILMETRO CHILQUINTA CTC ECOM EMEC EMEL EMELAT ENAEX ENDESA ENTEL IANSA LAB CHILE PILMAIQUEN PULLINQUE SOQUIMICH SCHWAGER TELEX

– 14.0 24.0 17.0 7.5 – – – – – 14.3 18.0 – 4.0 – – 23.0 7.2 –

20.0 80.0 39.0 72.0 8.2 – – – – – 0.7 18.0 38.5 32.1 – – 59.0 32.3 –

34.0 6.0 31.0 9.0 12.0 100.0 – 100.0 – 67.0 6.0 12.5 21.5 12.6 – – 18.0 3.0 –

46.0 – 6.0 2.0 37.0 – 100.0 – 100.0 33.0 22.0 – 15.0 – 100.0 100.0 – – 100.0

100.0 100.0 100.0 100.0 64.7 100.0 100.0 100.0 100.0 100.0 43.0 49.0 75.0 48.7 100.0 100.0 100.0 42.5 100.0

Source: CORFO, standardization department

they were expressly created. Another advantage of privatization is that companies are free to decide how to allocate their investment funds, with no impediments arising from the social priorities of public funds. Lastly, they were placed in a position to reduce their foreign debt at a discount.

178


Difficulties encountered in the process The opposition to the military regime criticized privatization severely, in regard to the objectives thereof, the companies sold, the procedures applied and the prices charged. The efficiency objective was criticized, arguing that efficiency may also be achieved in the public sector. But whereas public-sector concerns showed a surplus in the period 1975–88, the practical evidence of previous administrations showed that the reverse had been the case. The political pressures brought to bear on public-sector concerns in a democratic context are difficult to avoid. As for the companies selected for sale, criticism was aimed mainly at the privatization of natural monopolies (power and communication companies). The important point, however, is not so much who manages these companies, as the operation of appropriate tariff laws that will place production on a socially-efficient footing. Regarding the procedures applied, the basis for criticism is unclear, for the procedures were varied, as described above, and past errors linked to concentrated stock ownership were avoided. Lastly, the opposition argued that sale prices were exceedingly low and meant a loss to the Treasury. This position calls for a few comments. First, if there were actual losses for the Treasury, they were offset by gains for the private sector, which would mean a socially-neutral transfer. The argument might be correct in respect of sale of companies to aliens. Examination of sale prices, however, reveals that any possible price subsidy has taken place mostly in sales of stock to workers.13 At the end of 1989, CORFO maintained ownership of the shares in the electric sector, and in the sectors of drinking water, transport, coal, and so on. These assets, in any case, are relatively small compared to the state-owned property held by CORFO in 1980. However, a significant number of these companies represent an important section in relation to the size of their sector. The new government, which came to power in March 1990, defined a platform contrary to privatizations. None the less, towards the end of that year it changed its policy announcing some privatizations of companies in the hands of CORFO. Effects on employment Evidence in the past three years suggests that in general there have been no layoffs in privatized companies. Several years before privatization (1974–9), public-sector companies had undergone internal restructuring, which reduced overstaffing; effects on employment thus took place several years before privatization. Redistribution effects The redistribution effects of the privatization process are not entirely clear yet and will be observed in the medium term. Workers who purchased stock in the companies and sold, have made significant capital gains. In most sales to workers the company would bear any capital losses if the shares are retained until the worker’s retirement. This measure prevents negative redistribution effects. CONCLUSION The Chilean experience has a series of peculiarities among which it is noteworthy that it took place under a military government, and after a very important institutional and economic collapse. These elements made possible the existence of a sufficient critical mass which supported the process of modernization of the


179

economy, and the privatizations. Furthermore, the style of government allowed prompt decision so that the transference of property could be appropriately timed. The mainspring of the process was the pursuit of a free market economy, the state filling mostly subsidiary roles. The economic outcome has been successful, though beset by some problems and mistaken policies. Lastly, the speed of the process has been favourable, mainly because the prospect of returning to state ownership has been considerably reduced, with beneficial implications for the economy as a whole. NOTES 1 Excluding CODELCO, the copper mining company, and largest state-owned concern in Chile. 2 The Corporation de Fomento de la Production (CORFO—Chilean Development Agency) acts as a development bank and is responsible for organizing, managing and selling public-sector companies. 3 Corporación de Reforma Agraria (CORA—Land Reform Agency). 4 Corporación Nacional Forestal (CONAF—Chilean Forestry Agency). 5 Domestic expenditure was reduced in 1982, resulting in a 14.5 per cent drop in GDP. 6 Appendix 4 explains the organization of these private institutions in 1981. 7 Institution de Salud Provisional (Social Security Health Institution), private concerns designed to cover health needs, created in the early 1980s to bring private activity into the health sector (see Appendix 4). 8 Other stock prices also increased in the period as a result of economic recovery. 9 Deflated for consumer price index (CPI); dividends and capital contributions, adjusted by CPI for the relevant month. 10 It is worth noting that the financial condition of public-sector companies after the crisis was better than that of many private companies, because debt levels had been controlled by the government according to more conservative criteria than the private sector. 11 Law 18,046 governs capital reduction. 12 This strategy has been followed mainly by CAP and ENERSIS, a holding company that owns CHILMETRO. 13 Hachette and Luders (1989).

APPENDIX 1 Table 12A.1 Income from sale of public sector companies (1974–84) (‘000 US $)

Compan ies Banks Assets Agricult . Land Other Total

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

12,839

57,630

91,462

68,900

97,000

15,824

6,857

6,002

170, 10,768 8,041

746 16,755 10,581

– 5,000 –

125, 000 40,900 10,700 –

21,500

– 12,551 10,835

102, 810 6,474 11,026 –

28,900 7,100 –

41,000 15,000 –

– 3,838 –

– 3,746 –

– 27,502 –

– 6,174 114, 691

– 7,688 113, 836

– 3,399 114, 800

– – 164, 600

– – 69,600

– – 112, 000

– – 19,662

– – 10,603

– – 33,504

62 1,654 25,390

245 2,482 239, 144 Source: Nankani (1988)

180


APPENDIX 2 Table 12A.2 Balance of stock sales (1988) No. of company No. of share- % 10 largest % Private sector workers Dec. 88) holders (Dec. 88) shareholders (Dec. share (Dec. 88) 88) I Stocks sold on the Stock Exchange (a) Stocks eligible for purchase by AFPs CHILGENER 869 1,172 69 CHILMETRO 2,828 9,712 63 CHILQUINTA 770 1,509 70 CTC 7,518 24,565 80 ENDESA 2,925 80,000 30 ENTEL 1,460 3,433 81 LAB CHILE 681 965 73 SCHWAGER 2,296 1,703 69 SOQUIMICH 5,611 7,101 61 TOTAL 24,958 130,160 66 (b) Stocks not eligible for purchase by AFPs CHILE FILMS 127 259 100 CAP 9,329 9,961 46 EDELMAG 118 1,148 12 EDELNOR 331 1,333 96 ENACAR 6,455 1,908 95 IANSA 1,599 19,446 83 ISE GENERALES 270 4 100 LANCHILE 1,092 1,075 100 PEHUENCHE 90 92 100 TOTAL 19,411 35,226 81 II Stocks not sold on the Stock Exchange ECOM 100 Workers EMERC 100 SIGDO KOPPERS EMEL 100 Workers EMELAT 100 EMEL and ENDES workers ENAEX 100 AUSTIN POWDER and FAMAE

PILMAIQUEN PULLINQUE TELE Source: CORFO, standardization department.

100 100 100

100 100 100 86 92 62 100 55 100 88 100 100 100 13 8 100 2 32 32 54

I.M.Trust GOLAN S.A. CHILE PAC


APPENDIX 3 Table 12A.3 Accounting results: ten largest privatized companies 1985–9 Company ENDESA Profit/Assets Dividends/Profits CHILGENER Profit/Assets Dividends/Profits CHILQUINTA Profit/Assets Dividends/Profits CHILMETRO Profit/Assets Dividends/Profits CAP Profit/Assets Dividends/Profits ENTEL Profit/Assets Dividends/Profits LAB. CHILE Profit/Assets Dividends/Profits CTC Profit/Assets Dividends/Profits SOQUIMICH Profit/Assets Dividends/Profits IANSA Profits/Assets Dividends/Profits Source: Santiago Stock Exchange. Note: 1 Average for 1985 and 1986.

1985

1986

1987

1988

1989

−19.01 0.0

−19.0 0.0

9.2 0.0

12.9 18.0

7.3 –

3.2 61.7

7.1 47.9

3.1 43.4

7.6 39.2

7.3 –

5.1 43.6

8.5 49.0

8.7 86.1

12.2 74.7

18.4 –

10.3 43.8

11.4 44.7

10.0 64.5

14.7 59.2

21.7 –

1.5 12.2

2.1 9.7

4.5 13.6

8.3 25.2

12.0 –

21.3 43.5

42.4 26.4

42.9 20.9

42.5 16.4

40.0 –

– –

– 0.0

14.7 33.6

30.8 39.7

23.8 –

15.5 0.0

15.0 53.1

12.1 50.0

19.0 74.5

17.2 –

28.2 –

29.5 22.1

34.9 40.0

43.4 35.1

21.1 30.9

9.0 0.0

5.8 0.0

7.3 0.0

42.6 47.0

57.2 –

181

182


Appendix 4 Privatization in the social sectors The process of giving greater weight to the role of the private sector also extended to various areas of social service. The government introduced legislative amendments reducing state monopoly over such services. This, for example, is what happened in the case of university education. Starting in 1981, the government opened up the possibility of creating new private universities and institutions of higher education without fiscal financing; to date (1989), this has meant the organization of eleven new private universities. A brief description of the main changes in these sectors is given below. Education In addition to university education, similar programmes were implemented at other levels of education. Agreements were reached with various entrepreneurial associations, which covered a substantial portion of technical education; thanks to such agreements, these associations took over the management of stateoperated training centres in the area of production or services. The government pays a subsidy for each student enrolled. The process has brought corporations closer to the training of their future middle managers. Regarding elementary and secondary schooling, the government established a subsidy for every student enrolled, which is paid to schools, whether municipal or private. This has led to considerable increase in the supply of free educational services furnished by private institutions. Health Starting in 1981, all members of the social security system were allowed to elect freely whether to make their mandatory contribution for health to a state agency (Fonasa) or private health institutions (Isapres). This was the origin of these private services, either open or closed, which cover a minor but expanding percentage of the population. Housing During the administration of Salvador Allende, the government, besides subsidizing housing demand, basically through interest rates, executed direct construction work and provided real estate services generally. This led to considerable inefficiency and unfair treatment; as a result of pressure from interest groups and of the subsidy mechanism applied, government resources were not addressed to the neediest sectors. This policy was changed and the state was withdrawn completely from the supply of housing and real estate services. Furthermore, a direct subsidy to demand was established, concentrating resources mainly on lower-income sectors. This subsidy is granted strictly according to a grading system; then, having obtained the necessary certificate, the interested party approaches the market to find the desired dwelling. Social security One of the most deep-reaching and significant transformations carried out in Chile was the implementation of a new social security mechanism. The system in effect in 1973 was based on the criterion that active


183

workers should finance pensions for the retired (sharing system). Management of such funds was performed by special public institutions known as Cajas de Prevision. There were thirty-two such pension funds at the time in the purview of the Ministry of Labour and Social Security, providing a wide assortment of benefits and keeping up unbelievable discriminations. As in any system where there is no competition and no suitable device to encourage savings for social security purposes, the former pension system was completely bankrupt and the state was forced to contribute increasing amounts of funds. (In 1971–3 the social security deficit amounted to an average 2.5 per cent of GDP). The new system, based on individual capitalization, began in 1981. Each member selects a privatelyowned pension fund to manage his or her social security funds. These savings are deposited in individual capitalization accounts, in an amount equal to 10 per cent of monthly remuneration, to form the retirement fund. An additional 3.4 per cent is contributed to finance a system of disability and survivor pensions. The system is based on free election; each worker may choose any pension fund for depositing his or her funds, and may subsequently change as often as he or she finds it advisable. Retirement age was fixed at a single level: 65 years for men, 60 for women. There are twelve pension funds operating today, which compete for member contributions. They invest such funds in the capital market. The portfolio must meet certain pre-established diversification requirements, affecting both the instrument and the issuer thereof. In the case of corporate securities, additional requirements must be complied with, such as deconcentrated ownership. It is worth noting that between 1982 and 1986 pension funds have halved their operational costs per member. Fund profitability has proved higher than what might have been obtained in the capital market under similar risk conditions. The average return was 6.4 per cent in 1987. It is worth noting that this result was obtained in spite of the severe crisis that the domestic financial market underwent in 1983. REFERENCES Address by the Minister Vice President, CORFO, at Euromoney Conference on Investment in Chile. CORFO Annual Reports for several years. CORFO reports on privatizations. Goldfarb, E. (1988) ‘Liberalización económica y privatización en la Bolsa de valores de Chile’, Bolsa de Comercio de Santiago, December. Hachette, D. and Luders, R. (1987) ‘Análisis de privatizaciones 1974–1982’, Annual Meeting of Economists. Hachette, D. and Luders, R. (1989) ‘Precios subsidiados o de mercado’, Annual Meeting of Economists. Mujica, R. (1989) ‘La modernization del sector agropecuario entre 1974 y 1988’, Instituto de Economía, Universidad Católica de Chile. Nankani, Helen (1988) Techniques of privatization of state-owned enterprises’, World Bank. Santiago Stock Exchange, Annual Reports for several years. Vatter, J. (1988) ‘Capitalismo popular’, Revista Economia, Universidad de Chile. Larroulet Vignau, C. (1984) ‘Reflexiones en torno al estado expresario’, Centre de Estudios Públicos.

13 Privatization in Guyana Carl B.Greenidge

INTRODUCTION AND DEFINITIONS Although privatization as a concept is relatively novel in the political lexicon of Guyana it is not entirely unknown. What is relatively new to Guyana is the systematic divestment of publicly-owned enterprises as a matter of deliberate policy. Divestment has not been pursued in this South American republic as part of an ideological commitment to the ‘magic’ of the market, but in recognition of the effectiveness of marketization, notwithstanding its handicaps. One of the reflections of this non-ideological embrace is that the term ‘privatization’, with its wider political connotations, has been eschewed by the government in favour of the more neutral term, ‘divestment’. And yet in spite of this, Guyana has since 1988 implemented what is probably the most extensive privatization programme in the Caribbean. Privatization usually refers to the transfer of ownership and control from the public to the private sector with particular reference to asset sales. This includes both total and partial transfers (Hemming and Mansoor 1988). It need not involve payment or sale, however. The concept has also been deployed to encompass more general structural changes such as leases and management contracts, franchising out of public services, the general contraction of the public sector and the reassignment of property rights from the state to private individuals and entities (IBRD 1988). In the latter regard, one author has described privatization as the process of introducing the discipline of market forces and in that sense it, ‘covers a wide continuum of possibilities, between denationalization at one end and market discipline at the other’ (Ramanadham 1989). The latter concept of marketization embraces the removal of statutory monopolies or the direct and indirect elimination or attenuation of barriers to entry (UN 1989; Ramanadham 1989; Hemming and Mansoor 1988). For the purposes of this paper, privatization will be used to describe the transfer of ownership or control from the public to the private sector. Whilst the divestment of land has been commonplace in post-Columbian Guyana, divestment of other assets is relatively novel. Prior to the commitment to the divestiture of selected enterprises in 1989, privatization was limited to the transfer of the assets of a few unviable public enterprises (PEs) such as the Guyana Agricultural Products Corporation (GAPC), Savannah Industries Ltd (SIL), Guyana Glassworks Ltd (GGL), and Guyana Leathercraft Ltd (GLL), to the private sector. Some enterprises were closed and their assets handed over to other PEs. The Guyana Marketing Corporation (GMC), Guyana Marine Foods Ltd, Guyana Fish Processors Ltd and the Small Industries Corporation (SIC) are cases in point. In addition, shares of some enterprises were made available to co-operatives or private businesses at the time of the establishment or nationalization of the entities. Examples of this kind are the Guyana National Cooperative Bank (GNCB) and the Guyana Co-operative Insurance Service (GCIS). Most recently, shares of

CARL B.GREENIDGE

185

enterprises, such as the Demerara Distillers Limited (DDL) and the National Bank of Industry and Commerce (NBIC), have been made available to both local and foreign investors. However, none of these early divestitures had been part of a wider programme aimed at remedying fiscal or macroeconomic disequilibria. At best they were intended to give substance to institutional policies aimed at modifying the structure of ownership, raising cash for the specific enterprise or of accommodating interested or affected parties (Sophia Declaration 1973). The debate over the subsequent turnabout in policy has been very narrow in focus. It has centred almost exclusively on denationalization, its desirability, disposal price, costs and barriers to local private participation. Marketization, as defined earlier, has not been much debated, explored or employed. At the policy level it has not been treated as a serious part of the process. Indeed, in many instances the monopolies enjoyed by the PEs have been sought and granted relatively unmodified, to the privatized entity. THE PUBLIC ENTERPRISE SITUATION The nature of Guyana’s public enterprises (PEs) Defining these enterprises in Guyana is a relatively simple exercise because user charges are associated with very few services in the public sector of Guyana. Complications only arise when considerations about the intention to cover full costs are brought into the picture (Floyd et al. 1984). In addition, there are a limited number of holding companies and commercial municipal enterprises. For this reason, an earlier study employed a definition which focused primarily on government ownership and commercial pricing of output (Brown 1981; Greenidge 1982). Most of the PEs are wholly-owned and incorporated under the Public Corporations Ordinance of 1963 (Alexander, 1981; Greenidge, 1982). All the ‘non-financial’ PEs listed in Table 13.1, save Quality Foods Ltd, Sanata Textiles Ltd, Livestock Development Corporation, the independent and the un-consolidated companies, are so incorporated and come within the demesne of the Public Corporations Secretariat (formerly GUYSTAC). The other companies, with the exception of the Mards Workshop, are incorporated under the traditional Companies Act. The Workshop falls in ‘no-man’s land’ between the traditional public service department and commerce. Roughly 20 per cent of the entities were jointly owned in 1981 and the proportion is about 25 per cent today. Joint-ownership has taken various forms. In the case of the road transport company, GTSL, and GNCB, a commercial bank, the other owners are a trade union and co-operative societies, respectively. The joint-owners of the livestock company, LIDCO, and the stockfeed manufacturer, GSL, are private sector companies as well as PEs. In some cases, such as the fisheries company and the fishing accessories manufacturer, the partners are foreign. Some of the companies such as the Guyana Liquor Corporation (GLC) and the Bauxite Industry Development Company (BIDCO) are holding companies. BIDCO has a 50 per cent joint-venture with a Norwegian partner in GUYBULK, an international shipping company. In addition, the Public Corporations Secretariat (PSC) and the Co-operative Financial Agencies (COFA), carry out some functions similar to those of holding companies but their main assignments are administrative and supervisory tasks. Some PEs have wholly-owned subsidiaries. PEs account for a significant proportion of gross domestic product (GDP), employment and capital formation; consequently, they exert a considerable influence on economic trends. PEs savings played a key role in financing the Central Government capital investment programme in the 1960s and early 1970s.

186

PRIVATIZATION IN GUYANA

Declining financial and physical performance of these enterprises as a whole contributed in part to Guyana’s ‘lost decade’ and triggered a scramble for privatization in its narrower sense. At their apogee, there were over sixty PEs in Guyana. In 1980 these enterprises accounted for some 48.1 per cent of GDP and around 50 per cent of gross Fixed Capital Formation. The activities of the entities ranged from sugar-milling, utilities, fishing, agricultural activities, bauxite mining, stone quarrying, commercial airlines, and pharmaceuticals to banking, insurance services and retail trading. It may be seen from Table 13.2 that in 1980 the most significant contribution, in GDP terms by the PEs, was to the mining and quarrying sector (15.7 per cent) and the service sector, including banking and distribution (11.4 per cent), followed by the agricultural sectors (Greenidge 1982:205). Their employment contribution has been relatively high although they have tended to be more capitalintensive than the rest of the productive sector. By 1990 the number of PEs had been reduced, primarily by attrition and to a lesser extent by divestment, to 40.1 The contribution of these entities to GDP in that year was 44.4 per cent, at which time the share of mining and quarrying had fallen to 9.6 per cent. Similarly, the shares of manufacturing and engineering and construction had given way to services and agriculture, having fallen to 5.8 and 1.6 per cent, respectively. Estimates of total PEs employment levels are shown in Table 13.3. In 1980 the PEs accounted for almost 58 per cent of total public sector employment. These levels compare with 71 per cent in 1990. The largest single employer in 1980 and 1990 was the Guyana Sugar Corporation (GUYSUCO) which accounted for nearly 32,000 employees and 32 per cent of total public sector employment in 1980, 34 per cent in 1985, and 43 per cent in 1990. The sugar company’s importance in this area has increased so dramatically with the decline in the overall economy that its establishment exceeded that of the entire Central Government’s by almost 50 per cent in 1990. During the mid-1980s the numbers were roughly in balance. Employment levels in the public sector, as might be expected, have declined significantly since 1970 and 1980. Between 1985 and 1990 total public sector employment fell by 13 per cent. Employment in the PEs has, however, declined somewhat slower than the rest of the sector. In 1970 PEs employed 7,493 people (Boodhoo 1971). In 1980 the employed had risen to some 56,848 persons; by 1985 and 1990the numbers had slid to just under 50,000 and around 47,000 persons, respectively. This represents a 6 per cent decline relative to 1985 and a 14 per cent fall compared with 1980. Total Central Government Table 13.1 Pre-1989 ownership pattern Public enterprises (non-financial)

Government share of equity (%) Subsidiaries

1 Guyana Electricity Corporation (GEC) 2 Guyana Telecommunications Corporation (GTC) 3 Guyana Airways Corporation (GAC) 4 Guyana Transport Services Limited (GTSL) 5 Guyana Post Office Corporation (GPOC) Agriculture-based companies 6 Guyana Rice Milling and Marketing Authority (GRMMA) 7 Guyana Rice Export Board (GREB) 8 National Padi and Rice Grading Centre (NPRGC) 9 Guyana Fisheries Limited (GFL) 10 Guyana Nichimo Limited (GNL)

100 100 100 90 100 100 100 100 67 60

GSfL

CARL B.GREENIDGE

Public enterprises (non-financial)

Government share of equity (%) Subsidiaries

11

87

Livestock Industry Development Company (LIDCO) 12 National Edible Oil Company Limited (NEOCOL) 13 Quality Foods (Guyana) Limited (QFL)* 14 Demerara Woods Limited (DWL) 15 Guyana Timbers Limited (GTL) Commercial companies 16 Guyana Stores Limited (GSL) 17 Guyana Oil Company (GOC) 18 Demerara Sugar Terminals (DST) 19 Guyana National Shipping Corporation (GNSC) 20 Guyana National Printers Limited (GNPL) 21 Guyana National Trading Corporation (GNTC) 22 Guyana Pharmaceutical Corporation (GPC) 23 Sijan Palace (SP)* 24 Sijan Plaza (SPI)* 25 Guyana Stockfeeds Limited (GSfL) 26 Guyana Soap and Detergents Company (GSDC)* 27 National Paint Company Limited (NPCL)* 28 Guyana National Engineering Corporation (GNEC) 29 Sanata Textiles Limited (STL) 30 Guyana Glassworks Limited (GGL) Independent companies 31 Bauxite Industry Development Company (BIDCO) 32 Guyana Sugar Corporation (GUYSUCO) 33 Guyana Liquor Corporation (GLC) 34 Seals and Packaging Industries (SAPIL) 35 Demerara Distillers Limited (DDL) 36 Guyana Broadcasting Corporation (GBC) 37 Guyana National Newspapers Limited (GNNL) 38 Guyana Mining Enterprises (GUYMINE) Unconsolidated companies 39 Hinterland Road Construction Company Limited (HRCCL) 40 Construction Management Combine Limited (CMCCL) 41 Mards Workshop (MARDS) Financial intermediaries 42 Guyana National Co-operative Bank (GNCB) 43 Guyana National Co-operative Bank (GNCB Trust)

187

100 – 100 100 90 100 – 100 100 100 100 – – 2

GSfL

NPCL, GSDC, SPI, GFL

– – 100 100 100 100 100 100 – – 100 100 100

Guybulk, Guytrade, Guymine Demerara Sugar Terminals DDL (47%) Sapil (100%)

–

HRCCL, Guybridge, Ayangana Construction Co., General Construction Co.

100 100 95 100

Guyconstruct

188


44 45

Guyana Co-operative Insurance Service (GCIS) Guyana Co-operative Mortgage Finance Bank (GCMFB) 46 National Bank for Industry and Commerce (NBIC) 47 Guyana Bank for Trade and Industry (GBTI) 48 Republic Bank (RB) Notes: Figures rounded to the nearest whole number. *=See GPC

98 100 30 100 100

Table 13.2 Sectorial composition of gross domestic product—1970–901

Agriculture , Forestry and Fishing Sugar Rice paddy Other crops Livestock Fishing Forestry Mining and Quarrying Bauxite and alumina Other Manufactu ring Sugarmilling Ricemilling Other Engineerin g and constructio n Services Distributio n Transportat ion and

Total

1970 Public sector

Public enterprises

Total

1980 Public sector

Public enterprises

Total

1990 Public sector

Public enterprises

(19.2)

–

–

(23.5)

(10.8)

(10.8)

(27.6)

(14.4)

(14.4)

9.1 2.8 2.9 2.2 1.1 1.1 (20.4)

– – – – – – –

– – – – – – –

11.2 3.1 3.6 3.1 1.3 1.2 (16.5)

9.8 0.4 – 0.1 0.1 0.4 (15.9)

9.8 0.4 – 0.1 0.1 0.4 (15.7)

14.3 1.4 5.1 1.4 3.2 2.1 (16.4)

13.4 – – 0.1 0.5 0.4 (9.6)

13.4 – – 0.1 0.5 0.4 (9.6)

19.3

–

–

15.7

15.7

15.7

9.6

9.6

9.6

1.1 (12.1)

– (1.7)

– (1.7)

0.8 (12.2)

0.2 (7.9)

– (7.9)

6.9 (11.4)

– (5.8)

– (5.8)

3.2

–

–

3.7

3.7

3.7

4.0

4.0

4.0

0.8

–

–

0.8

0.5

0.5

0.6

0.3

0.3

8.1 (7.9)

1.7 (4.3)

1.7 –

7.7 (7.1)

3.7 (5.2)

3.7 (2.3)

6.9 (6.5)

1.5 (2.6)

1.5 (1.6)

(40.6) (16.0) 11.4 0.6

(0.9) –

(40.8) (31.6) 8.0 7.1

(11.4) 7.1

(38.0) (29.6) 7.6 5.3

(13.0) 5.3

5.9

0.9

5.2

4.1

7.3

6.6

1.7

4.1

6.6

CARL B.GREENIDGE

Total

1970 Public sector

Public enterprises

Total

1980 Public sector

Public enterprises

Total

1990 Public sector

communica tion Rent 2.3 – – 1.4 – – 1.7 – Financial 3.5 0.0 – 4.0 1.7 0.2 4.2 2.3 services Other 3.8 – – 2.5 – – 14.6 14.6 services Governme 13.7 13.7 – 18.7 18.7 – 2.6 0.8 nt Total 100.0 22.0 2.6 48.1 100.0 71.4 100.0 62.0 1. At current factor cost Note: The sum of the individual items may not necessarily add up to the totals because of founding.

189

Public enterprises

– 0.3 – 0.8 44.4

employment on the other hand fell by 50 per cent—from 21,686 to 19,280,—between 1985 and 1990 alone. The largest reductions among the PEs were experienced in the GUYSTAC group of corporations (around 25 per cent). Employment among the banking and non-banking financial intermediaries and the GLC group of companies moved in the opposite direction. The turnover of the enterprises, as reflected in annual revenues, is displayed in Table 13.3 (last two columns). It may be seen that the independent companies account for nearly 52 per cent of total revenues. The average size of these enterprises is significant in absolute and relative terms. The bauxite and sugar companies account for the ‘hog’s’ share of the country’s export earnings as well as total public sector revenues and borrowing. There has not been a great deal of analysis published on PEs in Guyana; so information on their financial performance is somewhat limited (Greenidge 1982). Over the years 1977 to 1979, dividend payments increased from 4.8 to 5.8 per cent of capital employed for the then GUYSTAC corporations. However, this represented a decline relative to net income after tax—from roughly 16.2 per cent to 10.7 per cent. Additionally, owners’ equity declined as a source of capital employed. At the same time the equity to loan ratio for the group declined from 0.8 to 0.73 whilst other sources of capital employed increased from 18.6 to 21.7 per cent (State Planning Secretariat 1980). The establishment of public enterprises Most of the enterprises were brought into existence during the period 1970–6 via a process of nationalization of the interests of the Transnational Corporations (TNCs) operating in bauxite and sugar (Prince 1974; Greenidge 1982). To a lesser extent the conversion of a number of former government or public service departments such as the Post Office telecommunications and telegraph operations and the Marketing Board, also contributed to this feature (Boodhoo 1971). Nationalization of local private sector assets, while not uncommon, was not widespread, primarily because of the relatively underdeveloped state of this sector. However, the distributive sector attracted attention as foreign exchange shortages emerged in the late 1970s and with it the incidence of shortages of goods, conditions of sale, hoarding, profiteering and discrimination of various kinds. Some enterprises were set up de novo but these were relatively few and far between.

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Several factors have been responsible for this expansion. These Table 13.3 Public enterprises: employment and annual revenue A Enterprises (non-financial)

Employment

1985 1990

1989

1990

Utilities 1 Guyana Electricity Corporation (GEC) 2 Guyana Telecommunications Corporation (GTC) 3 Guyana Airways Corporation (GAC) 4 Guyana Transport Services Limited (GTSL) 5 Guyana Post Office Corporation (GPOC) Agriculture-based companies 6 Guyana Rice Milling and Marketing Authority (GRMMA) 7 Guyana Rice Export Board (GREB) 8 National Padi and Rice Grading Centre (NPRGC) 9 Guyana Fisheries Limited (GFL) 10 Guyana Nichimo Limited (GNL) 11 Livestock Industry Development Company (LIDCO) 12 National Edible Oil Company Limited (NEOCOL) 13 Quality Foods (Guyana) Limited (QFL) 14 Demerara Woods Limited (DWL) 15 Guyana Timbers Limited (GTL) Commercial companies 16 Guyana Stores Limited (GSL) 17 Guyana Oil Company (GOC) 18 Demerara Sugar Terminals (DST)2 19 Guyana National Shipping Corporation (GNSC) 20 Guyana National Printers Limited (GNPL) 21 Guyana National Trading Corporation (GNTC) 22 Guyana Pharmaceutical Corporation (GPC)

4,488 1,405 1,198 563 666 656 2,793 1,242 39 82 334 52 193 338 –

4,050 1,509 1,442 429 115 555 1,914 856 25 74 65 157 233 40

513 6,681 1,456 101 – 184 363 766 943

464 4,470 1,251 108 – 193 357 429 446

23 24 25

26

27

Sijan Palace (SP)1 Sijan Plaza (SPI)1 Guyana Stockfeeds Limited (GSfL) Guyana Soap and Detergents Company (GSDC)1 National Paint Company Limited (NPCL)1

Annual Revenue (G $m.)

1,315.4 211.0 619.4 417.6 26.9 40.5 693.3 426.5 9.5 3.3 96.2 ... 35.5 69.0 – 53.3 – 2,138.3 670.5 375.2 – 76.3 47.8 411.3 235.8

2,302.2 653.0 816.2 758.6 19.3 55.1 779.2 502.4 15.1 5.4 91.8 ... 43.1 70.1 – 51.3 – 2,759.3 961.0 440.6 – 103.6 64.4 366.0 290.5

60 – 86

– 22 58

… 33.4 95.5

– 58.2 143.2

–

63

12.7

19.1

35

41

30.0

64.7

CARL B.GREENIDGE

28

Guyana National Engineering Corporation (GNEC) 29 Sanata Textiles Limited (STL) 30 Guyana Glassworks Limited (GGL) Independent companies 31 Bauxite Industry Development Company (BIDCO) 32 Guyana Sugar Corporation (GUYSUCO) 33 Guyana Liquor Corporation (GLC)3 34 Seals and Packaging Industries (SAPIL) 35 Demerara Distillers Limited (DDL) 36 Guyana Broadcasting Corporation (GBC) 37 Guyana National Newspapers Limited (GNNL) Un-consolidated companies 38 Hinterland Road Construction Company Limited (HRCCL) 39 Construction Management Combine Limited4 (CMCCL) 40 Mards Workshop (MARDS)

1,624

1,010

107.6

187.6

833

492

42.2

60.0

230

–

–

–

32,929 4,887

35,751 4,948

5,392.4 2,233.5

7,380.0 3,468.4

26,700

28,865

2,534.6

3,738.9

930

1,670

–

–

86.5

112.4

–

–

494.0

–

132

95

12.4

16.2

180

173

31.4

44.1

1,682 –

697 –

479.3 218.0

217.0 112.0

432

417

258.0

105.0

1330

512

1.3

…

191

192


41

Guystac/Public Corporations Secretariat

155

97

Total 48,708 47,211 11,018.7 13,437.3 Source: Public Corporations Secretariat and the specific individual public enterprises. Note: The figures for the GUYSTAC group of companies may vary from those published elsewhere, based on State Planning Secretariat data, for example, which pertain to average employment. The figures for the GLC/ SAPIL/DDL may underestimate actual numbers employed because they are taken from the NIS and concern contributions to the scheme. 1 Included in GPC in 1985. 2 Included in Guysuco 3 Includes DDL 4 Included in CCML in 1985. Also see section 2a with reference to 1990. B Financial intermediaries

Employment

1985

1989

1990

Annual Revenue (G $m.) 1990

1,584 1,905 1,205.6 1,981.3 Guyana Cooperative Insurance 116 164 45.6 10.9 Service (GCIS) 2 Guyana Cooperative Agricultural 320 316 112.4 230.9 and Industrial Development Bank (GAIBANK) 3 Guyana National Co-operative 502 601 764.8 1,257.0 Bank (GNCB) 4 Guyana Co-operative Mortgage 61 55 5.8 113.4 Finance Bank (GCMFB) 5 Guyana National Co-operative 50 77 64.5 64.0 Bank (Trust) 6 National Insurance Scheme (NIS) 535 692 212.5 306.0 Independent banks 427 508 1,296.7 974.3 1 Guyana Bank for Trade and 138 191 399.9 543.9 Industry1 (GBTI) 2 National Bank for Industry and 2893 317 896.8 430.4 Commerce2 (NBIC) Total 2,011 2,249 2,502.3 2,955.6 Notes 1 Formerly Chase Manhattan and Barclays. Separate government owned entities until merged in 1989. In 1989 revenues were G $ 192m and G $ 207.7m respectively. 2 Formerly Royal Bank of Canada. 3 30 September.

COFA 1

involve a combination of internal and external, political and economic factors. The international political environment and the spread of socialist ideology, including the embrace of ‘statist’ economic policies as part of the armoury of conventional economic wisdom, became increasingly crucial facilitating factors as the 1970s wore on (Berberoglu 1979; Phillips 1982; Fauriol 1984; Erisman 1984; Gilpin 1987). Related to this was the empirical work on the possible contribution of PEs to the process of development and the recognition of the potential of this tool (Jones 1975).

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The removal of internal political constraints in the form of the comprador partner in the coalition government was another permissive factor (Greenidge 1982). Revenue windfalls from the world sugar shortages of 1973 and 1974 provided the ‘socialist’ government with the wherewithal with which to purchase or acquire TNC assets. One specific proximate cause of the initial establishment of the enterprises was the need to increase investment in infrastructure which the private sector was either unwilling or unable to undertake. Three cases in point were the railways, power and road transport. Additionally, a struggle over the fiscal contribution of various arms of the TNC subsidiaries in the mineral and agricultural sectors eventually led to a spate of TNC nationalizations between 1970 and 1976 (Girvan 1976; Shahabuddeen 1981; Greenidge 1982). Factors contributing to the demise of PEs As mentioned earlier, the decline of the enterprises was attributable to specific factors in Guyana as well as a changed international political and economic environment. Problems with the PEs began to manifest themselves at the turn of the decade of the 1970s. Between 1978 and 1984, the income terms of trade declined from 117 to 472. Over the period 1980 to 1989 the decline was from 100 to 86 (IDB 1990). By 1981, the problem had become too obvious either to ignore or to consign to the relevant supervisory ministry alone. The World Bank in an unsolicited piece of advice to President Burnham in 1982 strongly urged that the main PEs be immediately denationalized. Given the acrimony, the heat and the circumstances surrounding some of the main nationalizations, this gratuitous advice was seen as an effort to embarrass the government politically. As a consequence subsequent recommendations emanating from the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) came under increasing suspicion. This was reinforced as the political stance of the US government drifted from disinterested to unhelpful. The Multilateral Financials (MFIs) in turn declined to provide funds for the revitalization of the main productive entities. Without their imprimatur, the foreign private sector also refused to undertake any significant investment. The government sought to effect unilaterally some adjustment after it was forced to close an uncompetitive alumina plant in 1982. Its IMF programme was cancelled in 1982 due to failure to achieve the agreed targets, and what has since been acknowledged as overambitious structural targets aimed at moving government policy in a direction and at a pace to which the government was not wedded; the attempts were doomed to fail. Efforts to renegotiate another programme in 1983 attracted what could be considered harsh measures, which were unmatched by appropriate levels of financial support from the MFIs. A lengthy period in the international financial wilderness followed, during which time the government was forced to attempt adjustment almost entirely without international financial support. These efforts included the restructuring of the GUYSTAC corporations, the reorganization of their management and supervision and a variety of other changes including the introduction of performance contracts. As a result of these efforts the corporations falling under GUYSTAC were able to improve their financial performance. Their combined operating surplus, for example, as a proportion of total revenues, increased from less than zero to 13 per cent from 1983/4 to 1987/8. However, the magnitude of the underlying imbalances, including the chronic shortage of foreign exchange, a burgeoning debt burden, and an equally unsustainable fiscal problem remained. It may be argued that from 1982/3 the fiscal problem deteriorated primarily as a result of poor PE performance. The direct transfers, borrowing and government guarantees constituted a drain on the public sector. The PEs as a whole failed to contribute positively to the investible surplus of the public sector primarily because of weak

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bauxite and sugar operations. Isolating the net fiscal impact of PEs, in an economy in which their interrelationships with the remainder of the economy are so pervasive, is not without its complexities or pitfalls (Floyd 1984; Stella 1989). However, a ‘feel’ for the magnitude of the problem may be obtained from some examples. Between 1976, when the enterprise was nationalized, and 1990, nationalization payments by the state amounted to £ 12m. Over that period the state received no dividends, was paid negligible amounts of corporation and property taxes, remitted G $ 1,200m in levies payable and in addition, invested G $593m to keep the industry alive. Similarly, over the fourteen years, 1977 to 1990, the bauxite company, GUYMINE, only paid income and corporation taxes in four years. Between 1980 and 1989, G $77.9m of current transfers from the Treasury were effected to clear the overdrafts accumulated by the company. In the cases of bauxite and sugar responsibility for funding an extensive range of communal services, such as potable water, health, education and cultural facilities was transferred from the companies to the Treasury. In the case of the GUYSTAC corporations, between 1978 and 1987, some G $703m was transferred from the Treasury. In the following two years, 1988–90, the transfers to the electricity corporation alone amounted to G $836m. At the end of December 1990, the external debt contracted by the PEs or by the Government of Guyana on behalf of PEs was US $285m of which US $197m was still outstanding. So, the traditional Central Government deficit on the current account, instead of being offset by dividends and operating surpluses of the PEs, was compounded. In the absence of measures strong enough to reverse this situation, the overall deficit on the current account of the public sector quickly assumed outlandish proportions. As a result of this state of affairs, there was a generous resort to the domestic banking system, inter alia. Central Government domestic borrowing represented 24.6 per cent of GDP in 1980, fell to 11.4 per cent in 1981 and never fell below 30 after 1982—it achieved a peak of 50 per cent in 1986 (IDE 1986: 277). As a consequence, a debilitating inflationary spiral was set in train (Floyd 1984:144–80). Early divestments and moves to marketization Prior to 1989 some divestment of PEs was effected. Most of the PEs in question were liquidated as a result of being unviable. This was frequently carried out without reference to accepted accounting practice (Greenidge 1982:165). Enterprises suffering this fate included the Guyana Glassworks Ltd (GGL), Guyana Leathercraft Ltd (GLL), Savanna Industries Ltd. One exception to this pattern was the National Bank of Industry and Commerce (NBIC), acquired by the state in 1984 for G $1 from the Royal Bank of Canada. Seventy per cent of the shares were offered to the public six months after its Table 13.4 Privatization of public enterprises: 1984–8 and post-1989 Enterprise

Year

Status

Method

Use of proceeds Nationality and Price no. of main buyers

NBIC

1984

partially privatiz.

share issue

NBIC

DDL

1985

partially privatiz.

share issue

GLC

local – individuals & entities: ‘000’s foreign/local: – ‘000’s

CARL B.GREENIDGE

Enterprise

Year

Status

Method

GLL

1988

defunct

SIL

1988

defunct

GGL GTL

1989 1989

closure fully privatiz.

closure/rental debts of building closure and debts rental of building some asset sale debts sale of assets Treasury

GNL GFL

1990 1990

fully privatiz. mostly privatiz

sale of assets Treasury sale of some Treasury assets and lease of infrastructure (land & trawlers)

Sijan Palace GNTC

1990 1990

sale of stocks sale of assets

Treasury Treasury

GUYCONSTR UCT GTSL QFL

1990

closure partially privatiz. closure

liquidation sale of assets sale of assets

GBTI (RB)

1991

1991 closure 1990/1 closure

195

Use of proceeds Nationality and Price no. of main buyers local:N/A

–

local: N/A

–

– US $2.7m

Creditors

N/A Caricon company: one local: one Local, expatriate Guyanese foreign inch. joint venture: misc local: rice Local and foreign: 1 N/A

Treasury Treasury

local: 10+ Caricom: 5+

G $32.3m G $0.9m+US $0.2 G $11m

G 21.1m G 54.3; US $1. 5m

G $0.7m G 95m+US £3. 8m –

share offer share issue Treasury as per NBIC imminent DWL 1991 fully privatiz. sale of assets Treasury foreign US $16.5m GTC 1991 80% privatiz. sale as going Treasury foreign: 1 US $16.5m entity GRMMA 1991 partially sale of assets Treasury Caricom :2 US $5.3m privatiz. companies GNPC 1991 impending sale Treasury N/A GUYSUCO 1991 management equity None Possibly – contract foreign discussions in train GUYMINE 1991 management equity None Possibly contract foreign discussions in train Source: Ministry of Finance files and Divestment Unit, Public Corporations Secretariat. Note N/A=not applicable. For an expansion of the acronyms see Table 13.1 DDL—Demerara Distillers Limited, a former subsidiary of GLC. + − $ to date

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acquisition. The issue was heavily oversubscribed. In that issue, priority was assigned to applicants as per the following criteria (NBIC 1985): (a) Employees of the enterprise (b) Nationals (c) Trustees of locally-registered pension funds (d) Locally-controlled insurance companies (e) Other locally-controlled companies or corporations (f) Other residents (g) Other companies operating in Guyana The above ranking reflected the priorities of monetary management, the need to satisfy a public with very limited outlets for its cash and the need to secure the allegiance of a somewhat well-to-do and vocal group of employees.3 Some privatization in the wider sense was also taking place during that period. Contracting-out of services had been a widespread practice in both the bauxite and sugar industries, as far as can be recalled. However, in a major departure from common practice, a contract was awarded by GUYMINE to a foreign private company, Green Construction Co. Ltd, in 1981, to undertake the removal of overburden in the mines, a prelude to the mining of bauxite. It might be added at this stage that this is a stage at which a considerable proportion of the value added in the industry occurs. The Guyana Electricity Corporation (GEC) and the Guyana Telecommunications Corporation (GTC) similarly moved to hire-in transport and maintenance services of various kinds in the face of the managements’ incapacity to deliver these services efficiently or at all from within their entities. In 1989, the bauxite company, GUYMINE, was forced to liquidate its subsidiary, GUYCONSTRUCT, a construction company which turned out to be a financial liability. At the time of its liquidation, GUYCONSTRUCT had a bank overdraft of over G $80m and a long list of creditors unmatched by any assets to speak of. In 1989, Guyana Timbers Limited (GTL) was sold. With few assets and all the shareholders equity lost, it had an overdraft of G $33m in 1984 and during the preceding five years had equity injections. THE THINKING ON PRIVATIZATION Naturally, the attitude to privatization was partly influenced by the winds of ideological and philosophical change sweeping the region and the world. In this regard the external factors had a domestic counterpart. In many countries the experiment in socialist policies alienated the capitalist elements and the private sector reacted by withholding both its ‘enthusiasm’ and resources on the one hand and by committing whatever resources it was prepared to invest to the parallel economy (Kirton 1985). With the winds of change has come a rapprochement between governments as a whole and the private sector. For the global community this is a post-confiscation era and in this era the private sector and TNCs in particular have come, to some extent, to embrace patterns of operation more acceptable to host countries. This has enabled those countries to fashion regulative frameworks less draconian in nature and perhaps able to work in a less confrontational environment than that which had contributed to their obvious failure in the past. Another contributory factor was the recognition that ownership of companies operating in the international market did not necessarily mean control. A growing body of research was tending towards this view in a region closely wedded to the plantation and to dependency models of development4.

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A major and growing domestic influence in the foregoing privatizations was the declining capacity of the enterprise to deliver the goods and services for which they were established. Among the PCS (or GUYSTAC) corporations, capacity utilization over the years 1983 to 1985 averaged 35 per cent. In many cases it was as low as 20 per cent. This was especially evident in the utilities, including electricity, telecommunications, and road transport, to name but a few. In 1978, GEC’s electricity generating capacity in the Demerara system collapsed. With an installed capacity of 100 megawatts, GEC’s rated capacity was only about 42 MW in that interconnected Demerara system. Between 1980 and 1984 the company delivered on average only 72 per cent of the power that the network generated. Some 28 per cent of the latter was lost or stolen (IDE 1986). In 1989, at which point considerable rehabilitation of generation capacity had already been effected, generation was 25 per cent below 1980 levels. The potable water delivery system which depended heavily on electric power had been extensively disrupted. Small and medium-sized manufacturers had been virtually decimated and normal urban life in Georgetown was practically impossible. Electricity and telecommunications services had been competently run in the 1960s and 1970s; so much so that they were the sources of technical assistance to sister Caricom territories at that time. By the 1980s the story was quite different. Privatization was also partly pushed by managements which recognized in the current wages and salaries policies severe constraints on their autonomy, particularly their capacity to enhance their own wage and salaries packages and to attract and retain skills. There can be no doubt that some directors and managers see in employee shareholding, a device for securing a significant quantity of shares for themselves also. Latterly, expatriate Guyanese have also been seeking to participate in this activity. Perhaps far more important than these special cases has been general public pressure for widespread share ownership. One key influence in the acceleration of privatization was fiscal. Given the fact that the enterprises were an onerous burden on the public sector, privatization was seen as a means of reducing drag. As has been observed, the losses of the enterprises had been financed by current transfers from the Treasury and borrowing from either the banking system or abroad. It is widely accepted that privatization can reduce the burden of current transfers on the Treasury. It cannot be said to have the same effect with respect to accumulated losses. Unless it is exceptionally fortunate in the price it receives, the Treasury will in one way or the other be required to take on and service the debts or will receive divestment proceeds that take into account the losses (Hemming et al. 1988: Chap. 5). It is sometimes argued that the divestment of enterprises that currently contribute to the Treasury will give rise to a deterioration in the deficit because of the taxes paid on profits and dividends which will have been foregone. In many instances the discounted future income stream would be negative because the burden of foreign obligations arising from devaluations and involuntary rescheduling, is onerous. In such cases the companies ought to be divested anyway (Hemming and Mansoor 1988). It might be added that, to the extent that privatization gives rise to an improved performance by the entity, the fiscal benefits could also increase if market and tax framework are appropriate. The net fiscal benefit of divesting the genuinely profitable enterprises will therefore depend on the subsidies and fiscal concessions granted by the government. In the best of circumstances, assessing the net impact of privatizing profitable enterprise is not easy (Heller, et al. 1988). It is also argued that additional benefits of a macroeconomic nature can flow from this exercise. Generally speaking, such benefits would have to be indirect since the results of the switch in ownership are purely once and for all. By itself, it need not have any positive impact on borrowing or growth. Whilst the literature on privatization is not entirely clear about the extent of its macroeconomic benefits, on the fiscal front it is fairly widely accepted that it may confer a once-and-for-all benefit through the

198


transfer of liabilities and the induction of structural change. Theoretically, the latter may spawn a long-term increase in the rate of growth of productivity. In this regard, a persuasive observation made by one advocate of privatization is that, even in the most propitious circumstances, the programme of privatization is unlikely to be sufficiently productive to have a really large effect on the macroeconomic variables, and the effects of privatization, however beneficial, are likely to be swamped by other effects. (Walters 1988:22) Furthermore, one consultant concluded, in relation to Guyana, the majority of the problems encountered by the corporations to be privatized are not a result of ownership —the problems are a reflection of absence of market discipline and competition. Hence, privatization of ownership methods will not by itself make privatized entities more efficient unless accompanied by economic and financial liberalisation (including trade liberalisation). On the other hand privatization of management techniques will not succeed if high tariff and non-tariff barriers allow continuation of private monopolies. (PCS 1989) Limited success in restructuring PEs has given rise to the search for privatization as an alternative or supplementary device for enhancing structural adjustment. In 1983, after the closure of the alumina plant, the government contracted the services of Kuhn Loeb Lehman Bros., Lazard Freres and S.G.Warburg to review and recommend measures for the revitalization of the PEs with special reference to the bauxite and sugar industries. The Advisory Group, as the group was termed, focused extensively on the boards and supervisory apparatus under which the PEs operated and the granting of ‘constrained autonomy’ to the PEs. One novel recommendation pertained to the introduction of ‘performance contracts’ and the establishment of a Supervisory Council (SC) to oversee the implementation of these contracts. They also proposed the replacement of the full-time secretariat, GUYSTAC, by an ‘informal’ one, whose sole task would be to arrange the council meetings, provide technical advice and prepare the performance contracts. The utilities, GTC, GEC, together with GAC, were to be placed under the SC. At the same time the government was advised to strengthen the technical, managerial and financial skills available to the enterprises. The Post Office Corporation (POC), the Guyana National Newspapers Limited (GNNL), and Guyana Broadcasting Corporation (GBC) were to be placed under ministries. In order to maximize scarce managerial skills the commercial companies were to be placed under Holding Companies, the core of which were GNEC, GPC, GSL and GNTC. The companies which were either too small, operated in a very competitive environment, in need of external marketing and technological skills, or had limited linkages with the remainder of the economy, were to be divested entirely, offered for joint venture or leased. GFL, GTSL and GTL fell into this category. Basically, the supervision of the companies was to be restricted to ensuring that the performance contracts were effectively implemented. They recommended that the government rely on general regulation and economic policy measures to effect control of the PEs and achieving planning goals (Advisory Group 1983). The government, although accepting most of the recommendations, did not implement them as per the report. Thus SCs were added to the existing multiple tiers of reporting and decision-making rather than

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replacing them, thus compounding the problem. No holding company was established for the two sets of commercial enterprises. However, the exercise eventually gave rise to exploratory investigations of joint ventures and debt-equity swaps involving Caribbean governments and foreign firms with managerial and marketing skills and expertise. With a few exceptions, the marketing model did not take off, being unable to attract any interest in Trinidad and Tobago, the main creditor to Guyana. The firm’s work turned in time to sugar and bauxite after the initial report which gave a very favourable assessment of the operations of the sugar company. The sugar industry, whilst able to secure IDB financing for the partial rehabilitation of its mills, was confronted by severe industrial disruptions over the years, culminating in a seven-week strike in 1989 which left it unable to meet its EEC quota for the 1989–90 supply year and facing the real prospect of the permanent loss of part of this very lucrative market. Bauxite, on the other hand, was unable to expeditiously draw down its sole source of reliable, concessional, external financing. Production suffered. For want of the proverbial grass the horse was starving. These factors, together with an overall shortage of financing for the adjustment programme on which the government embarked in 1989, forced the policy-makers to turn to divestment of the strategic heights of the economy. In 1988 the government laid in the National Assembly a paper on its investment policies5. This paper sought to remove the ambiguities and restrictions associated with an earlier policy document (Government of Guyana 1979). In 1988 discussions with foreign private investors were intensified on DWL, QFL, NPCL, GSfL and GSDC. The pioneering Monitored Agreement signed with the IMF in 1989 paved the way for Guyana’s re-entry into the international financial community. The agreement also heralded a sweeping liberalization of the trade and foreign exchange regimes. These changes, together with the commitment to open up all sectors to private investment, laid the basis for a reassessment of Guyana as an investment prospect. In 1989 the government announced its intention of divesting the following PEs: (a) Guyana Transport Services Ltd (GTSL) (b) Guyana Fisheries Ltd (GFL) (c) Guyana Nichimo Company (GNC) (d) Demerara Woods Ltd (DWL) (e) Quality Foods Ltd (QFL) (f) Guyana Rice Milling and Marketing Authority (GRMMA) (g) Guyana Stockfeeds Ltd (GSfL) (h) Soap and Detergent Company Ltd (SDCL) (i) National Paint Company Ltd (NPCL) (j) Sijan Palace (SP) (k) Guyana National Trading Corporation (GNTC) These entities had been selected either because their performance had been and was expected to continue to be unviable or marginal in the foreseeable future, or because they were candidates for infusions of up-todate technology and marketing innovations.

200


PROBLEMS OF PRIVATIZATION Introduction Since the beginning of 1989 fourteen companies have been either wholly or substantially divested. The contracted price associated with these transactions, excluding rentals, was US $46.3m plus G $204.2m. An additional six PEs are almost certain to be divested in 1991 and at least another half a dozen are also likely. This compares with four privatizations between 1984 and 1989. The resources garnered from this process have gone in part to liquidate arrears to creditors where such debts have been reconciled. The remainder, including all foreign exchange receipts, have been paid over to the Treasury. These do not represent net receipts for the Treasury, however. They are to be used to clear outstanding debts and where possible, to help finance the capital programme. The mode of privatization has been primarily by sale of assets. Those sales have been via public tender except in the case of the largest enterprises where it has been by private treaty for reasons already mentioned. A range of other devices of disposal have also been employed including share issues, leases, sale as a going concern and management contracts. Guyana Stores Ltd, a very profitable wholesale and retail trading entity recently made shares available to employees. In most instances buyers have been required to pay cash. A major and controversial exception has been Demerara Woods Limited to Timber Holding Incorporated and Demerara Timbers Limited. The government has given preference to buyers in a position to pay in convertible currency. Debt swaps have not featured in these transactions but have been proposed and are being considered in one case. Given the thinness of the capital market, the risk of undervaluation of assets is quite high. Indeed, there has been considerable controversy over the price. In addition to criticism voiced over price and terms, there has been concern about the pace of divestment and the handling of affected employees while problems have been encountered in the administration of the programme. These are examined in varying degrees of detail in the remainder of this section. Application-appraisal and ‘selling’ of PEs Two obvious tasks which need to be undertaken as a prelude to privatization are to make a reasonably informed assessment of the financial and operational credentials of applicants and to provide accurate and timely information on the entity to be privatized. Surprisingly, both these have proved to be less straightforward than one might be led to believe. The need for the assessment should be self-evident although there is sometimes a tendency on the part of decision-makers and the public to be impatient with what appears to be irrelevant and lengthy enquiries. The fact is that a straight sale of assets (which are not germane to an economy’s well-being) does not warrant exhaustive investigation of an applicant’s background. The authorities need only to satisfy themselves of the applicant’s capacity to pay. However, when a going entity is being sold, and more especially where a utility or an important productive and employment entity is involved, it is necessary to be fully satisfied about bona fides. The national interest will not be best served if, as a result of inexperience or limited financial capacity, the buyer turns out to be incapable of maintaining delivery of a critical service. For all these reasons it is necessary to examine the applicants’ industrial relations history as well as their financial and technical capacity. Not that these are definitive guides, but they can help. With the burgeoning growth in international investment fraud, the financial status of prospective buyers cannot be a matter of indifference to governments. Furthermore, given the generally weak regulative post-

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privatization framework to be found in many developing countries, failure to check it carefully would be politically and financially foolhardy. In this regard, one desirable characteristic in a prospective buyer is transparency in previous business transactions. In many cases, not only do firms decline to supply the basic information necessary to properly assess their financial credentials, but their very corporate structures appear designed to obfuscate. Corporate layering, for example, is not unusual among applicants. This is a device commonly employed to evade taxes, milk profitable operating companies with which they are associated or cover up some form of malpractice. A major factor limiting the ability of small countries such as Guyana to make reliable assessments of the credentials of applicants is the uncritical reporting in the main centres such as the US (NASAA 1990). One standard point of reference lies in the reports compiled by Dunn and Bradstreet. Useful though these are, they depend largely on voluntary submissions. A good deal has to be read into what is not said or what correspondents fail to provide. Beyond such general guides there are, of course, the publications put out by the relevant trades or the agencies which either register or monitor the relevant trades. Sometimes such information, in combination with endorsements including certificates of good standing or licences, is very helpful, but to be sure, it is usually necessary to delve into a variety of subsidiary aspects such as how information was collected, whether it was verified, and so on. In these circumstances, external support and advice may prove to be of some help. Membership of international institutions such as the International or Commonwealth Telecommunications Union can be very useful, not only in providing information on issues such as rates of return and regulations, but also in providing expertise in areas such as valuation and tariffs. It is also possible to hire such skills either from the above-type of agency, for example, the International Finance Corporation (IFC)6 or private companies. In the case of the GTC, a merchant bank provided advice on the price. External assistance was also secured for the valuation of the forestry and sawmilling complex, DWL. It goes without saying that such advice does not guarantee public acceptance of the result. In any case, the advice should not be accepted uncritically.7 The time and effort required for satisfactory preparation for the privatization of an entity is frequently under-estimated. To some extent this may arise from mis-judging the skill mix. Background work on an airline application, for example, occasioned contacting the FAA, the relevant computerized data bases, Airline Directories including the World Aviation Directory and Interavia Aircraft Leasing Finance and Sales. So, securing definitive evidence of the existence of a company, not to mention its viability or legitimacy of operations, may neither be straightforward nor cheap, either in terms of time or skills.8 Even with the establishment of the Divestment Unit in the PCS and the recruitment of externally-funded consultants, the preparation of material for distribution to interested parties has been time-consuming. Also insufficient attention has probably been devoted to a distinction between a frank and precise description of the financial status and physical standing of the companies and an effective but accurate sales promotion document. The profiles prepared were basically accounts-cum-information sheets. But the object of the exercise was to capture the interest of investors by highlighting the positive features of the companies and their potential for development. The name of ‘the game’ should have been selling, not educating. The prospectus should be enticing in the sense of engendering interest and suggesting a very worthwhile purchase. As a consequence of the underemphasis on ‘sales’, many of the offers only attracted a limited number of takers or those interested in bargain basement deals. Preparing such a prospectus can be costly in the sense of requiring a wide range of skills and resources, either not traditionally retained by the public sector or severely depleted by emigration. Such resources would obviously include commercial advertising skills as well as accounting and negotiating expertise. Additionally, making an unviable company an attractive prospect usually requires cleaning up balance

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sheets and transferring obligations. Indeed, some observers argue for a complete restoration of the company and its management prior to an attempt to privatize. Whilst this would clearly be unrealistic if there were an attempt to implement it in more than a few instances, it does point to the need for some modicum of investment if serious undervaluation or unnecessary loss of investment are to be avoided. Needless to say, the information required to facilitate the sale of a going concern would be somewhat more extensive than that required for the sale of an asset. A common failure in the preparation of the prospectuses in Guyana has been the recognition and pricing of non-tangible assets. Generally speaking, however, the information needed for the exercise is extensive. Preliminary preparation would involve the following in most cases: 1 an examination of the financial and physical operations of the enterprise; 2 establishing the preliminary value of assets; 3 examining the various approaches to divestment and their appropriateness in relation to the specific firm; 4 completion of legal niceties such as establishing ownership of assets, securing transports (titles) to land; and 5 ascertaining the rights of existing shareholders and employees. The information required to facilitate a conclusion about valuation alone is quite onerous. Such information may include: 1 the nature and history of the company; 2 the prospects and background of the industry providing explanations where possible to the factors which may have contributed to poor or relatively bad performance in the recent past; 3 tangible and intangible asset values including goodwill; 4 earnings record; 5 previous stock sales by the company and the size of the proposed sale; and 6 market price of a comparable company in a recent sale. Other special considerations such as routeing rights may be even more important than the foregoing in some cases such as airlines. The absence of up-to-date audited accounts does not make for timely completion of the exercise. Of the companies owned by the state, audited accounts for 1988 were only available for about 60 per cent in 1990. The sale of each of the entities falling under the PSC/ GUYSTAC umbrella has required, first, the dissolution of the corpor ation as a ‘public corporation’ followed by its incorporation under the traditional Companies Act. Another factor contributing to the workload is the fact that some of the corporations rose out of the ashes of old entities which had not been formally wound up. Thus many assets assumed to be the property of these and other companies were not found in their books and were therefore not theirs to sell. This could also arise where land has been compulsorily acquired for public purposes. In such cases the state is not free to dispose of the land as it sees fit. The timely unravelling of these problems requires both legal and administrative skills as well as a great deal of patience. In summary, the preparation of a PE for divestment is likely to be very demanding precisely in terms of the type of skills, which the public sector in Guyana lacks. By the end of August, six months or so after the circulation of initial company profiles, the PCS had received no less than eighty-six enquiries, forty-eight of which were foreign. Divestment of water and

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electricity alone in the UK took some three years. Hasty preparation has been blamed for the privatization problems of British Gas which took somewhat less time (Heath 1989:123). The short-term consultancies which Guyana has been able to secure with the assistance of the UNDP/UNIDO in particular, whilst invaluable, have hardly been significant when set against the necessary tasks. Managing privatization Responsibility for privatization was initially assigned to the Public Corporations Secretariat (PCS) which was required to report to an economic subcommittee of the Cabinet. Subsequently, the Minister of Planning was given responsibility for overviewing the work of the PCS. A standing committee of economic ministers and senior officials was set up to approve final recommendations. The PCS is charged with vetting applications, undertaking the relevant analysis and making recommendations to the Minister of Planning for all but the rice, bauxite and sugar entities. A Divestment Unit, headed by a very senior officer, and reinforced with UNDP/UNIDO experts, was established in the PCS to undertake the tasks and the Attorney General’s Chambers and the Auditor General’s Department were to provide special support to the Unit. The rice entities are to be handled by the Office of the President, and more specifically the Office of the Economic Adviser, whilst the others are the responsibility of the Minister of Planning and the relevant managements assisted by some other agencies. These arrangements informed by the distribution of skills and interest, appear to be unexceptionable. In reality, however, there were many problems. Among these was striking a right balance between speed of decision-making and completion of technical assessments. The financial considerations, the lack of a clear separation between the policy minister and the minister responsible for divestment was also a source of problems. Initially, the issue of the channel of communication with the affected employees arose. Notwithstanding the list of enterprises to be privatized, buyers approached the administration about other enterprises. Eventually a decision was taken to add to the list the entities appearing to have the greatest prospect of success, naturally the most profitable of the PEs. At that point the Guyana Telecommunications Corporation (GTC) was included in the list. The need for a visible success story to establish credibility swung the argument. At the same time, industrial action and the impracticability of engineering fiscal balance within the time frame and with the resources being made available by the Support Group led to a decision by the government to announce the addition of the bauxite and sugar companies (GUYMINE and GUYSUCO, respectively) to the list. If the time frame set for the completion of the first eleven enterprises was overambitious, then these additions were certainly not going to help. They did not. There is little doubt that the quality of the analysis suffered. In carrying out its task, the Divestment Unit prepared background documents outlining the options in terms of mode of privatization, the optimal sequencing of privatizations and the resources needed to complete those tasks effectively (Public Corporations Secretariat 1989; Rubin 1989). Nothing akin to the comprehensive guidelines of Nigeria, Malaysia or Brazil was, however, attempted (Pinheiro NetoAdvogados 1990; Ministry of Public Enterprises 1989; Edozien, et al. 1989). Culture shock; the ‘hard sell’ Guyana is no stranger to political lobbying by any means; but the manner in which lobbying with regard to privatization is undertaken has served to divert attention from the substantive issues.

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On the domestic front, considerable lobbying and concern has been generated by what some have regarded as unduly favourable treatment of foreigners. As a consequence, there has been much representation to secure either more favourable treatment of locals or to block sales to foreigners. The sale of GTL, a logging and milling entity, attracted representation by the local producers notwithstanding the fact that domestic producers in this sector have enjoyed extensive protection for decades. Many of the local applicants have been unable to raise the necessary cash, especially the foreign exchange, partly because of their unwillingness to repatriate capital being held abroad, and partly because of the impact of a depressed local market and tight and expensive credit on liquidity. Many of the prospective expatriate Guyanese turned out to be in search of a quick kill. These factors fuelled the growth of an active domestic lobby, and meaningful debate over important aspects of the process has become clouded by allegations of discrimination in favour of foreigners. It is with respect to the foreign buyers, however, that lobbying has posed its greatest threat. Many of the firms embark on a ‘hard sell’ approach with practically no holds barred. They employ the full spectrum of tools available to the committed North American lobbyist, ranging from the advertising media, suborning of officials, to recruiting the assistance of resident diplomatic missions. In a small country such as Guyana, with a demoralized and haemorrhaging public service, these tactics are very difficult to combat effectively.9 Employee reaction and its containment One of the first problems which confronted the government was the reaction of employees. Perhaps it should be emphasized that it has not generated as much acrimony as issues of price and terms but it has tended to feed an undercurrent of nervousness among many groups. In the case of the more successful entity employee participation it has been found to be a reasonably effective means of retaining support for the programme. Furthermore, where enterprises have been sold as going entities, assurances on tenure have been sought and secured for employees provided, of course, that no cause is provided for dismissal. At the same time the government has made arrangements to ensure the preservation of employees’ accumulated rights and benefits such as pensions and gratuities. Thus where there existed no arrangmeents for funded pension schemes, the Treasury has been required to make provision for payments. It has to be acknowledged that such assurances have not served to fully assuage the fears of workers and union leaders. The private sector in Guyana is dominated by closely-held private limited companies. More specifically the companies tend to be family-owned, and char acterized by what is widely accepted to be market-segmentation by ethnicity. The public sector taken as a whole is no longer the purview of a specific ethnic group although specific activities clearly remain so. More importantly, the declining PEs are those in which the groups underrepresented in the private sector are mainly employed. As has already been mentioned, sugar and, to a lesser extent, food and agricultural processing have experienced an expansion in employment opportunities. There is therefore an old fear among some PEs employees that privatization will be followed by a radical change in the ethnic composition of the firm’s labour force. These fears have been fed in recent times by calls for fair employment practices in the public service with no acknowledgement of the need for a similar code in the private sector (or the community-based enterprises of GUYSUCO and DDL). The fear is that unless the displaced workers can make their way into the ranks of the self-employed there may well be parallel changes in ethnic participation ratios.10 To compound these fears, practically no assistance has been secured by way of redeployment support since Guyana is basically a labour-scarce economy and the mechanisms of labour market segmentation or rigidities, if they exist, have not been analysed.11 The resistance of workers has, therefore, been left to express itself through other outlets. Some of those who do not leave of their own volition take advantage of

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the rapidly-declining levels and quality of supervision to misappropriate as many of the company’s assets as possible.12 This is believed to have occurred on a fairly extensive scale in the case of GUYCONSTRUCT, and some branches of the GNTC and GTSL. To some extent this reaction may also be attributable to failure to communicate with the workers. Negotiating tactics There has been a tendency for negotiations on the privatization of the larger companies to be limited to a single buyer only. This has partly been necessitated by the complications of MFI involvement. It is also the result of interposing advisers between applicants and the government team. In effect, an informal system of short-listing takes place. Furthermore, this tendency has been reinforced in some cases by awarding the potential partner a management contract prior to agreement on equity participation or purchase. This practice runs the risk of discouraging other potential partners who see the contracted firm as having an unfair advantage because of the inside track that it enjoys (Grimstone 1989). It has arisen because of the urgent need to improve the performance of these companies and the new conventional wisdom among M FIs which requires some concrete commitment to divestment as a precondition for the commitment of any funds of substance by the MFIs. This has been the case with GUYMINE, GUYSUCO and GEC. In no case has the TNC in question been prepared to commit itself to an equity holding prior to a lengthy period of operation of the management contract. With the de facto displacement of local managers which arises in such cases, there is an obvious danger that the information base, on which privatization decisions, such as asset value and pricing, rest, will be monopolized by the TNC. Pricing and valuation Although there is a good deal of literature on the pricing and valuation of company assets it tends not to be terribly informative in relation to an economy without a capital market and in circumstances where the entity is a monopoly or near-monopoly (Howard 1982; Johnson 1983; Walters 1988). Pricing and valuation have been the most controversial issue in the context of privatization in Guyana. In the situation of exceptionally high rates of inflation and dramatic currency depreciation in which Guyana finds itself, failure to adequately adjust balance sheets and to make such adjustments as close to the date of closing as possible and to take into account long time-lapses between the agreement of sale and closing, may well result in windfalls accruing to buyers. Given all of these problems and those mentioned earlier, Guyana’s PEs would not be good candidates for criteria such as price-earnings ratios based on historical or future earnings. In the last analysis, of course, whether any formula at all is employed is a function of negotiations. Two circumstances may mitigate against the application of any formula. First, there may be few or no takers at that price. This has been the case with a variety of important enterprises in Guyana. These include the buses owned by the Guyana Transport Services Ltd and acquired from Yugoslavia. It can also arise where assets are expensive and immovable, or if questionable technological appropriateness is an issue. Guyana Glassworks is a case in point. The former characteristic tends to limit the number of prospective local offers. In such circumstances those charged with privatizing have tended to lean on the side of a speedy sale where possible, if only to avoid parliamentary criticism about perpetual requests for supplementary provisions with which to meet the costs of moth-balling.

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Another factor affecting the price settled is collusion. There have been cases of two or three local bidders colluding to secure assets at lower prices than either party initially bid once they discover the identity and value of the other bids, particularly if the prices offered vary widely. Choosing the mode of divestment Choice of the mode of divestment has not turned out to be a problem in Guyana, primarily because the very limited capital market and the limited means of local entrepreneurs rule out some of the share issue options in most cases. Some entities have ground to a halt in the face of the Central Government’s inability to provide funds or to countenance further increases in their overdrafts. In such cases the sale of assets or of the entity other than at liquidation prices would not be an option. GGL, GTSL and GUYCONSTRUCT, all fall in the latter category. Generally speaking, the choice of mode has to be informed by the specific circumstances. In the case of the fishing enterprise, GFL, leasing seems to have worked quite effectively. However, similar other attempts have foundered, for example, in the case of the airport facilities. Telecommunications is currently the subject of rapid and unpredictable technical change. A debate has centred on whether sale of the entire network was necessarily the most appropriate route, more so whether the basic system as well as the other services including those not utilized by GTC should have been granted to the company as a monopoly. This may have arisen from paying insufficient attention to the technological and related aspects of the PE. It has since been persuasively argued that this was a strong candidate for marketization. We have already alluded to the widely-accepted view that transfer from a public to a private monopoly is likely to involve no more than a financial transfer from the state to the private sector. The chances of increased efficiency arising from such a transfer are also slim. In other countries where the expansion and modernization of the system were the main objectives of policy, it has been undertaken not by wholesale divestment but via sale of the rights to install digital overlay networks and/or new services and capabilities. The latter may include new niches and specialized networks where rapid technological advances have removed the ‘publicness’ of the service and permitted competition in business communications and services such as cellular, paging, data communications and satellite and value added services. In addition, the installation and operations have been subcontracted (Ambrose, et al. 1990). None of these options was explored in the case of GTC, presumably because the team reacted to an offer outside of an independently formulated ‘vision’ of the long-term development of the sector. Subsidies and fiscal concessions The fiscal concessions required by most of the interested parties also pose problems. Insistence on 25- and 50- year tax holidays alongside 10- to 40-year monopolies are not uncommon even when the companies being acquired are profitable, are being acquired as assets, or are being acquired without any liabilities. It is difficult to entertain such invitations to make gifts to buyers. Basically the fiscal authorities have taken the view that, once the PE is privatized without any marked handicaps such as heavy debts and liabilities, or unprofitable community services, they warrant no special concessions unless they undertake capital expansion programmes which would normally attract fiscal incentives. Most buyers have been required to pay cash and to complete payment within a year at the most. Controversy was generated by the recent divestment terms of Demerara Woods Ltd because these terms appeared to be more generous than those at which the government itself can borrow. It has been contended that in effect the

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buyer is being provided with a subsidy along with those which the company will receive under the fiscal incentives legislation. Protection of national and consumer interests, tariff setting and related procedural or legal issues The problem of unfair practices has already been mentioned. Cognizance has to be taken of the need to put in place devices to protect consumers and the country against the myriad of unfair and harmful business practices that are prevalent among international businesses. Many of the mechanisms which facilitate such practices have surfaced in proposals for the acquisition of the larger PEs. Among these have been the use of shell companies, layering of companies, subsidiaries as suppliers, and so on. Most have been identified and excluded but it needs to be said that preventing such practices is not a once-and-for-all exercise. It is necessary to monitor these activities continually. A good example of the pertinence of this guide may be had from a case in which a proposed management fee was excluded from the agreement by the government team. Within a short time of the establishment of the new entity a contract was awarded to the parent company for unspecified services but based on gross revenues including rental of buildings, proceeds from securities and capital gain! There has been a tendency to discount the poor background of some companies, possibly because of the limited number of applicants. This means, however, that reasonable safeguards will have to be enshrined in the law and agreements to protect the consumers against some of the unfair practices employed elsewhere.13 In Guyana this has been undertaken by way of the establishment of a Public Utilities Commission which is specifically charged with protecting the national interests as well as those of consumers in relation to matters such as tariffs. The case of ATN/G T & T, currently before the Public Utilities Commission less than ninety days after acquisition of GTC, provides a salutary lesson of the need to have all the protective legislation and regulative agencies in place prior to completion of sale.14 In the company’s relatively short history both its privatization deals have been the subject of controversy and conflict with the regulative agencies.15 Watering down of shareholding One risk associated with privatization via joint ventures is the forcible dilution of ownership interest by some form of recapitalization. Whereas the UK and New Zealand employ the ‘Kiwi’ or ‘Golden’ share as a safeguard against such an eventuality, inter alia, Guyana does not. Such safeguarding has been seen as a task more effectively carried out by either the representative on the board or the policy ministry. In the past these watch-dogs have failed to ‘bark’. The privatization of DDL is a case in point. Supervision of the independent PEs was so lax that the financial benefits of reducing the government’s shareholding in one of its most profitable enterprises did not accrue to the state at all. The proceeds were collected by the holding company, GLC, and devoted primarily to the construction of a spanking new DDL head office at a time when the Treasury faced a major fiscal crisis. As a consequence of a subsequent attempt by the DDL/GLC Board to repeat the feat, the GLC was dissolved and the National Industrial and Commercial Investments Limited (NICIL) established and specifically entrusted with the task of managing and monitoring, in a manner consistent with public policy, the govern ment’s shareholding across the entire range of enterprises except COFA.16

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LESSONS AND CONCLUSIONS Privatization has been undertaken in Guyana as part of a very extensive programme of structural adjustment termed the Economic Recovery Programme (ERP). Under this programme there has been, since 1988, a dramatic liberalization of the trade and payments regimes. That has facilitated an upsurge in the interest of investors in Guyana. The steep devaluations which have characterized the ERP have also served to make investing in Guyana a most attractive prospect for those with access to convertible currency. At the same time, the attempt to restore economic balance on the domestic and external front, partly by constraining public expenditure and partly by controlling the creation of credit, has served to depress the local market and to compress wage incomes. Against this background, privatization, though imperative, is complex. Compared with the pre-ERP era and relative to the rest of the English-speaking Caribbean, Guyana may be said to have had remarkable success in privatizing its PEs. Since 1989 some fourteen enterprises have been privatized and the number will probably double by early 1992. This success has not come without problems and there are several lessons to be learned (see Table 13.4). Experience suggests that privatization is both a skill and time-intensive exercise. Politically, there is usually a premium on speed. However, it imposes severe strains on the capacity of the mechanism established to manage the process. Indeed, it may be difficult to avoid the impression that some enterprises are being offered as ‘loss-leaders’ —in the supermarket sale sense. Rather than helping the process, this impression may compound the managerial problems by attracting bargain-basement seekers. It is evident that privatization teams need to be strongly reinforced by technological expertise as well as skills in the area of commerce and advertising in which the public sector is likely to be very weak. A limited number of safeguards have been built into the agreements signed so far. Obviously a balance needs to be struck between the need to attract investors and safeguarding the national interest. A privatization agreement cannot by itself serve that purpose, but, if carefully crafted, can make life very much less uncomfortable for the regulatory authorities whose capacity is at the best of times weak. It reduces the scope for misunderstanding and the waste of taxpayers’ money on litigious companies. Judging from the criticisms aired in the press, a great deal needs to be done in terms of keeping the public informed of the issues and the state of play with respect to privatization, especially the negotiations. In a country such as Guyana, where the impact of the adjustment programme may have an asymmetrical impact on different communities, it is very important that the consequences be anticipated and handled in a timely manner. For those likely to be most adversely affected by the process it would be prudent to ensure that privatization is not regarded as a zero-sum game. Privatization carried out without the benefit of fairly well-defined guidelines with respect to its fiscal aspects may yield none of the benefits discussed earlier. Generally speaking, the fiscal imperatives which fuelled the drive to privatization cannot be solved by privatization per se but it does help. And for the maximum benefits careful attention will have to be paid to creating and maintaining a vibrant, competitive environment. NOTES 1 Including the current subsidiaries of PEs, except the National Bank for Industry and Commerce (NBIC) and Guyana Telecommunications Corporation (GTC), in which the state has minority shareholding (30 and 20 per cent, respectively) or those enterprises which have been closed or fully divested. Note that the Guyana Liquor Corporation (GLC) has been replaced by National Industrial and Commercial Investments Limited (NICIL) and Hinterland Road Construction Company Limited (HRCCL) and Ayangana Construction Company (ACC) by General Construction Company Limited (GCCL).

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9

10

11 12 13

14 15

16

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1977 as base. See Ramanadham (1989:424) for some of the considerations associated with privileged treatment of employees. See, for example, McCoy (1981). Government of Guyana (1988). See also Commonwealth Secretariat (1984). See IFC (1990). See, for example the Daily Telegraph, ‘Panel raps Warburg over Budgens’, Business News, Friday August 1989. See also The give-away state’, The Economist, 4–10 May, 1991. A good deal of the documentation necessary to undertake the appraisal of prospective buyers as well as the supporting analysis was undertaken by Guyana’s office of the Minister, Trade and Investment in Washington DC. The author also wishes to record a debt of gratitude to the irrepressible and meticulous Mr Joseph ‘Joe’ Tyndall for making available an extensive quantity of documentation which he had collected or prepared during the course of that work. See issues of The Catholic Standard and Stabroek News, November 1989 to March 1990, particularly those of Sunday, 11 February and Monday, 29 January, respectively, for some idea of the exaggerated claims and gilding which one firm undertook in Guyana. Not that some aspects of these tactics are unknown elsewhere. See, for example, Auerbach (1988). Unless, of course, greater opportunities for emigration can be found. It is not the intention to argue for the accuracy of any of these perceptions but to point to an important factor influencing one set of reactions to the programme. There is a well-researched, though not current, historical background informing these perceptions (see Despres, 1970). Indeed, given the sensitive nature of this issue, reasoned discussion in any forum is a rarity. Which is not to suggest that all or most of such action or its causes are attributable to a specific group. Some causes are associated with the rapid compression in real incomes. See, for example, the New York Public Service’s case against the Nynex NY Telephone company in the New York Times, 9 February 1990; Wall St. Journal, 9 February 1990; Washington Post, 9 February 1990. See also a case involving the draining of resources from a recently-acquired subsidiary—the Texas Air/Eastern Airline reservation system sale: Wall St. Journal, 1 March 1990: A4 and 2 March 1990: A2 et seq; New York Times 2 March 1990. See also 15 March to 15 May 1990 issues of the Stabroek News, The Catholic Standard and the Guyana Chronicle. See the Daily News, US Virgin Islands, over the period 1 November 1985 to 31 August 1989, for a running commentary on a similar saga involving the same company and the local Public Service Commission as well as the utility workers. See Stabroek News and the Guyana Chronicle, June-September 1980. This debate turned into a major political confrontation on the right of the state to be consulted by the board of a fully state-owned company, GLC, about the manner and extent of the disposal of its shares in the subsidiary, DDL.

APPENDIX LAWS OF GUYANA 1 Public Utilities Commission Act no. 26, 1990. 2 Public Utilities Commission (Amendment) Act no. 10, 1991. 3 Telecommunications Act no. 27, 5 October, 1990. REFERENCES Adda, W. (1989) ‘Privatization in Ghana’ in V.Ramanadham (ed.), Privatization in Developing Countries, London, Routledge.

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Ambrose, W. et al. (1990) ‘Privatizing telecommunications systems: business opportunities in developing countries’, Discussion Paper no. 10, Washington DC., IFC, IBRD. Arnhein, C. (1989) ‘Wedded bliss or bitter woe’, Management Today. Auerbach, S. (1988) ‘Toshiba spent millions to blunt US sanctions’, International Herald Tribune, 14 October. Berberoglu, B. (1979) ‘The nature and contradictions of state capitalism in the Third World—a re-examination of dominant conceptions and an alternative formulation’, Social and Economic Studies 28(3). Boodhoo, M. (1971) ‘The role of public enterprises in economic development in Barbados, Guyana and Trinidad and Tobago’, PhD thesis, University of Leeds. Braithwaite, L. (1970) ‘Race relations and industrialisation in the Caribbean’ In J.Heiss (ed.), Readings on the Sociology of the Caribbean, MSS. Commonwealth Secretariat (1984) Investor’s Guide to Guyana, CFTC/ Caricom. Despres, L. (1970) ‘The implications of nationalist politics in British Guiana for the development of nationalist theory’, in J.Heiss (ed.), Readings on the Sociology of the Caribbean, MSS. Edozien, J. et al. (1989) ‘Privatisation in Nigeria’, in V.Ramanadham (ed.), Privatization in Developing Countries, London, Routledge. El-Naggar, S. (1989) Privatization and Structural Adjustment in the Arab countries, International Monetary Fund. Erisman, M. (ed.) (1984) The Caribbean Challenge: U.S. Policy in a Volatile Region. Fauriol, G. (1984) Foreign Policy Behavior of Caribbean States: Guyana, Haiti, and Jamaica, University Press of America. Floyd, R. et al. (1984) Public Enterprise in Mixed Economies. Some Macro-economic Aspects, Washington DC, International Monetary Fund. Gilpin, R. (1987) The Political Economy of International Relations,Princeton University Press. Girvan, N. (1976) Corporate Imperialism: Conflict and Expropriation, Monthly Review Press. Glickman, N. and Woodward, D. (1989) The New Competitors. How Foreign Investors are Changing the US Economy, New York, Basic Books. Government of Guyana (1979) The Investment Code, Ministry of Information, November. Government of Guyana (1988) The Guyana Investment Policy, State Paper, National Assembly, Georgetown. Grimstone, G. (1989) ‘Privatisation: macro-economics and modalities’, in V. Ramanadham, (ed.) Privatization in Developing Countries, London, Routledge. Heath, J. (1989) ‘Privatisation: modalities and strategies’, in V.Ramanadham, (ed.) Privatization in Developing Countries, London, Routledge. Heiss, J. (ed.) (1970) Readings on the Sociology of the Caribbean, MSS. Heller, P. et al. (1988) ‘The fiscal impact of privatisation with examples from Arab countries’, in El-Naggar (ed.) Privatization and Structural Adjustment in the Arab countries, International Monetary Fund. Hemming, R. and Mansoor, A. (1988) Privatisation and Public Enterprises, International Monetary Fund, occasional paper no. 56. Howard, J. (1982) ‘What’s it worth to you? A step by step guide to establishing an accurate valuation of your business’, Inc, July. International Bank for Reconstruction and Development (IBRD) (1986) Guyana: A Proposal for Economic Recovery, Report no. 6501-GUA. International Bank for Reconstruction and Development (IBRD) (1988) Bank Lending for State-owned Enterprise Sector Reform: A Review of Issues and Lessons of Experience, Country Economics Dept., 15 September. International Development Board (IDB) (1986) Economic Report: Guyana Economic and Social Department, Country Studies Division, November. International Development Board (IDB) (1990) Economic and Social Progress in LA and the Caribbean, October, Washington DC. International Finance Corporation (IFC) (1990) Statement of Qualifications for Privatisation Assignments, Corporate Finance Services Department, September.

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Jayawardena, A. (1989) ‘Privatisation in Sri Lanka’, in V.Ramanadham (ed.) Privatization in Developing Countries, London, Routledge. Johnson, A. (1983) ‘How to measure your company’s value’, Nation’s Business. Jones, L. (1975) Public Enterprise and Economic Development: the Korean Case, KDI Press. Kay, J. and Bishop, M. (1989) ‘Privatization and the performance of public firms’, in United Nations (1989), Chap. 1, part 2. Kirton, C. (1985) Public Policy and Private Capital in the Transition to Socialism: Grenada 1979–83, (mimeo). Kuhn Loeb Lehman et al. (1983) Preliminary draft blueprint for GUYSTAC companies including appendices A and B: February, August, September and December. McCoy, D. (1981) ‘Foreign indirect investment in the Commonwealth Caribbean: issues of ownership and control in the agricultural, finance, and natural resources sector’, West Indies Law Journal March. Ministry of Public Enterprises (1989) ‘Privatisation in Malaysia’ in V. Ramanadham (ed.) Privatization in Developing Countries, London, Routledge. NASAA (1990) The 1990 NASAA Study of International Investment Fraud and Abuse, report to the subcommittee on commerce, consumer and monetary affairs, government operations committee, US House of Representatives, July. National Bank of Industry and Commerce Ltd (NBIC) (1985) Prospectus covering the issue and offer for sale, 11 May. Phillips, P. (1982) Models of State Formation and Transformation in the Caribbean: Jamaica after World War II, Dept. of Govt Seminar Series, Mona, University of the West Indies, May. Prince, E. (1974) ‘The development of public enterprises in Guyana,’ Social and Economic Studies, 23 (2), ISER, University of the West Indies. Pinheiro Neto-Advogados (1990) Privatization: Brazilian Denationalization Program. Public Corporations Secretariat (PCS) (1989a) Comparative Assessment on Management/employee Buy-outs, Leasing, Management Contracts, and Breaking-up of Public Sector Corporations , UNIDO/UNDP, GUY/08/008 Project. Public Corporations Secretariat (PCS) (1989b) Statement on Corporate Strategy for Divestment of State-owned Enterprises, mimeo. Ramanadham, V. (ed.) (1989) Privatization in Developing Countries, London, Routledge. Rubin, S. (1989) Requirements for effective Government of Guyana divestment programme, UNDP/PCS, GUY/86/008. Shahabuddeen, M. (1981) Nationalisation of Guyana’s Bauxite. The Case of Alcan, Georgetown, Guyana, Ministry of Information, 257–69. State Planning Secretariat (1990) Comments on the Financial Data for Public Corporations, mimeo. Stella, P. (1989) Toward Defining and Measuring the Fiscal Impact of Public Enterprises, IMF Working paper, September. United Nations (UN) (1989) Role and Extent of Competition in Improving the Performance of Public Enterprises, Proceedings of a United Nations Interregional seminar on Performance Improvement to Public Enterprises, Dept. of Technical Co-operation for Development Administration Division, New Delhi, India, 12–19 April. Walters, A. (1988) ‘Liberalization and privatization: an overview’, in El-Naggar (ed.) Privatization and Structural Adjustment in the Arab Countries, IMF, Chap. 2.

14 Privatization in Morocco A.H.Saulniers

Morocco has recently undergone a major national debate concerning privatization as a prelude to the current government programme. The analysis of this chapter concentrates on that debate within a framework comparable to the other country papers. The first section reviews the public enterprise situation as the setting for implementing the 1989 privatization law; the second section surveys the thinking on privatization, and the third section examines actual privatizations. THE PUBLIC ENTERPRISE SITUATION IN MOROCCO The aggregate situation In 1985, the last year for which complete figures are available, Morocco’s public enterprise portfolio consisted of 688 directly- or indirectly-held firms (first-degree subsidiaries only). The firms accounted for 17 per cent of gross domestic product (GDP), 20 per cent of gross fixed capital formation, and 17 per cent of employment. Origins The public portfolio grew out of France’s pre-Second World War efforts to control natural resources and other key sectors of the protectorate’s economy. Mining, exporting, and transport formed the early portfolio. For example, the phosphate mine and processor, the Cherifian Phosphate Office (Office Chérifien des Phosphates—OCP), currently and for many years Morocco’s largest firm, was founded in 1920 as a public enterprise; the large mining holding company, the Mining Research and Holding Board (Bureau de Recherches et des Participations Minières)—BRPM, was similarly formed in 1928. In Morocco, after the war, France created agricultural marketing boards, industrial ventures, and a wide range of support firms in the service sector. Nationalist retribution came after independence in 1956 when Morocco took over firms, or placed them under heavy controls, in an effort to ‘Moroccanize’ the economy. Later, new firms were created to provide essential services and to aid the drive for industrialization. In the absence of a national private sector capable and willing to provide the levels of capital, risk-taking, or technical expertise deemed necessary by government authorities to achieve the desired industrialization, the government invested heavily in large, capital-intensive industries, including steel, fertilizers, basic chemicals, and petrochemicals. Later, existing public enterprises spun off subsidiaries, often to escape the heavy financial controls exercised over their operations by central government authorities. From 1973 to 1977, 92 per cent of newlycreated public enterprises were subsidiaries of existing ones. Still more growth came from government

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investment banks or finance companies that took minority shares in private ventures with the intention of redeeming the shares, once the companies had shown the capacity to survive, and reinvesting the proceeds in new ventures. Such ‘rolling privatization’ of government shares lagged far behind expectations, with the result that the portfolio continued to grow. The current portfolio consists of the remnants of the creation process. Some public firms were created for rational, economic motives. Others became public by accident, as subsidiaries of firms swept into the portfolio in the Moroccanization. Others were created by public firms seeking to circumvent the oppressive government control system. The portfolio is widespread, with firms found in many sectors. Government authorities admit that the current portfolio is far from optimal and, thus, requires major efforts at rationalization. Table 14.1 breaks the portfolio down by sector of activity. The largest single group of 373 firms is found in the services, of which 110 are in transport and communications. Industry of all types accounts for 176 firms, a quarter of the portfolio, with agro-industry, including sugar manufacturing and refining, the largest single component. The importance of Morocco’s public enterprise varies from sector to sector. As seen in the table, they account for about 90 per cent of value added in mining and energy, 70 per cent for the financial sector, and 50 per cent in transport and communications. Their value-added contribution is minimal for agriculture and commerce. Few public enterprises are found other than at the national level, municipally-owned water and electric utilities excepted. They are included in the above figures as they come under the supervision, tutelle, of the Ministry of the Interior. Table 14.1 Morocco’s public enterprises by sector of activity (1985) Sector of activity

No. of firms*

Share of value added in sector (%)

Agriculture Mining, extraction Energy Industry Agro-ind. (incl. sugar) Chemicals Other industries Services Building & public works Finance Commerce Transport & comm. Other services Source: Berrada (1988:14) Note: *=693; n.a.=not available

44 55 45 176 89 14 73 373 14 37 47 110 165

3–4 90 90 25 n.a. n.a. n.a. n.a. n.a. 70 3–4 50 n.a.

Numbers and capital outlays Table 14.2 breaks down the investment undertaken by Morocco’s major public enterprises from 1983 to 1985 by sector of activity. During the period, they invested 24.6 billion Dh, approximately US $3 billion. The sectorial breakdown demonstrates clearly that little investment has been done by firms in agriculture

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and agro-industry, public works, finance, and trade. However, the sectorial data, showing that investment is clustered in energy, chemicals, and transport, do not reveal the full extent of investment concentration in the public portfolio. For the thee-year period, half the investment, more than US $1.5 billion, was done by only four large public enterprises: the railway (ONCF), the water (ONEP) and electric utilities (ONE), and the phosphate group (OCP). The size structure of public enterprises Morocco’s government share in public enterprises varies widely. From the data shown in Table 14.3, and for the portion of the portfolio for which data are available, more than 40 per cent of portfolio holdings are negligible, with a value of less than 10 million Dh. US ($1 million), while another 40 per cent have a value between 10 and 100 million Dh (US $1 to US $10 million). Slightly more than 10 per cent of the firms Table 14.2 Investment by Morocco’s public enterprises by sector of activity: 1983–5 Sector of activity

No. of firms*

Investment (Dh.m)

Agriculture Mining, extraction Energy Industry Agro-ind. (incl. sugar) Chemicals Other industries Services Building & public works Finance Commerce Transports & comm. Other services Source: Ministère des Finances, DEPP, DEE Note: *=277

17 20 20 83 34 7 42 137 5 25 20 30 57

335.7 1,614.5 7,212.6 6,338.8 620.5 4,141.3 1,577.0 9,062.8 28.8 459.3 346.6 5,584.2 2,643.9

have negative equity while less than 5 per cent of the portfolio is made up of highly-capital intensive firms with a value of equity and reserves exceeding 1 billion Dh. US ($100 million). Holding companies Morocco employs a series of holding companies for its public enterprise portfolio. The Ministry of Finance has identified 18 larger groups, 9 of which had 25 or more subsidiaries in 1985 (Table 14.4). The CDG pension depository has the lead, followed by the three industrial development holdings, SNI, BNDE, and ODI. These are followed by sector-specific holdings, BRPM for mining, SOFICOM for marketing of agroprocessed items, and CMKD for tourism and hotels. Because of widespread fragmented interlocking holdings, more than one quarter of the firms owned by the large groups are represented in more than one portfolio and some firms may be owned by up to six Moroccan public enterprises.


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The general structure of public ownership Table 14.5 breaks down the portfolio by degree of government shares. Twenty per cent of the portfolio, 142 firms, is wholly-owned. These Table 14.3 Public enterprise size structure: public value: equity and reserves (1985) (Number of public enterprises, N=264) Sector/millions Dh

1000

8 3 0 23 0 8 1 14 43 1 3 5 11 23 77 29.2

4 5 5 18 0 5 1 12 41 1 9 9 7 15 73 27.7

1 3 2 16 6 2 0 8 9 0 0 3 0 6 31 11.7

1 2 8 10 3 2 3 2 23 0 10 2 5 6 44 16.7

0 1 4 1 0 0 1 0 5 0 2 0 2 1 11 4.2

Table 14.4 Principal holding companies in Morocco (1985) (number of subsidiaries by share of equity) Share of equity (%)

100

CDG 4 SNI 1 BNDE 0 ODI 0 BRPM 3 SOFICOM 5 CMKD 0 OCP 13 CIH 3 Total N 29 % 8.5 Source: Ministère des Finances, DEPP, DEE Note: n.a.=not available

50– 99.99

24– 49.99

>25

n.a.

N

9 4 0 9 12 18 16 4 2 74 21.6

11 9 2 18 7 2 6 3 3 61 17.8

33 37 15 13 9 5 7 7 19 145 42.3

6 0 27 1 0 0 0 0 0 34 9.9

63 51 44 41 31 30 29 27 27 343 100

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Table 14.5 Structure of public ownership (1985) State direct or indirect percentage

(N)*

100 50 to 99.99 33 to 49.99 20 to 32.99 1 to 19.99 0 to 0.99 Not available Source: Berrada (1988:12) Note: * Public administrative establishments are included in the table

142 161 63 87 128 39 68

Table 14.6 Percentage return on total equity Percentage return on total equity*

N

Above 20 20–15.01 15–10.01 10–5.01 5–0.0 Negative Source: Ministère des Finances, DEPP, DEE Note: * Return not calculated for 30 firms with negative equity

33 18 22 34 52 67

include the roughly 80 public administrative establishments. Forty-five per cent, 303 firms, is majority- or wholly-owned; while the government share in 167 firms is less than 20 per cent. The profitability structure of public enterprises Available data, shown in Table 14.6, show that most of Morocco’s public enterprises are profitable. Rates of return on total equity are positive for 159 of 226 firms. Some of them are extremely profitable, with more firms earning a rate of return that exceeds 10 per cent than there are firms with a negative return. The figures must be interpreted cautiously, however, as, to avoid taxes, fixed assets are not often revalued to take account of their replacement value. Reported total equity, consequently, may be valued too low, leading to artifically high rates of return. Table 14.7 Transfers (1983–5) (billion Ph.) Treasury to PE PE to Treasury Net Source: Ministère des Finances, DEPP, DEE

−11.3 +5.6 −5.7


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Cash flows between public enterprises and the public treasury Morocco has no thorough study, along accepted international guidelines, of financial flows between public enterprises and the public treasury. Nevertheless, simple estimates are available that, from 1983 to 1985, the treasury transferred a net of 5.7 billion Dh. to the public enterprises, or 23.9 per cent of the total government deficit of the period (see Table 14.7). The aggregate data mask the degree of transfer concentration. Roughly 60 per cent of the transfers to Treasury come from the large phosphate producer, OCP, while 43 per cent of the transfers from Treasury went to the cereals marketer and the railway. The water and electricity producers accounted for an additional 14 per cent of transfers from Treasury, while another 17 per cent went to eight regional agricultural development offices. Actual divestitures Until the early 1980s divestitures in Morocco have been largely limited to portfolio balancing by major holding companies involving the sale of assets or subsidiaries to the private sector and management contracts in hotels. These are examined below. THE THINKING ON PRIVATIZATION The Moroccan parliament passed a law authorizing privatization on 11 December 1989. Much of the thinking about privatization evolved in response to that law, a draft of which had been discussed for 14 months. In Morocco, privatization evolved from the dialogue on the optimal mix between public and private sectors to bring about national development, that has been going on for at least ten years. Early contributions to the policy dialogue stem from work done in 1979 and 1980 under the Minister-Delegate in the service of the Prime Minister, Mr Abdellatif Jouahri, who, according to a circular issued by the Prime Minister, was to ‘rethink the role of public enterprises as a privileged instrument of the economic and financial policy of the government to contribute to the realization of development objectives’. He inventoried the portfolio, examined its actual and desired place in the economy, and proposed many changes to state-public enterprise relations. The results of the study, which has never been officially released, concentrated on revitalizing the public enterprises by reducing direct central government controls over many of their actions. Privatization that transferred property from the public to the private sector was not recommended by the Jouahri report. However, it urged privatization of the management environment for a limited number of firms with no a priori justification for being in the public portfolio, ‘[the firm] will behave and be managed as a private enterprise, i.e., without privileges, without being a burden on the public, without administrative controls’. The Jouahri report estimated transfers between public enterprises and government. While showing that major additional funding would be needed to finance planned investment during the first half of the 1980s, it never proposed the introduction of private capital through joint ventures as a viable policy alternative. One Jouahri report recommendation was put into effect with the creation of the Vigilance Committee in 1983. The committee, made up of the Ministers of Finance, Economic Affairs, and Public Works, was to help restructure the relations between government and public enterprises by cleaning up payments arrears. The committee’s tasks helped prepare the way for the privatization debate by bringing about a sorelyneeded financial overhaul of the portfolio. Another recommendation led to the creation of the Permanent Interministerial Public Enterprise Committee (CIPEP) in 1980. The committee never had clearly-defined functions or operating criteria and was never endowed with a permanent secretariat. In 1987, it was reactivated by the Prime Minister and

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given the specific task of co-ordinating the government’s public enterprise policy concerning investment, financing, pricing, and salaries. The committee was made up of the Ministers of the Interior, Finance, Public Works, Economic Affairs, and Plan and chaired by the Prime Minister. Other ministers participated as the occasion demanded. CIPEP also co-ordinated any public enterprise reform actions including contractprogrammes, restructuring, and privatization. The PERL The official thinking on privatization has also been influenced by the Public Enterprise Restructuring Loan (PERL). The World Bank loaned US $240 million to Morocco in 1987 to support restructuring of public enterprises. One of PERL’s objectives, improving portfolio efficiency, was to be reached by developing a strategy leading to a medium-term programme to divest the state of those activities more effectively handled in the private sector. Funds from the PERL were used to undertake a massive evaluation of the government portfolio with the intention of defining possible privatization candidates and the core of non-privatizable firms. The report, which was never made public, circulated among top administration decision-makers as the privatization issue came to the fore in April 1988. The law On 20 October 1988 at the beginning of the fall session, a short eight-article draft law was presented to Parliament. The draft sought a blanket authorization to privatize, subject to Parliamentary ratification. The text listed six firms exempted from privatization for strategic reasons. The six exceptions were: the phosphate holding (OCP); the water (ONEP) and electricity (ONE) utilities; the telephone company (ONPT); the railway (ONCF); and the airline (RAM). The draft set three basic objectives: to permit access by new social classes to share ownership while combating increased concentration of wealth; to develop regional economies; to safeguard employment. It set no time limit for privatization but gave the government six months to fix its operating procedures and an additional year for parliament to ratify them. A minister would implement the programme, assisted by a five-member, interministerial commission. Sales would be carried out either through the Stock Exchange or by private placements. Workers would be able to acquire shares. To control portfolio growth during the privatization process, the minister would have to approve the creation of all new public firms or subsidiaries. The Left felt that the law impinged on Parliament’s constitutional prerogatives: ‘all transfer of goods from the public to the private must be authorized previously by the legislature’ (italics as in original). Opposition to legislation that would put the power to privatize into the hands of the administration and merely leave ratification of those decisions to Parliament was inevitable. The Left adopted the tactic of refusing to even discuss the text in committee and halted the debate on privatization during the autumn session 1988 and the spring session 1989. After repeated claims that the draft law was illegal had not swayed opinions in Parliament, the Left changed tactics and called for a royal arbitration on the draft’s constitutionality. No such arbitration was made public, but the draft was amended to impose a six-year limit on privatization. In addition, the government proposed to delete the list of exclusions making, in effect, all firms privatizable; but, in the face of heated opposition, it later provided a list of seventy-five enterprises plus thirty-seven hotels slated for privatization before 31 December 1995. On 11 December 1989 Parliament approved the law by a vote of 78 to 45 with 3 abstentions.


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The law, much of which emerged unchanged from the parliamentary debate, provides the framework for the current privatization programme. It will be implemented by a minister assisted by a five-member transfer commission made up of officials from the principal ministries concerned, who are named by the King on the basis of their competence in economic, social, and financial matters. The law fixes four methods to be employed in the privatization programme: financial market mechanisms; tenders; the combination of financial market mechanisms and tenders; and direct negotiation. It also provides for an independent valuation authority to oversee the propriety of the evaluation process. To meet the law’s social objectives, priority may be given for certain potential shareholders and special advantages are provided for the workers in firms being privatized. To control portfolio growth during the six years, the minister has to approve the creation of all new public firms or subsidiaries except for those subject to other legal provisions. A set of decrees to implement the basic privatization law was approved by the Cabinet on 15 September 1990 and by the Council of Ministers on 16 October 1990. The decrees fix the powers of the Minister of Privatization and the Transfer Commission, detail the methods of transfer and evaluation, and indicate special treatment for the workers in privatizable firms. Other favoured groups in the privatization process include local buyers for selected firms that are designated for regional priority (these buyers include Moroccan workers abroad whose origin is in the region) and farmers who wish to purchase shares in the agro-industrial concerns that buy their produce. The actors This section examines the positions concerning privatization of the main actors in Morocco. The King King Hassan II has led the privatization movement in Morocco. His continual pushing of a recalcitrant contrôliste administration in the name of economic liberalism has been the most important force in keeping the privatization issue on the national agenda. In late 1977, the King named Mr Abdellatif Jouahri to the post of Minister-Delegate in the service of the Prime Minister charging him with surveying the whole portfolio. In 1981 Jouahri was named Minister of Finance with the task of disengaging the state from the economy. In 1984 the King posed the policy choice between ‘freedom, opening the way for competition, and suppression of freedom with a single party and an omnipresent state’. He made his choice clear and authorized demonopolizing public transport systems which led, initially, to major changes in Casablanca and in Rabat-Salé. In opening the autumn session of Parliament in 1986, the King called on the administration to draft a law on the disengagement of the state from the economy for parliamentary discussion. He stressed the twin problems of inadequate management of public firms and the need to provide state financing of the increasing portfolio deficit, calling the current situation a ‘scandal and a mark of flagrant irresponsibility’. He suggested that disengagement would rationalize management and reduce the need for budget transfers within the coming fiscal year. Financial problems and political opposition gave the administration excuses to avoid preparing the text. The King reinforced his concerns in October 1987 in a pointed statement to government officials who were beginning work on the new five-year plan. The King reminded the planners of the need to orient Moroccan society to the ‘just middle’ by freeing the state of the burden to administer some companies. He chided sceptics who ‘believe that a Moroccan, working for the government, is competent and that a group

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of Moroccans, working outside it, is not’. The planners did not wholeheartedly embrace the royal directives; they devoted less than a page in the plan to ‘the restructuring of the public sector and the disengagement of the state’ and emphasized the need for detailed study before embarking on any disengagement. Faced with continuing recalcitrance, in an unprecedented move, for the first time since the adoption of the current Moroccan constitution in 1972, the King opened the 1988 spring parliamentary session, dedicating his entire speech (and the session) to privatization. In a further break from tradition, the King spoke from a written text so as not to leave any doubt about the meaning of his words. He stressed that his speech was meant to guide discussions and that it was not a set of royal instructions. He indicated that privatization could modernize the economy, help regional development, increase the well-being of citizens, unleash an entrepreneurial spirit heretofore barred by public enterprises, and foster Morocco’s position in and openness to the international economy. He emphasized that privatization in no way resulted from decisions to reduce the budget deficit or to abandon the state’s role as promoter of national development, attributing, in passing, much of the recent ‘excessive and unjustified’ growth of the public sector to the proliferation of ‘unnecessary’ and ‘useless’ subsidiaries and to public sector participation in a wide range of projects. He pointed out that mismanagement arose, in part, from the confusion between the state’s management and control roles. He faced the issue of foreign participation in privatization and indicated the need to attract foreign investment to Morocco. Social issues were addressed when the King proposed alternative solutions to unemployment possibly resulting from privatization: spreading out sales to avoid creating a massive unemployment problem, or imposing employee retention on the new buyers. He also stressed that privatization should not increase the existing concentration of wealth, but that it should give a chance to ‘new men’. Recognizing that Morocco’s constitution vests parliament with authority over transfers from public to the private sector, the King proposed guidelines for the content of the privatization law. (a) It should list firms excluded from privatization because they offer essential and monopoly public services; are vital for the national economy; and should be kept public in the general interest. (b) Part of the state agricultural lands should be privatized. (c) It should fix rules for appraisals to be carried out by ‘competent and independent’ organizations. (d) It should fix rules for choosing among potential buyers based, in part, on criteria of regionalization, employment safeguards, and opposition to concentration of wealth. (e) It should forbid further public sector growth by the creation of new public enterprises or their subsidiaries. Limited exemptions based on exceptional circumstances should be authorized only at the highest levels. Measures to accompany the privatization process were also mentioned. They included: accounting and legal reforms, restructuring companies in the portfolio, revitalizing the moribund Casablanca stock market, and solving the problem of foreign investment in certain sectors of the economy. To maintain coherence in the whole programme, the King proposed creating a special unit to oversee the privatizations from beginning to end. In October 1989, eighteen months after his speech to Parliament, when the draft text of a privatization law had long been buried in committee, the King reopened the issue by naming a Minister of Privatization, saying ‘If any country has applied a certain liberalism it is Morocco’. He explicitly instructed the new minister.


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We do not want monopolies. That is the first objective. In second place, We will only privatize those sectors earning a profit… We want the wealth to benefit all parts of Morocco, instead of being held and monopolized by a few concentrated regionally. The operation must also be fruitful. In December 1989, the king’s speech to the opening of Parliament in April 1988 was adopted, unanimously, as the preamble to the law on privatization. The Cabinet A clear view of long-term policy intentions was provided by the Prime Minister, Mohamed Karim Lamrani, in a 1985 speech to parliament. He indicated that certain sectors taken over by the state after independence would be gradually handed over to private enterprise. He added that the government planned ‘a bold policy of denationalization to return to private enterprise everything that naturally belongs to it’. Later, Cabinet officials showed considerably more reluctance in handling the issue. The new Prime Minister, Azeddine Laraki, presenting the government programme to Parliament in early November 1986, avoided using the word ‘privatization’. He indicated that the government would try to ‘distinguish those [firms] that the general interest indicates should be kept under State control’ for which ‘the objective is to alleviate the budget allocated to these establishments by revising their management and eventually modernizing their human and material environment’. Other ministers were scarcely more enthusiastic. At the opening of a major conference in 1988 held to publicly air views on privatization, the Minister of Finance stressed everything but privatization. He gave a succinct bird’s eye view of the portfolio; mentioned the need to rationalize the sector, by which tariff reform was understood; discussed clearing up the arrears from the government to the public enterprises; and mentioned the need to institute the process of disengaging the state from activities where the private sector has an advantage. The word ‘privatization’ was not mentioned in his speech. At the same conference, the planning minister was equally skilled in avoiding the topic, simply mentioning that the new plan provided for an examination of the role of the state in Morocco’s economic development and for possible disengagement of the state from some activities. The absence of references to privatization in the presentations by Cabinet ministers at the major national forum to air the privatization issue prompted some negative press comment. The most vocal Cabinet member to address the privatization issue has been the Minister of State without Portfolio, Moulay Ahmed Alaoui, political director of Morocco’s largest circulation daily. In closing the 1988 conference, he stressed that although ‘certain strategic sectors of the national economy need to remain under the control of the public sector…the State must disengage itself from the other sectors and leave the initiative to the private sector’. He specified procedures: ‘privatization must take place according to terms of reference…to defend the interests of wage earners, workers, and administrators’. Later, in front page editorials, he repeatedly commented on the King’s message to parliament, stressing the need to safeguard employment, to promote regional development, and to avoid the concentration of wealth. He even engaged in an editorial debate with the Communist Party newspaper over the need for privatization versus reorganization to correct the abuses of ‘clientelism, nepotism, bureaucracy, misappropriations of public goods’. The Minister of Privatization, Moulay Zine Zahidi, has championed moderation in an attempt to calm fears: ‘privatization does not signify a renunication by the State of economic action, but an intention to continue assuming its mission in an effort to develop and to equip the country’. ‘Privatization is surrounded by a set of guarantees, [for example] all is not privatizable at once…we will act very prudently…public

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enterprises are the patrimony of the state, that is to say of all Moroccans, there is no question of a cut-rate sale of that patrimony. It must be sold at a just price in conditions of transparency’. After passage of the law, the Minister of Privatization listed the objectives of privatization: to reinvigorate the economy; to get growth going again with a positive impact on employment; to provide investment opportunities for public enterprise workers and managers; to foster popular shareholding; to avoid concentration of wealth; and to promote regional development. He stressed that privatization was being undertaken for more social than economic reasons. Political parties This section presents the views of Morocco’s major political parties about privatization. The Constitutional Union (Union Constitutionnelle—UC)

Parliament’s largest party with eighty seats, considers privatization part of a general programme of economic liberalization. It holds that although public enterprises may have had roles to play in the past, in recovering national sovereignty and in providing infrastructure to an economy ‘bled white and weakened by being a colonial satellite’, now, more than thirty years after independence, the private sector has developed and has acquired sufficient financial and human capital that it can substitute for the state. Moreover, public enterprise development has negative aspects: firms are overindebted, on the verge of failure, or need constant subsidies, which are three financial symptoms of public sector management, bureaucracy, and antieconomic attitudes. Buyers should be chosen from: large groups whose activity complements that of the firms being privatized; small and medium enterprises, in limited sectors, including management buy-outs; and foreign investors, provided they are limited to a minority position. The National Independents’ Rally (Rassemblement National des Indépendants—RNI)

A leading party with sixty-one seats in Parliament, embraced privatization: ‘as a party having liberal orientations, we cannot but support a privatization law by which certain public establishments pass to the private sector’. ‘If Morocco undertakes the privatization of certain public enterprises, it is because it has attained the levels of maturity and experience which were missing just after recovering [its] independence and freedom’. The RNI insisted that privatization guarantee the general interest; foster equity; avoid enriching the rich and impoverishing the poor; and be done with transparency. The Independence Party (Partie Istiqlal—PI)

Morocco’s old-line nationalist group, with forty-three seats in Parliament, emphasized the need to ‘conserve the importance of the public sector in the Moroccan economy’ and to keep ‘strategic’ firms public. It would have allowed privatization of non-strategic, competitive firms under restrictive conditions, but took the position in Parliament that the draft law was unconstitutional because it conferred parliamentary powers on the Minister of Privatization, it was too broad, and not transparent enough. Istiqlal proposed amending the law to give absolute priority to local governments for acquiring small, local firms, except for the sugar producers, where workers had priority; to forbid any purchases of shares by large firms; to give workers, at no cost, a 10 per cent of the shares of any firm being privatized or all government shares in any firm in which its stake was less than 25 per cent; to earmark all proceeds from privatization for creating new public enterprises for regional development; and to remove the major banks and holdings from the list of privatizable firms. Istiqlal also proposed a set of negative conditions on privatization: no government help or credit could be employed in buying a deficit-ridden firm; no one but the workers could buy


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agricultural firms and they would be obliged to live on the farms and make agriculture their sole occupation; no current hotel owner could buy a hotel; and no receipts from privatization could be used for debt reduction. The Istiqlal-affiliated union, FNA-UGTM, lobbied for worker priority in all transfers of agricultural land. Parliament accepted none of the Istiqlal amendments. The Socialist Union of Popular Forces (Union Socialiste des Forces Populaires—USFP)

The social democratic party, with thirty-six seats in Parliament, also opposed privatization. It argued for restructuring and modernizing the public sector built up ‘after independence in response to the need to free the economy from the hands of the colonizer’, stating that ‘neither economic reasons nor ideological motives can really justify…cut-rate selling of a patrimony painfully acquired at the expense of the popular masses’. It also criticized the government’s attempts to amend the draft law to placate criticism by the Left as causing the delays in Parliament. USFP also proposed a reform-oriented substitute to the privatization law that would have stressed the role of the public sector within the context of the development plans; created a Supreme Council for the public sector to survey its goals, management, and activity; provided for the reform of public enterprise boards of directors; authorized contract programmes; emphasized social over economic aspects in fixing public enterprise prices for goods and services; created a National Commission to supervise all enterprise creation, nationalization, and transfer; and mandated evaluation of all holdings. The substitute law was not accepted by Parliament. The Party of Progress and Socialism (Parti du Progrès et du Socialisme—PPS)

The current embodiment of the Moroccan Communist Party, with only two seats in Parliament, held that ‘the public sector should be reformed, not dismembered’ and Morocco should not ‘liquidate the public sector for the benefit of big private interests’. Later, attempting to shed the labels of dogmatism and demagoguery, it declared that while the party accepted privatization in principle, the local private sector ‘has neither the scale, nor the capacity as a credible alternative’ to the state. It held that the draft law only confirmed the unjust class spirit underlying policies ‘in the service of the interests of foreign and local monopolies and depriving the Moroccan people of the goods that they created with their money and their efforts’. The PPS wanted to develop the public sector even further and proposed amending the law to set the goals of privatization as: to protect the national economy from foreign dependence; to increase employment; and to supply the domestic market. It would have created an unwieldy transfer commission; required individual prior parliamentary approval for any concrete measure relating to transfers to the private sector (italics as in original); given absolute priority to industrial or agricultural workers, renters, widows and orphans of the armed forces, and communal governments; annulled any sales that result in majority foreign control at any time during twenty-five years after the transfer; forbidden purchases of firms using public credit; forbidden using proceeds for debt reduction or any debt swaps; earmarked all proceeds for regional development projects; mandated annual reports from purchasers; and provided for renationalization of any transferred firm that incurred a deficit. No PPS amendment was accepted by Parliament. Private sector Representatives of the Moroccan private sector have long pushed for privatization of agricultural lands controlled by state farms. In recent years some land has been sold. It was no surprise that the private sector welcomed a general privatization. The Moroccan General Economic Confederation (Confédération Générale Economique Marocaine—CGEM), the large employers’ federation, co-sponsored a major conference to sound out the nation’s decision-makers on the subject of privatization one week before the

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opening of the special parliamentary session on the topic. Later, in reaction to the royal message in April 1988, the CGEM head declared that the Moroccan private sector ‘was able to play its role’. He had previously characterized the whole privatization debate as a chance to ‘flog the bureaucracy, vituperate the state monopolies, and glorify the efficiency of private enterprise for which competition is the golden rule’. In 1989 its new president was even more enthusiastic, ‘Privatization will be a stage in getting the economy moving again.… It should result in the constitution of solid groups capable of sustaining the synergy and maintaining the process of improving social conditions’. One of those groups, ONA, the largest African private group, took control of a bank in July 1988, which some felt would give it a keen advantage in the upcoming privatizations. However, ONA’s president later clearly stated that it would not participate in the privatization programme. The CGEM also took the lead in providing an important forum for the Minister of Privatization to set out the lines of the programme in early 1990. The private sector worried about its ability to compete with foreign capital: ‘privatization should hardly denote a reinforcement of foreign capital in the national economy…privatization should be an opportunity to promote private national capital’, but others down-played those fears. The Left criticizes Morocco’s private sector as ‘intellectually and financially incapable’ of taking the public sector’s place. ‘Privatization, as understood by our private sector, is synonymous with opportunities for the very greedy wealthy and with concentration of economic and financial power by already strong groups’. Many private sector business interests expect the privatization programme to reinforce the existing concentration of wealth and power and look sceptically at the process, one of whose stated goals is precisely to avoid those concentrations. Government officials Government officials were divided; some opposing and others favouring privatization. A top Ministry of Finance official was quoted as being proud that ‘in Morocco we haven’t succumbed to the fashion of privatization’ because ‘privatization doesn’t constitute a miracle remedy’. He reasoned that the private sector was small-scale and scattered; it was so badly managed that any sale of public enterprises risked a decline in management quality; and it had so little savings capacity that any sale of small, easily-managed firms would rapidly absorb available savings and preclude any new private ventures. Many government officials were more comfortable with a public enterprise ‘rationalization’ than they were with privatization. Part of the ‘techno-bureaucracy’ was opposed because a large public enterprise sector provided its members with favours and privileges that would disappear with private sector management. Yet others favoured privatization, expecting that bureaucrats would achieve a miracle ‘overnight metamorphosis into promoters’ similar to that which took place during Moroccanization. After the King’s message in 1988, most government officials expressed support for privatization, but their inertia has not greatly changed. Conclusion In Morocco, a consensus has apparently emerged about the role of the state in general and of public enterprises in particular. The thinking holds that the role of the public enterprises has been to get the economy going, in the years after independence, while awaiting the maturity of the private sector. Now, more than thirty years later, it is time for the private sector to take on more responsibility for Morocco’s economic development. The consensus diverges when considering what to do with existing public enterprises: accepting the premise that the state’s role is a temporary substitute for the private sector’s entrepreneurial efforts leads to the conclusion that the enterprises must be privatized; accepting the premise


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that the state has a permanent entrepreneurial role that is independent of the private sector means they must be retained. Building the minimal consensus has been a conscious act on the part of Morocco’s leaders. Some find precursors of privatization in the policy pronouncements of the mid-1970s and attribute the delay in implementation to a long lag needed to prepare public opinion to accept the policy. Some conclude from the emerging consensus that a return to the past is impossible and that a reliance on individual initiative and on the private sector will dominate the Moroccan political/economic environment for years to come. ACTIONS IN PRIVATIZATION The early denationalizations Morocco has had a broad privatization programme that is not recognized at home nor well known abroad. Because it has been largely devoid of ideological content, it has not attracted much attention. Morocco privatized early and used a variety of methods, but without any overall guiding policy. Thus, the National Bank for Economic Development (BNDE) majority government share was diluted from 56 per cent to 44 per cent in 1963, and dropped to 34 per cent in 1975. Similarly, the National Investment Company, SNI’s government share, dropped from 31 per cent to 24 per cent in 1977, with the main intended beneficiaries of the drop being Moroccan workers living abroad. Leases and management contracts have been employed in some state-owned hotels. For example, prior to 1974, two hotels, the El Badii in Marrakech and the Fès in Fez, were managed by the US hotel chain, Holiday Inn. After 1978 they were managed by DIAFA, a firm largely owned by Moroccan professionals. Sugar-beet producers were permitted to buy shares in governmentowned sugar companies. Sucrerie de Béni Mellal, Sucrerie Nationale de Beht, and Sucrerie de Doukkala, following a royal speech in 1973 giving them that option; however, the farmers’ response was limited to less than 4 per cent. To divest itself of non-performing assets, the Real Estate and Hotel Credit Agency, CIH, began selling equity participation in the second half of the 1970s, when most of its portfolio investments were not showing a profit. Other asset sales were carried out by the two public enterprises that hold agricultural lands nationalized from foreigners. Thus, SODEA sold 14,411 hectares from 1973 to 1985, an amount equal to less than 19 per cent of its total holdings. The recent denationalizations During the 1980s the pace of privatizations increased; however, there still was no overall policy to guide them. Demonopolization of legal monopolies has been employed with some success as in the case of the large export service firm, Marketing and Export Office (Office de Commercialization et d’Exportation— OCE), ranked third nationally in sales in 1982. After OCE’s monopoly on exports of canned food was removed in 1984 and that on citrus and fresh vegetables in 1985, producers, co-operatives, and new private firms made up of former OCE staff, captured most of the agency’s business—at a lower cost to exporters. Exports did not suffer; instead they continued to expand. Now, OCE operations are scaled back and many of its agro-processing subsidiaries are slated for privatization. Demonopolization of urban transport systems took place in Morocco’s major urban areas, beginning with Casablanca (1985) and Rabat-Salé (1986). Monopolies had been held by the Régie Autonome des Transports Urbains de Casablanca and the Régie Autonome des Transports Urbains de Rabat-Salé. Opening the previously closed markets to the private sector provided a sorely needed relief to urban transport bottlenecks and eliminated long waits and overcrowding by dramatically increasing the number of buses in circulation.

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Management contracts and leasing have been implemented in almost all government-owned hotels. In 1982, nine hotels and in 1985 eight more hotels, of the Moroccan Tourism Office, were leased to DIAFA, a firm largely owned by Moroccan professionals, for twelve years. In 1984, the hotel at the Sidi Harazem hot springs was leased to Dounia Hotels on a long-term contract as were five hotels of the group Maroc-Hotels. The Société Chellah Immobilière leased its Rabat hotel to Hilton International and later to the Hyatt chain. Boats of the fishing company’s subsidiary, Société Marocaine de Pêches au Thon (THONAPECHE), were leased to a Spanish firm, based in the Canary Islands, which refitted them for sardine fishing. In 1989 management of the hot springs at Moulay Yacoub was given to a French firm, GESTHERM. By far the most important privatizations in Morocco have taken the form of portfolio restructuring or divestment either of assets or of subsidiaries of the major holding companies. These operations were seen mainly as standard portfolio management practice, not as privatizations. The SNI has led in portfolio restructuring. From 1980 to 1989 it sold shares in over thirty-five firms largely through private placements validated through the Casablanca Stock Exchange. Some are listed in Table 14.8. Similarly, the Industrial Development Office, ODI, from 1980 to 1988, totally or partially ceded six firms to the private sector and, through capital dilution, opened four firms to greater private participation. Its policy was ‘to maintain a dynamic portfolio equilibrium’. Also, BNDE, from 1984 to 1986, sold its Table 14.8 Selected SNI privatizations (1980–9) Auto-Hall Banque Commercial du Maroc (BCM) Brasseries du Maroc (BM) Chaine Hotelière Marhaba (CHM) Commercial et Maritime (CICM) Compagnie Africaine d’Assurances (CAA) Compagnie Marocaine de Filature et de Textile (COFITEX) Compagnie Marocaine d’Agences Maritimes (COMARINE) Compagnie Marocaine de Métaux et d’Entreprises (COMAMETO) Consortium Industriel Crédit du Maroc Delatre-Levivier Maroc Financière Lesieur Fonderie de Plomb de Zellidja (FPZ) Lafarge-Maroc Le Carton L’Entente-Compagnie d’Assurances Lesieur Afrique Longometal Afrique Source: SNI, Annual Reports, various years

Messageries Marocaines Office Maritime Tangerois (OFIMA) Omnium Nord-Africain (ONA) Orbonor Paquet Voyages Rebab Cie. SA Limited Société Chérifienne d’Engrais (SCE) Société des Boissons Gazeuses du Gharb (SOBOGAR) Société de Développement Industrielle de la Haute Moulouya (SODIM) Société d’Equipement Domestique et Ménager (Crédit EQDOM) Société d’Exploitation des Procédés Boussiron (SEPROB) Société Marocaine d’Automobiles Berliet Société Nouvelle de Construction Industrielle (SNCI) Société Ouïmes Etat Sucrière Marocaine et de Raffinage (COSUMAR) Wagon-Lits Tourisme Maroc

participation in six firms, three of which were privatized (EUCAPAN, LUKUS, SCRM), three others traded to another public firm, and liquidated one other. The Fund for Savings and Management (Caisse de Dépot


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et de Gestion—CDG), reduced its share in seven companies in 1985 alone (see Table 14.9). The National Fishing Office, ONP, sold two subsidiaries in 1984, Société Marocaine des Produits de la Mer (SOMAMER) and Société de Commercialisation et de Distribution des Produits de la Mer (ASMAK), liquidated another, MAROPECHE, and sold off a boat, the Guéliz, belonging to yet another, the Société Chérifienne de Pêche et Traitement des Produits de la Mer (PROMER). Also in 1984, the Treasury sold off all or part of its shares in two sugar companies, the Compagnie Sucrière Marocaine et de Raffinage (COSUMAR) and thé Sucrerie de Doukkala, and a Table 14.9 Selected ODI privatizations (1980–89) Briqueterie de Taza Confection Générale de Fès (COGEFES) Laiterie de Doukkala Laiterie de Fès Manufacture Arabe des Produits de Cuir (MAPROC) Société de Provende et d’Embouche du Tadla (SOPROTA) Société des Dérivés du Sucre (SODERS) Société Industrielle de Conserves de l’Oriental (SICOR) Société Internationale d’Industrie et d’Ingénierie (S31) Vêtements du Nord (VETNORD) Source: ODI, Annual Report, various years Selected CDG privatizations (1985) Banque Marocaine du Commerce Extérieur (BMCE) Crédit Immobilier et Hôtelier (CIH) Consortium Maroco-Koweitien de Développement (CMKD) Compagnie de Transports du Maroc-Lignes Nationales (CTM-LN) Société Nationale d’Aménagement et la Baie de Tanger (SNABT) Société Immobilière Yasmine Société Hôtelière de Sidi Harazem Source: CDG, Annual Report, 1985

sewer-pipe manufacturer, thé Société Nouvelle des Conduites d’Eau (SNCE), to the private sector, while a mining subsidiary of BRPM, the Société de Pyrotine de Kettara (SEPYK), had been closed awaiting liquidation. In 1989 Liwa International, a company from the United Arab Emirates, purchased three hotels from two different Moroccan public enterprises, Hotels de Fès in Fez, El Badii in Marrakech, and Atlas in Agadir, the last from SOTORAM, a Royal Air Maroc subsidiary. Many firms that were not entirely sold off in the privatizations of the 1980s were listed as privatizable under the current legislation. One case of change in organizational structure may be noted. The operational activities of the Ministry of Posts and Telecommunications were transformed into a public enterprise in 1984 under the King’s ‘personal impulse’. Some note an improvement of the existing infrastructure.

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Preparations for the current privatization programme As part of the preparations for passing the privatization law in 1989, Morocco abrogated the decree applying the Moroccanization law passed in 1973. Sectors, including banking, real estate, insurance, certain industries, some transport, ranching, and some commerce, which previously had been limited to national investors, were thereby opened for foreign investment. Popular opinion held that the measure was done to prepare the investment climate to welcome investors from the member states of the new Maghreb Arab Union. To boost investment even further, some members of the business community sought to abrogate the law of Moroccanization itself, not only the decree of application. A revitalization of the weak Casablanca Stock Exchange has been sorely needed to permit it to function adequately as a vehicle for privatization. Total volume on the bourse for 1989 was estimated at under US $100 million, equivalent to less than 2 per cent of total investment. The Ministry of Finance established a working group that reported on the Stock Exchange in 1987. Parliamentary action is needed on a bill arising out of that report that would improve the brokerage system and increase the information available to, and the protection of, potential stockholders. In the interim, the privatization law provides for methods to tap financial resources in the absence of an adequate capital market, such as worker participation and private placements. PROBLEMS ENCOUNTERED Political opposition to privatization One recent privatization raised substantial opposition in the press and in Parliament, the demonopolization of OCE. The problem centred on the loss of employment as around 700 workers, out of a total labour force of 1,200, were released, with a year’s salary as severance pay, when OCE’s sales tumbled. Although no actual transfer of property was made to the private sector, the massive firings poisoned the debate on privatization during the spring 1988 parliamentary session. An independent study, however, whose findings were neglected, indicated that jobs created in the new export firms largely surpassed the lost jobs at OCE. CONCLUSION The privatization debate has centred almost exclusively on the transfer of enterprises from the public to the private sector. Except for OCE, where demonopolization was assimilated to privatization, other forms such as contracting out or leasing out are rarely mentioned or examined. Privatization in Morocco is at a take-off point from the small, dispersed actions such as portfolio restructurings or management contracts to a full-fledged, well-oriented programme implemented by a Ministry of Privatization. Several issues bear watching as the privatization develops. First, from the inclusion of several large holding companies on the list of privatizable firms, the impact will surpass the seventy-five companies listed. The number of first degree subsidiaries held by those firms is approximately 200. While a few figure on the list of privatizables, most do not, which should magnify the impact on the portfolio and appears to constitute a clear repudiation of subsidiarization through holding companies, the main growth policy since the mid-1970s. Second, portfolio divestment may have a major impact on the 1.5 million acres of French colonial property run as state farms. Its privatization should increase agricultural productivity and help stem the rural exodus. Privatization of agricultural lands will complement the current programme. Third, Morocco has examined the experiences, perils, and pitfalls of privatization in Europe


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and in other developing nations. It intends to learn from their programmes and to avoid their mistakes. Fourth, the parliamentary elections scheduled for 1990 that were postponed for two years to 1992 provide a near-term deadline to come up with notable successes. The opposition, so manifest in the parliamentary debates, is waiting for the government to make a mistake. The government knows it and will seek to avoid giving the opposition an opening. NOTE Opinions are only the author’s. Comments by Abdelkrim Al Amrani, Abderrafie Al Houari, Lhassan Belkoura, Jamal Echiguer, Larbi Jaïdi and Clive Gray are gratefully acknowledged. REFERENCES Actes du Colloque Secteur Public-Secteur Privé: vers un meilleur équilibre, Rabat, L’Amicale des Ingénieurs des Ponts et Chaussées and La Confédération Générale Economique Marocaine, 1988. Alaoui Mdaghri, Driss (1985) Droit et gestion des entreprises publiques au Maroc, Casablanca, Université Hassan II, Collection de la Faculté des Sciences Juridiques, Economiques et Sociales. Berrada, Mohammed (1988) ‘Secteur Public/Secteur Privé, Poids respectifs, atouts et handicaps’, in Actes du Colloque Secteur Public-Secteur Privé: vers un meilleur équilibre, Rabat, L’Amicale des Ingénieurs des Ponts et Chaussées and La Confédération Générale Economique Marocaine, pp. 11– 19. El Kaouachi, Fikry (1988) ‘Désengagement de l’Etat: Les positions en présence’, La vie économique, 6 May, pp. 20–23. El Midaoui, Ahmed (1981) Les entreprises publiques au Maroc et leur participation au développement, Casablanca, Afrique-Orient. ‘Privatisation: La nouvelle donne’ special section in Le Matin du Sahara et du Maghreb, 25 December 1989. Revue marocaine de finances publiques et d’économie, special issue on privatization, no. 6 (1990). Royaume du Maroc, Ministère des Finances, DEPP, DEE (1985) Inventaire des Etablissements & Participations Publics.

15 Privatization in Algeria Rezke Hocine

THE PUBLIC ENTERPRISE SITUATION Public Enterprise Proper For a better understanding of the characteristics of public enterprise in Algeria, it needs in the first place to be understood within the context of the country’s political and economic evolution since its attainment of independence. Algeria is a young country. In 1962, the date of Algeria’s independence, its economy showed all the characteristics of a colonial economy, namely, extraction of natural resources and raw materials (mining, oil) for transformation and use in the metropolitan country, with the result that there was very little local manufacturing. The industrial fabric was almost non-existent. Algeria thus underwent, during an initial period of almost a decade (1962–73), a series of nationalizations, touching the mining sector, the oil sector, the banking sector, the agrarian revolution, and so on. This was the phase known as the recovery of the nation’s wealth. At the same time a whole series of national companies responsible for developing entire branches of the economy was set up, often ex nihilo, and the nationalized units were attached to them. Algeria thus witnessed during the decade 1970–80 a substantial programme of development, particularly industrial development. The type of economy opted for by the country’s authorities was the ‘centrally-planned economy’: public enterprise was governed by the ordinance instituting ‘socialist management of enterprise’. Thus it could be regarded as the collective property of the work force, and there was a high level of worker participation in management. At the same time, public enterprise was subjected to very close administrative supervision. As a result, by the end of the 1970s the public sector occupied a predominant position in the economy. The private sector, organized by the Act of 15 September 1966, focused primarily on the food, textiles and building materials sectors. Moreover, it used rudimentary technologies and largely unskilled labour. The impact of foreign capital was felt above all in services and works companies (mixed enterprises). The begininning of the 1980s marked a turning point in the conception of the economic management system. The ‘lack of efficiency’ of public enterprise was initially attributed essentially to its large size, and a major organizational (and to some extent financial) restructuring operation was launched. From eighty national companies organized by sector, about 400 enterprises specializing by field of activity and by function (separation of the production and marketing, and in some cases development, functions) were created. The private sector, for its part, was the subject of an Act of 21 August 1982 which aimed at

PRIVATIZATION IN ALGERIA

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developing it while at the same time regulating it. This Act had little impact on the promotion of the private sector because it sought to reject it too much and to subject it to a prior approval procedure. There is today some dispute as to the effects of this organizational restructuring. However that may be, in the middle of the 1980s the lack of efficiency of public enterprise was attributed to its lack of management autonomy, the very strict supervision of business management actions and, in general, to the bureaucratic management of the economy. A group going by the name of ‘Autonomy of Enterprises’ was then established at the level of the Office of the President of the Republic. As a result, six fundamental Acts on autonomy were promulgated in January 1988. 1 2 3 4

The Act on the Orientation of Public Economic Enterprises; The Planning Act; The Shareholding Funds Act; The Act modifying and supplementing Ordinance 75.59 of 26 September 1975 establishing the Commercial Code and laying down the specific rules applicable to public economic enterprises; 5 The Act modifying and supplementing Act No. 84.17 of 7 July 1984 concerning financial legislation; 6 The Act modifying and supplementing Act No. 86.12 of 19 August 1986 dealing with the banking and credit system.

On the basis of these Acts, a clear separation was instituted between the powers of the owner of an enterprise’s capital and the prerogatives of the enterprise’s administration and management. Under the new system, public economic enterprises became legal entities distinct from the state. The state remains a shareholder in the capital of the public enterprises, but no longer manages them. Eight specialized structures known as Shareholding Funds were established for the purpose of managing public-issue shares on behalf of the state. They are fiduciary agents. By the end of 1990, more than three-quarters of the former socialist enterprises had been transformed into joint-stock companies under the legislation on autonomy. In the parallel development, the promotion of the private sector was the subject, on 12 July 1988, of an Act which abolished the previous approval procedures and replaced them by a simple certificate of qualification issued by the Chamber of Commerce. Just recently, the Money and Credit Act opened up considerable prospects for liberalization of exchange rates and a single exchange rate (the dinar is still not convertible, and there are two exchange rates, the official rate and the parallel rate), for access to domestic and foreign credit and for investment by nonresidents. This Act abolished part of the discrimination that had hitherto been practised between the public sector and the private sector where access to financial resources was concerned, and in addition makes no distinction where investment is concerned other than between residents and non-residents (and no longer between nationals and foreigners). Whereas up until now non-residents could hold no more that 49 per cent of an enterprise’s capital, the Money and Credit Act allows direct investment by non-residents up to 100 per cent, including in the banking sector. As at the end of 1990, none the less, the predominance of the public sector remained intact and unchanged in the industry sector, building and public works and the service sector. The forms of management and the status of the enterprises have changed, but the owner remains the state. The agriculture sector, on the other hand, after undergoing an agrarian revolution which had far-reaching effects, was the focus in 1988 of the largest ‘privatization’ operation conducted in the country. A total of 3, 400 state farms were broken up and distributed to groups of private farmers.

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Public enterprise and regulation The above presentation of the evolution and position of Algerian public enterprise needs to be supplemented in three further respects: its financing; its foreign trade; and wages and labour relations, which constitute three essential fields for regulatory action. Where financing is concerned, up until very recently (the 1988 Acts on autonomy), public enterprise remained strictly supervised in terms both of investment and of operations. The share of the Treasury in investment has continued to increase, rising from about 30 per cent at the beginning of the 1970s and close to 50 per cent at the beginning of the 1980s to almost 65 per cent by 1988. The funding role played by the banking system and the prohibition on public enterprise having the use of any surpluses it might earn, deprived public enterprise of all motivation in so far as management was concerned. Another by-product of the absence of budgetary constraints was, paradoxically, the continual financial destructuring of public enterprise. Enterprises did not have their own capital, and were thus heavily indebted. The Act of 19 August 1986, instituting a banking and insurance regime, the Acts on autonomy (January 1988) and above all the Money and Credit Act (1990) have put an end to this situation, at least on paper. The banking system is invited to take all necessary steps to limit the risk of non-reimbursement. The Central Bank’s prerogatives are restored with respect to designing and drawing up monetary policy and to determining banking conditions. The Bank becomes an autonomous commercial enterprise, and thus has to base its actions on the rules of the market economy (security, solvency, and so on). The public authorities are empowered to provide support for autonomy not only in the short and medium term, but also in the long term. Support from the issuing institute in the Treasury is now limited in amount and duration. This institutional constraint reflects the Treasury’s intention of investing much less and confining itself to ‘strategic investments’. Where foreign trade is concerned, until 1988 public enterprises were constrained by the exercise of an extremely strict state monopoly on foreign trade. They also had to comply with an extremely bureaucratic public transactions code. Public enterprises thus had in fact no room for manoeuvre in their foreign dealings. The Act amending the state monopoly on foreign trade (1988) and the Money and Credit Act (1990) put an end to this situation; but financial constraints and the debt-servicing burden have somewhat lessened the effect of the autonomy thus given to public enterprises in respect of foreign trade. Where wages and labour relations are concerned, public enterprise was, until very recently, subject to a rigid job nomenclature and a rigid salary scale which de facto deprived the enterprise of the right to manage its human resources. The Acts on autonomy have given back to enterprise a certain freedom of movement in this area. In the past, moreover, the existence of a single party and of a trade union movement which owed its allegiance to that party deprived the social dialogue of all meaning. The recent political reforms and the introduction of a multiparty system will eventually make this social dialogue fully meaningful again. Some statistical data on Algerian public enterprise Some statistical data on Algerian public enterprise are given below. Table 15.1 shows the number of national-level public enterprises, 375, by activity sector. The industrial sector has the largest number of public enterprises (112). Table 15.2 shows the distribution of public enterprises by type of activity: services account for the largest number of enterprises (139), followed by production (98).


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Table 15.3 shows the evolution of national production over a number of years, by activity and juridical sector (public or private). It is apparent that, over a ten-year period, the gross added value of the public sector rose from 60 per cent to 72 per cent. Over the same period, the operating surplus of the public sector rose from 50 per cent to 65 per cent. This relatively small increase is a result of the fact that the public sector (and particulary the industrial sector) had been selected by the central planners as a growth factor, without being authorized to act with a focus on financial accumulation. As a result, prices evolved in a manner unfavourable to the public sector (particularly industry). For more details, Table 15.4 gives, for a ten-year period, the evolution, by branch of activity, in the public sector (and the economy as a whole), and by way of contrast in the private sector, of the following parameters: gross output; consumption for production; value added; consumption of capital; domestic revenue; production-related taxes; wages; and net operating surplus. The data used (source—the National Statistics Office) cover 1974 to 1983, and hence an extremely representative period in the evolution of the economy. The end of the 1980s, marked by the crisis in 1985–6, has been very similar to 1983. Where, more specifically, the financial situation of national-level Table 15.1 Public enterprises at the national level

1 Pêche Forêt Total 2 Mines Total 3 Alimentaires Manufacturières Chimiques Pétrochimiques Energie Steel, mechanical, electrical Matériaux de construction Total 4 Communication Total 5 6 Assurances Total 7

Secteur

Total

Agriculture, Pêche, Forêts 4 5 30 Mines 7 15 Manufacturier 13 7 8 5 11 38 16 112 Transport communication 2 36 Commerce Banques Assurances 4 11 Autres services

Agriculture

21

Hydrocarbures

8

Textiles, cuirs, papier

14

Transport

34

Commerce Banques

28 7

Tourisme

21

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REZKE HOCINE

Secteur Informatique Culture Santé Total 8 Hydraulique Habitat—Construction Total Total

16 9 4 50 Equipement Assurances 21 36 93

Total

Travaux publics

36

375

public enterprise is concerned, in addition to what has been said above about the evolution of net operating surpluses, it may be pointed out that more than two-thirds of the enterprises show a positive net balance and a little less than a third a negative net balance. The total net balance of the enterprises is nevertheless negative, at around −15 to −20 billion dinars (as at the end of 1988). Moreover, Algerian public enterprise is heavily indebted to the Treasury, since it did not have its own capital or endowment capital when it was established, and all its investments have been financed in Table 15.2 Distribution of public enterprises, by type of activity Activité

Nombre

Production:—Agriculture, pêche, forêts —Industrielle —Minière —Energie Total: Commerce et distribution Bureaux d’études Entreprises de travaux Services Total

16 75 6 1 98 18 40 80 139 375

the long term by the Treasury. This long-term debt is of the order of 100 billion dinars (as at the end of 1988). By way of comparison, enterprises in the eastern-bloc countries, and particularly in Poland, have no long-term debts, since the state took full responsibility for financing investment, and its cost does not appear in the enterprises’ accounts. Lastly, it should be noted that alongside national public enterprise and private enterprise, there is another category of enterprises, namely local enterprises (at the department or commune level). The number of local enterprises is estimated at more than a thousand, and their restructuring is under way. The activities of the local enterprises focus primarily on services (works, trade) and small-scale processing.


235

THE THINKING ON PRIVATIZATION Reasons why thinking turned in favour of privatization The reasons or circumstances which led thinking to turn in favour of privatization have been attributed essentially to the inefficiency of public enterprise, whether in agriculture (state farms) or in other sectors, particularly industry (national companies). This inefficiency is reflected at the practical level in shortages or poor quality of products and services. Public opinion is particularly sensitive to this, and is increasingly attributing these phenomena to the fact that the enterprises are public, whether the cause is inadequacies in their internal management or shortcomings in the country’s economic regulatory system, particularly with respect to the state monopoly over foreign trade. For a long time, these shortcomings were masked by the level of oil revenues: thus in 1982 the high oil prices led the government to Table 15.3 Growth of public enterprise. Production de la nation selon l’activité et le secteur juridique (Unité: Million de DA)

Valeurs ajoutées brutes Agricult ure Industrie hors hydrocar bures Hydroca rbures Travaux Publics Petrolier s Batimen t et travaux public Transpor t et commun ication Commer ces Services

1974

1975

1976

1977

1978

Secteur

Secteur

Secteur

Secteur

Secteur

public

Ensembl public e

Ensembl public e

Ensembl public e

Ensembl public e

Ensembl e

980.7

3,873.5

1,414.0

5,820.2

2,012.4

6,685.0

1,599.7

6,744.4

2,206.9

8,422.1

3,495.2

5,352.2

4,130.3

5,894.6

5,488.8

7,449.8

6,404.1

8,475.8

8,170.7

10,921. 3

15,039. 2 1,389.5

18,422. 3 1,453.0

11,725. 6 2,156.6

15,567. 7 2,226.4

16,228. 5 3,030.0

19,639. 0 3,107.3

19,520. 6 3,257.0

23,592. 9 3,267.7

20,319. 1 4,238.5

24,481. 0 4,238.5

2,003.7

4,120.2

2,848.2

5,375.8

4,082.4

7,077.7

5,745.8

9,038.1

7,231.4

11,304. 9

2,241.0

2,671.7

2,503.7

3,022.2

2,880.7

3,527.5

3,740.9

4,582.4

4,322.3

5,383.9

658.1

6,602.4

979.8

7,150.0

1,238.1

8,393.0

1,998.7

9,969.1

4,825.6

258.0

1,996.4

336.8

2,423.1

410.3

2,788.0

548.0

3,278.7

671.6

13,203. 8 3,949.7

236

REZKE HOCINE

1974

1975

1976

1977

1978

Secteur

Secteur

Secteur

Secteur

Secteur

public Sous 26,045. total 4 TUGP Droits de Douane Producti on intérieur e brute Consom mations producti ves Producti on totale brute

Ensembl public e

Ensembl public e

Ensembl public e

Ensembl public e

Ensembl e

44,491. 7 3,594.0 1,209.4

47,480. 0 4,422.1 1,744.5

58,667. 3 4,798.2 1,786.7

68,949. 1 5,629.7 2,308.3

81,905. 2 7,139.8 3,035.2

26,095. 0

35,371. 2

42,850. 8

51,986. 1

49,295. 1

53,646. 6

65,252. 2

76,887. 1

93,080. 2

25,131. 7

32,736. 6

39,526. 5

43,335. 6

51,190. 5

74,426. 8

86,383. 2

104, 778.7

120, 222.7

143, 270.7

1979

1980

1981

1982

1983

Secteur

Secteur

Secteur

Secteur

Secteur

public Valeurs brutes Agricult 2,622.1 ure Industrie 10,033. hors 3 hydrocar bures Hydroca 27,348. rbures 6 Travaux 4,405.3 publics petrolier s Batimen 8,905.4 t et travaux public Transpor 5,350.1 t et

Ensembl public e

Ensembl public e

Ensembl public e

Ensembl public e

Ensembl e

10,775. 9 13,570. 0

11,985. 0

12,923. 3 15,974. 1

14,257. 1

16,253. 2 18,738. 1

16,396. 6

16,107. 1 21,388. 6

19,743. 3

16,607. 6 25,335. 9

33,534. 7 4,405.3

41,640. 3 3,670.7

51,191. 3 3,670.7

58,582. 8 2,715.5

59,162. 8 2,715.5

58,484. 6 3,227.9

58,714. 7 3,227.9

61,996. 4 3,630.0

62,138. 7 3,630.0

13,714. 5

11,188, 2

16,526. 8

13,824. 0

20,089. 5

16,964. 9

24,376. 7

20,093. 9

28,526. 1

6,726.2

6,059.4

7,689.7

6,583.2

8,284.0

7,109.5

8,881.2

9,006.3

11,162. 2

2,736.0

3,144.6

2,756.9

2,721.0


commun ication Commer ces Services Sous total TUGP Droits de Douane Producti on intérieur e brute Consom mations producti ves Producti on totale brute

1979

1980

1981

1982

1983

Secteur

Secteur

Secteur

Secteur

Secteur

237

public

Ensembl public e

Ensembl public e

Ensembl public e

Ensembl public e

Ensembl e

5,852.5

16,789. 6 4,801.8 104, 318.0 6,072.0

18,975. 6 5,575.3 132, 526.8 7,899.4

25,966. 1 6,760.0 165, 422.3 11,763. 4 3,891.0

18,870. 8 7,965.4 184, 236.7 14,981. 6 4,361.7

899.2 65,416. 5

6,556.7

2,514.4

2,917.0

22,674. 9 6,164.6 154, 082.6 10,689. 3 4,263.3

112, 904.4

143, 343.2

169, 035.2

181, 076.7

203, 580.0

62,621. 8

74,585. 1

91,518. 9

89,094. 9

110, 587.7

175, 526.2

217, 928.3

260, 554.1

270, 171.6

314, 167.7

1,077.3 84,913. 6

8,146.8 1,256.2 108, 510.2

9,391.2 1,419.0 115, 750.6

11,597. 4 1,730.2 130, 518.5

Table 15.4 Public and private enterprise sectors (1973–84) Secteur public

Production brute Consommations productives Valeur ajoutée Consommation fonds fixes Revenu intérieur Impots liés à la production Rémunération des salariés Excédent net d’exploitation

Secteur privé

1974

1983

1974

1983

59% 59% 58% 77% 57% 62% 65% 52%

72% 74% 71% 89% 68% 84% 76% 57%

41% 41% 42% 23% 43% 38% 35% 48%

28% 26% 29% 11% 32% 16% 24% 43%

institute a programme for the elimination of shortages by means of massive imports. However, the world crisis and the drop in oil revenues again exposed the deficiencies in the mechanism and system of economic management and its inability to react to international changes.

238

REZKE HOCINE

Likewise, as has been seen, the financing of the economy and particularly investment by the Treasury had attained substantial proportions, 50 per cent at the beginning of the 1980s and 65 per cent by 1988. In a situation of increasing financial constraints and faced with an increasingly heavy debt service burden, the state is no longer capable of maintaining the financing of investment on this scale. For this reason, it is increasingly feeling the need to resort to other resources, and particularly to those of the private sector, whether domestic or foreign. Progress of privatization in Algeria How has the privatization issue progressed in Algeria since independence, in other words, now over almost three decades? As was seen in the first part, during the first two decades Algeria, in the context of its political options based on socialism, went through a phase of nationalization of foreign interests (and indeed of domestic private interests—the agrarian reform), and at the same time of supervision and regulation of the private sector (both domestic and foreign) with a view to incorporating it in the national planning process. During this period, the task was, after recovering the nation’s wealth, to ‘control’ the development of the private sector in a national development process which was marked by the predominance of the public sector. The decade 1980–90 may be regarded as a transition phase in the evolution of thinking, not directly about the issue of ‘privatization’ in the sense of ‘denationalization’ (except in agriculture at the end of the period), but rather about the progressive introduction of a market economy (euphemistically termed a trade economy) to replace the centrally-planned economy. Thus, at the beginning of the 1980s the organizational restructuring of public enterprises was aimed at transforming them into ‘manageable’ and, if possible, competive medium-sized enterprises. In agriculture the initial measures, at the beginning of the 1980s, involved liberalization of marketing arrangements and of the price regime for most fruits and vegetables, decentralization and restructuring of the the co-operatives responsible for supplying inputs and marketing, and the establishment of an agricultural bank. At the end of the 1980s, of course, as has been seen in the first section, the process accelerated: the 1988 Acts on autonomy aimed at giving public enterprises greater management autonomy and distancing the state from their management. The agriculture sector, for its part, underwent in 1988 a major ‘privatization’ operation in the full sense of the term. Over the same period, efforts were made to promote the domestic private sector, as well as mixed companies with foreign partners. Such is the weight of the past, however, that this effort, although affirmed in the legislation promulgating the five-year plans, has been thwarted both on paper and in practice. The texts designed to promote the national private sector and mixed companies take, in their statements of objectives, a markedly ‘defensive’ position which focuses on avoiding those effects of economic agents of this kind which are ‘regarded as being negative’. The nature and evolution of the legislation on the domestic private sector has already been described in the first section. A similar picture is apparent where mixed companies with foreign partners are concerned: the 1982 Act not only probihited majority shareholding by foreign capital, but de facto deprived the foreign partners, despite the fact that they were supposed to provide (and derive benefit from) ‘technological inputs’, of the ability to participate fully in the management of the mixed companies. In fact, the mixed company concept was rendered meaningless and regarded as a ‘public operator’ in the full sense of the term. The partner was less a partner than a provider of technical assistance, often kept on the side. The revision of this piece of legislation in 1986 did not bring about any real change in practical terms. A bill was submitted in the National People’s Assembly in 1989 aimed at enabling foreign partners to hold


239

a majority of shares: its examination was postponed because of lack of consensus on this specific point. A few months later, however, the Assembly adopted the Money and Credit Act which, as was seen in the first section, inter alia permits direct foreign investment in both public and private enterprises, including the banking sector. The two periods also differed in political terms. Following the death of Boumedienne in 1978, new trends in the country’s development strategy emerged. There were differences of opinion within the single party, the National Liberation Front. It was only at the end of the decade 1980–90 that both the political and the economic reforms were really decided upon and the basic texts were adopted by the National People’s Assembly. Among these texts was the revision of the Constitution in 1989, instituting a multiparty system and deleting the word ‘socialism’ from it, leaving the ‘socialist’ option which prevailed in the country for three decades open to any political party that may wish to take it up. Content and meaning of privatization in Algeria As is apparent from the foregoing, the concept of ‘privatization’ has several different meanings and contents in Algeria. To date, only the state agricultural farms have been the subject of ‘denationalization’ proper, being transferred to private groups. In the rest of the economic life, there has yet been no marked ‘denationalization’. However, other measures have been taken which may be regarded as ‘privatization’ in the broad sense of the term. The organizational restructuring of enterprises and their transformation into small- and medium-sized enterprises come under this heading, as do the measures relating to autonomy of the enterprises, their transformation into joint-stock companies, and the introduction of market-related criteria (solvency repayment capacity, and so on), which in fact amount to ‘privatizating’ management systems (though not yet all or part of the capital). As is apparent from the preceding analysis, mixed companies and recourse to foreign capital in general have not in fact yet had any major impact on the Algerian economic landscape. The recent Money and Credit Act and the Supplementary Finance Act for 1990, which opens up the concession regime, have laid the legislative foundations for the involvement of foreign or domestic private capital. Lastly, in the tourism sector, given the failure of the previous law on mixed companies to attract investment, a special measure has been resorted to in the form of the ‘Management Act’ which allows the management of a tourism facility (for example, a hotel) to be assigned to a foreign company for a ten-year period. This may also constitute one of the components of ‘privatization’ in the broad sense. It should be emphasized that this formula has not been applied to existing tourism facilities, but to new projects. PRIVATIZATION ACTIONS As will be explained in the last section on the difficulties encountered, it is not easy to separate the development of privatization on the level of analysis, on the one hand, from the development of privatization on the level of action, on the other hand. Although the majority of actions with a view to privatization, at least on the legislative and juridical levels, have been listed earlier, an effort will be made in this section to try to explain them in terms of their practical effects.

240

REZKE HOCINE

As was seen earlier, the first period of Algeria’s development was characterized, up until the end of the 1980s, by the development of socialism and the state sector and by control of the domestic and foreign private sector. Thus it was not until the decade 1980–90 that the means of, and a will to, ‘privatization’ emerged, while in practical terms the ‘denationalizations’ proper have taken place only in the agriculture sector, in 1988. In the other sectors, what has taken place is rather ‘privatization’ of the forms of management. The first measure taken was that relating to the organizational restructuring of enterprises. Table 15.5 shows the effects of this restructuring by sector of activity, in terms of a number of enterprises. It is the construction and industry sectors which have given rise to the largest number of new small or medium-sized enterprises. Where autonomy of the enterprises is concerned, a number of decisions have been taken, on paper, aimed at instituting such autonomy: one of them relates to the abolition of the ministries’ administrative oversight of enterprises; another involves the state as shareholder having public-issue shares managed by fiduciary agents known as shareholding funds. Table 15.6 shows how the activities of the enterprises have been provisionally allocated among the shareholding funds, of which there are eight. Each of these funds holds a controlling block of shares in the Table 15.5 Organizational restructuring Activity sector

Number of enterprises

before

after

restructuring Agriculture Industry—mining-energy Light industries Heavy industry Energy and oil Total Information—culture—tourism Information—culture Tourism Total Public works—water resources—housing construction Public works Water resources Housing construction Total Health Trade Post and telecommunications Finance Transport Total

7

23

9 6 2 17

51 45 30 126

6 2 8

24 21 45

4 3 5 12 1 7 1 8 9 70

36 29 36 101 4 28 2 12 34 375


241

enterprises concerned, it being understood that the enterprises’ capital is held by three or four shareholding funds. In practice, three-quarters of the enterprises have been officially notified of their capital and the terms of their transformation, but as at the end of September 1990 only half of all enterprises had in fact been transformed into joint-stock companies. Furthermore, the Money and Credit Act, adopted at the beginning of 1990, finally offers the possibility of the domestic private sector having the same ‘legal’ facilities of access to domestic credit and foreign currency as the public sector. The same Act also allows it to establish links with the foreign private sector, In addition, this Act no longer makes any distinction between the domestic and the foreign private sector, but distinguishes rather the resident and the non-resident private sector. For the non-resident private sector, in other words, that whose main business activity is located abroad, 100 per cent direct investment in Algeria is possible, including in the banking sector. Table 15.6 Distribution of national public enterprises by controlling shareholding fund Shareholding fund

Number

F1—Agriculture and food 41 F2—Mining—water resources—oil 41 F3—Capital equipment 31 F4—Construction 84 F5—Chemistry—petrochemistry—pharmacy 24 F6—Electronics—data processing—telecommunications 18 F7—Miscellaneous industries 22 F8—Services 82 Total 343 Note: Of the 375 national-level public enterprises, 343 are public economic enterprises (EPE), while the remainder, or 32 enterprises, have a different status (public establishments)

Lastly, the Supplementary Finance Act for 1990 opens up the concession regime to both non-resident and local companies (private or public) and allows them, depending on circumstances and on a non-exclusive basis, to sell imported products on the local market for both local and foreign currency. The range of products authorized is extremely broad, and covers both basic products such as pharmaceuticals and less strategic consumer items. Both the Money and Credit Act and the Supplementary Finance Act of 1990 are too recent to make an evaluation of their practical impact possible. PROBLEMS ENCOUNTERED One of the major sources of difficulty with regard to ‘privatization’ lies in the lack of clarity and transparency which has surrounded and still surrounds this issue. There has in fact not been any genuine analysis, at least publicized analysis, still less a sufficiently broad debate on a draft text in Algeria. This applies in particular to the decade 1980–90, which has been described as a transition period towards a market economy. As has been seen, in the previous period ‘privatization’ was confined to defining and supervising the role of the private sector and mixed companies in a socialist economy where the public sector was predominant.

242

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However, the issue of privatization has never yet been raised, at least officially, in the sense of denationalization (except in agriculture). This makes it difficult, as has been seen in the second and third sections of this study, to deal separately with the thinking about privatization, on the one hand, and privatization action, on the other. Very often, if not in the majority of cases, it is practical action which may reveal the underlying, but still not officially acknowledged, thinking on the subject. This first difficulty no doubt itself results from a second type of difficulty, namely, the absence of a political foundation. As has already been noted, there are differing political views on this issue. The reformers appear to want to avoid, at least for the time being, broad public debate on the subject. They prefer to proceed step by step, while disavowing any intent of privatization in the sense of denationalization of a public enterprise. Thus, for example, the Act on public enterprises of January 1988 provides in principle for ‘bankruptcy’, but at the same time prohibits, in numerous articles, sale of the activity which has gone bankrupt to a private enterprise. Another type of difficulty lies in the behaviour patterns inherited from the former management system: thus, despite the legislation on autonomy and the abolition of management oversight, the administration continues to weigh heavily on many aspects of the management of enterprises, and on the choice of the managers. Enterprise managers themselves, despite having called vigorously for autonomy, continue, as a reflex action or through fear of taking initiative, to refer back to their supervisory body decisions which they themselves are fully competent to take. Similarly, resistance is encountered among the workers themselves. For example, on one occasion it was decided to introduce a foreign partner into the management of a major hotel in the capital. The reaction on the part of the workers led to the failure of this project. This is why recourse to foreign capital and foreign partners has taken place essentially in new projects, and even there quite rarely. In the case of Algeria, the transformation of former socialist enterprises into joint-stock companies has been and continues to be an important stage in the reforms leading to privatization of forms of management, and thereafter no doubt of capital. This transformtion has encountered two kinds of difficulties: the first relates to the need to finance the transformation in some cases. Of course, this financing is required only for enterprises with a negative net balance, or about one-third of all national enterprises. Although the financing entails for the most part consolidating long-term debts to the Treasury, the amount involved causes hesitancy among the reformers and slows down the restructuring of enterprises with a view to their transformation into joint-stock companies. Other solutions are still under consideration, but their content and effectiveness are not yet clearly apparent. This results in a hybrid and indeed confused situation in which two-thirds of the enterprises have ‘become autonomous’ whereas others, among the largest of them, have not yet done so. This helps create doubts as to the true will of the reformers themselves to work for the autonomy of the public enterprises. The second type of difficulty lies in the slowness with which the shareholding funds are coming to play their expected role. This slowness stems in part from within the funds themselves (inadequacy of their administrators’ preparation for their new functions) and in part from their environment (inadequacy or absence of support). It should be noted that at this stage Algeria has not yet faced up to the difficulties associated with determining the selling price of a public enterprise, since no operations of this type have yet been conducted. On the other hand, it may be said that it is the shareholding funds which will eventually be able to sell the shares they hold in an enterprise either to another fund or to another enterprise, whether public or private. But this will be possible only when the draft legislation on transferable securities now being drawn up has


243

been adopted, and when it happens, the difficulty associated with determining the value of a share will be encountered. The last type of major difficulty lies in the regulations themselves. The transition to a market economy calls for a transition from administrative and bureaucratic regulation to regulation by incentives (through taxation, prices, wages, credit, and so on). The institution of this new type of regulatory system and the definition of economic policy are something new to the agents involved in economic life. That is why this new type of regulatory system has had difficulty in becoming established, and even when certain instruments are designed, at least on paper, they encounter difficulties in practice; and out of complaisance, the reformers themselves still operate by injunction rather than by using these instruments. CONCLUSIONS Algeria may be considered to have set the stage for the ‘privatization’ of all or some of its public enterprises. The legislation on the autonomy of enterprises (1988) and their ongoing transformation into joint-stock companies, together with the Money and Credit Act (1990) constitute the key elements in this structure. The legislative instruments for privatization exist, for the most part, but the content, scope and modalities of privatization are as yet totally undefined. In order to avoid the difficulties of implementation by the various agents concerned—workers, consumers, the citizenry, political parties —this question of privatization would benefit from being made the subject of broad debate focusing on a number of key questions.: 1 What are the sectors and enterprises which would gain in overall efficiency from the introducton of domestic or foreign private capital? 2 What is the possible impact, and in what areas and what enterprises, of the involvement of domestic private capital—for the domestic private sector is generally characterized by rudimentary management and a lack of professionalism? 3 How can the professional skills, located for the most part in the public sector, be utilized in the privatization operation? 4 Should privatization focus in the first place on public enterprises that are already going concerns (as is generally the case) or rather on potentially viable enterprises? 5 What is the true capacity of the shareholding funds, alone or with the support of private partners (for the most part foreign, in terms of management capacity and technology) to make enterprises which are currently in difficulties viable, so that they can be sold on the best possible terms and the resources used to finance other development opportunities? 6 How can the social impacts of restructuring, which are inevitable in terms of staff cuts, effect on prices, and so on, be reduced? The foregoing is simply a series of questions formulated by way of example as possible ones to be discussed in a broad debate. The political reforms, the institution of a multiparty system and the forthcoming legislative elections provide the institutional framework for discussion of these issues. What is at stake is the success or failure of any future effort at ‘privatization’.

16 Privatization in Egypt Hassan A.W.El-Hayawan and Denis J.Sullivan

INTRODUCTION Privatization is championed as a possible solution to many of Egypt’s economic problems. Some movement toward privatizing Egypt’s public sector has already occurred—for example, joint ventures, one ESOP (employee stock ownership programme), private management contracts in public hotels, and the sale of tourist hotels. Yet it is the May Day 1990 speech of President Hosni Mubarak, calling for privatization and liberalization, that has marked a new direction for economic policy-making in Egypt. While this speech is an important turning point, it does not end the long-standing and continuing debate over whether and how to privatize. THE STATE OF THE STATE AND ITS SOEs Direct state ownership of economic enterprises in Egypt had its roots primarily in the early 1960s, during the era of ‘Arab Socialism’, when the government initiated an extensive nationalization programme. State involvement in the economy expanded into industry, agriculture, banking, tourism, insurance, and much of the wholesale and retail trade. At present the government manages 393 state-owned enterprises (SOEs). Of these, 200 are industrial SOEs. Most SOEs are in the engineering (electronics) and food-processing industrial sectors. The rest are in utilities, petroleum, building and construction, retail and so on. At the local government (governorate) level, there are approximately 2,060 projects that the government owns and manages. It is these projects that President Mubarak has targeted for divestiture. The state also has some percentage of equity ownership in 245 joint venture firms under Law 43 (the cornerstone legislation initiating the open door policy). These operate almost entirely within the industrial Table 16.1 Public companies in Egypt Food processing Textiles Chemicals Metallurgical Mining and chemicals Petroleum Military production Electricity

21 30 26 29 9 15 15 11

PRIVATIZATION IN EGYPT

Banking Foreign trade Cotton Commercial insurance Supply and internal trade Maritime transport Internal transport Housing and infrastructure Construction and building materials Agriculture Irrigation Land reclamation Co-operatives and agric. credit Tourism and civil aviation Pharmaceuticals Printing and publishing Culture and mass communications Communications Other Total Total personnel Source: K.Sherif(1988)

245

8 13 12 4 43 16 17 10 45 7 6 13 18 6 11 2 3 1 2 393 1,075,303

Table 16.2 Public sector deficits as per cent of budgetary deficit 1973

1977

1979

80/81

81/82

82/83

83/84

84/85

85/86

86/87

25.31 37.0 32.6 1.47 16.80 32.89 30.2 31.04 Net rate of return (revalued capital) 5.25 5.88 5.52 4.3 2.18 1.99 1.71 1.69 Sources: Central Agency for Political Mobilization and Statistics; Ministry of Finance

33.16

34.0

1.70

1.6

sector. ‘State investments in these companies add up to approximately E£ (Egyptian Pound) 1,610 million. Of these joint ventures, 174 are profitable and 71 are losers’.1 Mubarak has asked his government to develop plans to divest the state of a majority of these enterprises. The fundamental problem underlying most of Egypt’s SOEs, and hence the calls for privatizing many of these enterprises, is their financial inviability, raising the public deficit and depriving the economy of necessary alternative investments and resources. Over the last two decades Egyptian SOEs have provided the treasury with very limited returns. For example, the net rate of return on revalued public assets for Ministry of Industry supervised SOEs was only 2.1 per cent during the periods 1980/81 through 1987/88 versus an annual inflation rate of 18 per cent during the same period. The weak financial returns from SOEs have had serious negative impacts on the treasury and it is estimated that the financial deficit from these enterprises now accounts for

246

HASSAN A.W.EL-HAYAWAN AND DENIS J.SULLIVAN

roughly 6 per cent of the national fiscal deficit… SOEs have contributed little to GDP growth. Between the years 1965 and 1987 SOEs accounted for less that 2 per cent of the increment in real GDP.2 Despite the insolvency of many SOEs, bankruptcy does not take place because the government covers the outstanding liabilities at the end of the fiscal year. Thus, issues such as return on investment, return on assets, profit margins, debt/equity ratio, and other financial considerations, are irrelevant for SOEs since the government is most often the major source of finance. Without this support, many SOEs would automatically become insolvent. Yet, the government continues to support its enterprises and refuses to let any close down. No Egyptian industrial SOE has been liquidated since nationalization took place in the early 1960s. While the government continually salvages its SOEs from financial collapse, it is said to be alarmed by the decline in rates of returns by SOEs. During the period 1980 through 1986/87 the net rate of return (on book value assets) declined from 11 per cent to only 6 per cent. During the same seven years, the net rate of return on revalued assets declined from approximately 8 per cent to only 2.1 per cent’.3 This failure of economic enterprises is a significant element in the continuing economic crisis situation in which Egypt finds itself. It also gives significant ammunition to those proposing economic reform through privatization. Yet, the public sector continues to hold significant support across government and society in Egypt for the supposed social benefits it provides (for example, guaranteed employment and income). While economic factors dominate the question of whether or not to privatize, privatization is as much a political process as it is one of economic restructuring. This process is open to influence from powerful actors within and outside of the Egyptian government: from Egyptian society (labour groups, Islamic investment corporations, and the indigenous private sector), foreign aid donors, and multinational corporations. With a multitude of voices raised over the issue of privatization, the debate rages over whether, how, and how much to privatize. DEBATING PRIVATIZATION In Egypt, much of the debate regarding privatization is a fundamental one of what the term means precisely. The most straightforward translation and interpretation of the concept is ‘selling of the public sector’ (bic qitaac al-c aam). Since the public sector is not merely an economic enterprise but also a tool for seeking social equity through guaranteed employment and minimum wages, it has significant support in and of itself, regardless of its economic efficiency or its being a significant drain on public resources. Thus, there are many in Egypt who interpret privatization to mean the ‘encouraging of the private sector’ (tashgiic qitaac al-khaas). This interpretation is somewhat less charged as an issue since it merely suggests that the private sector should seek and be given a greater role in promoting development of the economy without necessarily selling off state enterprises (which range from gum and candy production to iron and steel works). This support for private business is consistent with the open-door policy; it is also a plan that has not worked well in the past because private business people (especially those in small-scale enterprises) have been reluctant to take on the responsibility without being given greater assurances of limited governmental influence and bureaucratic controls.


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Other, seemingly strange or facetious, translations of the term privatization have been proposed such as khaskhasah, from the root khaas (private). Takhsiis has also been used, emphasizing the ‘private’ sector and again avoiding the question of what to do, if anything, with the public sector. Tamliik is another accepted concept referring to the bestowing of ownership (again, vaguely defined) and encouragement of private capital. The steering committee for the study and implementation of privatization, which was set up by the government, uses the concept khaskhasah, as do USAID officials. Relevant to the debate over the precise definition is the underlying question of what is to be privatized. Newspapers and magazines have been significant arenas for this debate—perhaps none more than the highly regarded and influential economic weekly, al-ahram al-iqtisadi (AI) under the editorship of Essam Rifaat. For supporters of privatization (until recently there have been very few), there has emerged a moderate version of privatization, calling for the selling of commercial state enterprises (for example, gum, candy and perfume manufacturers) but not the selling-off of the state’s ‘crown jewels’ such as iron and steel plants and such other heavy industries that are crucial for employment generation and are the backbone of the statecapitalist economy. This moderate position seems to be held by President Mubarak as well. In his May Day 1990 speech, he emphasized the need for ‘co-ordinated action’ in achieving economic reform which he considers his ‘primary duty’ and ‘a major national issue…[N]o other issue is as important and momentous’.4 While recognizing the dire need for economic reform, ‘which has been delayed for years and has piled up like mountains’, he nevertheless stresses the limits of reform: Kafr al-Dawwar, al-Mahallah al-Kubra, Stea, al-’Amiriyah, Helwan Iron and Steel, the aluminum company, Kema, the fertilizer companies, and other strategic industries. I will not sell these giant factories. However I will instruct the government to find a method to develop their management so that the production will increase, the revenue will increase, and we will relieve them of the debt burden in one way or another and liberate the management… It is better for us not to run such small concerns as hotels, tourist agencies and the rest of this junk. We do not need this. We need to concentrate on our big and strategic concerns, on our giant factories that are necessary for the country for both social and economic reasons.5 The gradual approach to economic reform in general, and privatization in particular, is a hallmark of Mubarak’s speech. There are of course more extreme interpretations of privatization, including a massive sell-off of state industries, regardless of their economic efficiency or social value. These voices are in the distinct minority. The opposite extreme consists of voices demanding the status quo—no sell-off of public enterprises, no turn to the private sector. These extreme voices feel that social benefits—guaranteed jobs for thousands of workers in state industries, state control over wages, and so on—far outweigh the economic costs of propping up failing industries. While the debate continues, there are efforts at privatization that can be analysed. PRIVATIZATION IN EGYPT: MODALITIES AND PRACTICE The potential forms of privatization in Egypt are much the same as those found elsewhere: public offerings of shares, private sale of shares through negotiations, new private investment in an SOE, or outright sale of SOE assets. These forms of privatization are relevant to the notion of denationalization, or liquidation of a public enterprise in whole, as well as that of ‘load shedding’, referring to reducing the scope of the public

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sector in part. Leasing or ‘contracting out’ represent the substitution of private contractors for in-house production (including management) and not the transfer of public assets to the private sector. Leasing is usually a long-term (for example, twenty to thirty year) lease while a management contract is more short term in nature. Leasing and contracting are useful in avoiding the political problems associated with privatization since ownership remains with the state while management is controlled privately. Employee buy-outs, most notable in the form of an ESOP, are another potential form of privatization and one that is, again, potentially more palatable politically. ‘Liberalization’ is the removal of statutory prohibitions on the private sector competing with the public sector and may be considered another aspect, if not an actual form, of privatization.6 TOURISM Leasing became a politically-feasible and economically-beneficial method of privatization in Egypt in the mid-1980s. Several tourist facilities had their management contracted out to foreign (primarily Scandinavian) companies. This partial privatization in tourism opened the door to a more full version when, beginning in 1986, tourist hotels were sold outright to private investors. These hotels are the Sheraton Hurghada, the San Stefano in Alexandria, and the Cairo Meridien. INDUSTRY Another area which proponents of privatization are heralding as an achievement is the creation of an ESOP in industry. USAID officials took the lead in setting up this ESOP, the first ever in Egypt, in order to hasten the process of privatization and to demonstrate the benefits of such reform as well as the diversity within the concept of privatization. This ESOP entails the creation of a pilot plant—that is, a new creation, not privatizing an already existing plant—known as the Alexandria Tyre Co. (ATC). ATC is a joint venture of TRENCO (Transport and Engineering Company) [of Alexandria], presently the sole public manufacturer of tyres; Pirelli, the Italian tyre manufacturer; and various Egyptian banks and insurance companies. The innovation in ATC is that 30.5 per cent of its shares will belong to the employees, organized in an ESOP.7 One problem, however, with the ATC ESOP is that it was not created by privatizing an existing public sector company—and thus, perhaps, should not be considered an example of successful privatization (which implies transferring ownership or control from a state entity to a private entity or entities). It was a whole new creation and the 2,000 employees who are the would-be owners of this company are not even employed by the company, as of this writing. This model of privatization fits into the Egyptian debate over privatization on the side of those who take a conservative view of the issue, that is, those calling for ‘encouragement’ of the private sector, tashgiic qitaac al-xaas, not ‘selling-off’ of the public sector biic qitaac al-caam. It also is a strange position for US AID officials to be in since they are the ones calling for a more liberal view of privatization, that is, selling-off of the public sector.8 An earlier attempt at privatizing an Egyptian industrial interest through a joint venture ended in failure after a wave of protest from opposition groups as well as from within the very government that had earlier approved the idea. This venture was the effort between General Motors (GM) and the Nasr Automotive Co. (NASCO) to produce passenger cars, 65 to 100 per cent of which would be locally built. NASCO was to


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privatize some of its ownership—30 per cent going to GM and less than 20 per cent to Egyptian investors and banks. NASCO would keep 51 per cent. While this project was approved by the cabinet in 1986, Minister of Industry Muhammad Abdel Wahab, raised objections, and in early 1987 the project was officially cancelled. Opposition press and several public sector managers raised objections and a strong media campaign was launched against the joint venture/ privatization project. Many opposition papers criticized the government and the NASCO/GM deal as beginning the process of selling state assets, endangering the jobs of public employees, and paving ‘the way for many other privatization programs’.9 AGRICULTURE Economic reform has been a primary goal in the field of agriculture. In December 1986-January 1987, measures were enacted to increase the procurement prices of numerous crops and to end cropping quotas of others.10 The latest efforts at privatization in agriculture strike at the heart of the socialist experiment in Egypt. PBDAC, the Principal Bank for Development and Agricultural Credit, is the Government’s sectorial bank for providing subsidized credit, seeds, and fertilizers to farmers and is the central conduit between the fellahin and the state in terms of delivery of quotas and, therefore, of marketing. The Ministry of Agriculture (MOA) has been discussing how to privatize PBDAC, with an effort at decentralizing these services and creating some competition in an effort to improve the efficiency and cut the costs to the farmers. President Mubarak has designated the Ministry of Agriculture as the ‘implementing agency’ for a US AID contract in privatization.11 This AID project is designed to promote substantial privatization activity in Egypt and the appointment of the Minister of Agriculture as head of the steering committee is a strong show of support for him by the President. THE GOVERNMENT’S REFORM PLAN With the principles of economic reform (agriculture), privatization (tourism), and employee participation (industry) firmly established in Egypt, the government has now adopted a basic reform plan to promote further reform throughout the economy. This plan suggests both a reform of the public sector and an encouragement of the private sector. The first element of this plan suggests that more autonomy should be given to SOEs. The government is committed to distinguishing between ownership and management. It will hold not less that 51 per cent of the SOE shares with the remaining shares being offered to the public. This will bring in new members as board of directors. Moreover, more authority and autonomy must be given to the general assemblies and board of directors so that they can work freely. Autonomy will give the boards: (a) freedom in setting their own system and procedures; (b) authority to decide on financing, maintenance, and rehabilitation from the SOE’s own resources; and (c) authority to utilize foreign employees to promote management effectiveness. The government plan also suggests changing the public enterprise law (97 of 1983) to permit the creation of holding companies to handle the following tasks: (a) achieving horizontal and vertical integration;

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(b) taking investment decisions concerning allocation and reallocation of funds among those companies within the same parent company; and (c) separation between the state as the real owner of the SOE and the management to minimize state intervention in SOE affairs. The plan further calls for organizational reform. In addition to the separation of ownership and management and limiting the number of holding companies, the plan calls for 50 per cent of the board of directors to be representatives of employees. A crucial as well as highly-charged issue concerns management freedom to hire and fire and to set wages. The plan seems to support the idea of giving such freedom to management. The proposed solution for financial restructuring is based on increasing equity by the SOE, the private sector, or employee ownership. The debt problem is not dealt with in the plan, but it is an important element of any reform process. SOEs are in debt: to the government, with one another, and to domestic and international banks. The government does recognize the need for a unified accounting system as well as for a reduction in the number of regulatory restrictions on business practices. The schedule for implementing this plan is as follows: Phase I Beginning in July 1990, local governments (governorates) should begin to sell off the 2,060 projects they own and control. Projects with a book value of up to E£. 50,000 can be sold. Most of these projects are small-scale enterprises such as beehives, microbus services, small animal projects, and the like. Initial reports indicate that, in this phase, 385 projects have been sold for about E£. 10 million, while their book value was E£. 4 million. Phase II In January 1991, projects with investment up to E£. 100,000 will be sold. Phase III After July 1991, projects with investment over E£. 100,000 will be sold. EXTERNAL SUPPORT FOR PRIVATIZATION External encouragement and funding—USAID, World Bank and the International Finance Corporation, Arab Gulf governments and investors—is not the main impetus to reform and privatization in Egypt or elsewhere, though it does help those intent on reform to pursue their goals. The main impetus is usually the recognition of the failure, in economic terms, of state efforts to achieve growth, development, and maybe even redistribution. Dismantling the failed state policies, if not much of the structure, of the past and present for a more successful future is the sincere desire of many bureaucrats. These officials often find themselves stopped by an equally sincere belief on the part of those opposed to reform that the system needs to be altered but not scrapped entirely. Such difference of opinions plagues most national bureaucracies, however, so Egypt is far from unique in this respect.


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PROSPECTS FOR AND OBSTACLES TO PRIVATIZATION It appears certain that the government is committed to liberalization, including privatization. President Mubarak has spoken about this issue over the past few years with tentativeness, but since his May speech and subsequent policy statements it appears that he is wavering no longer. Indeed, several of his ministers have been heard in public and in the media stating that ‘the government is committed to privatization’. Still, there are numerous obstacles to overcome in this political and economic process. The ruling National Democratic Party (NDP) outlines several of these: 1 The likelihood of heated public debate in society. This would not be a constructive debate, the NDP says, and therefore it should be avoided. 2 Legislative reform. They recognize the need for it but question the timing. They conclude that it is best to postpone, if possible, legislative changes in public and private sector activity. 3 Financial burden on lower income groups. The inevitability of this burden is enough to put caution in those considering reform and is enough to embolden those who are against reform. 4 Twenty-five years of talk about reform with no actual accomplishments. The NDP wonders if anyone will believe the government this time. The NDP wants to ensure reform’s success by taking three to five years to accomplish it.12 The ‘problem’ of privatization in Egypt is that reform is a complex, interconnected set of policies. It is not a straightforward or even singular policy. Reforming one economic, political, social, or policy element touches on at least one other, and probably several others at once. Thus, even in the best of circumstances (which never exist), even with the most committed political leadership and compliant public, privatization as one element of the reform process will affect multiple elements simultaneously. There is no one issue more important than any other; there are several groups of issues; some are more important or complex than others. We attempt to organize the various obstacles to privatization into distinct (but not mutually exclusive) categories. These include: (1) interest groups; (2) finance; and (3) legal framework. Under interest groups, there are various actors that can act as obstacles to the reform process in general and to privatization in particular. In Egypt, the power of the labour federations is often the first element mentioned in response to questions of what the impediments to privatization are. Another powerful group which might resist privatization is the public sector managers. Moreover, ‘bureaucrats’— that amorphous group of nameless cogs in the governmental machinery—can act as resistors. Financially, privatization will be difficult to implement in Egypt due to the complexity and uncertainty of the financial situation of most SOEs. Pricing policies of the government, including the subsidy systems (on inputs, outputs, food, electricity, petroleum, housing, telephones, and so on), is itself a complex social, political, and economic issue. Yet, it must be dealt with in the context of reform if privatization is to be meaningful. Valuation of assets and liabilities is a must if the government is intending to sell an SOE. What is the company worth, what are its debts and to whom are they owed-government? other SOEs? international banks? Once the problem of identifying the financial situation of a given SOE or group of SOEs is settled, the next financial concern is: who will buy them? A capital market exists in Egypt but it is insufficient for the expected needs of financing billions of Egyptian pounds (E£) worth of SOEs on sale. The legislative and regulatory framework in Egypt is also confused. Legislatively, there are a number of old and new laws attempting to encourage investment, but many of these are contradictory or restrictive. In regulatory terms, there are uncountable regulations prohibiting entrepreneurial activity and other investments. The World Bank is presently studying ways to cut these regulations to promote investment as well as normal business activity (in public and private sectors).

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Moreover, privatization is viewed as unconstitutional by some supporters as well as detractors of this process. The Egyptian Federation of Trade Unions argue that privatization runs counter to articles 24, 26 and 30 of the constitution. These articles call for the ‘people’ to own the means of production and for the public sector to have the leading role in development. Reformists, such as Khaled Sherif,13 agree that privatization is probably unconstitutional. Their solution: amend the constitution and give that much more governmental and societal support to privatization. THE CHALLENGE TO REFORM Many people, inside and outside the Egyptian government, say that the answers to Egypt’s problems are to be found in the private sector along with a reform of Egypt’s bloated public sector. While there may be a good deal of truth in these suggestions, the state will continue to be an important actor in Egyptian economic decision-making, as the state is in virtually every society. Turning to the private sector as a panacea would be to ignore the equally important task of improving the capabilities of the public sector. Sherif has outlined the issue quite succinctly and accurately; The core of the problem is that effective privatization takes both a strong state and a strong and vibrant private sector. Egypt has neither and is not likely to have either anytime soon. It is not a question of state role vs. no state role in the economy, but rather what kind of state role—one that can effectively foster private enterprise or one that blocks it. This question has yet to be answered by Egypt.14 Egyptian politics is characterized by dissensus. Various voices dominate the policy debate within individual ministries and across the bureaucracy as a whole. As some ministers suggest major economic restructuring, other ministers caution Mubarak against such drastic moves. This group is committed to the retention of Egypt’s ‘socialist’ structure. This latter group, while opposing a dismantling of the socialist structure, nevertheless recognizes that Egypt’s economy is in a shambles. They thus acknowledge the need for some policy reform, but propose instead a ‘gradual’ approach to such reform. The rivalries and struggles for power between numerous ministries keeps the entire government from co-operating to improve the functioning of a bureaucratic structure which has an inordinate say in the running of Egypt’s economic system.15 The divisions within the government over these most significant policy issues are perhaps the most important reason for the lack of resolution to this debate. This problem is complicated by the power of the People’s Assembly, public management, and unions to disrupt and even prevent efforts at privatization. For reformists, such power is viewed as an obstacle; for gradualists, this power is an important asset in their struggle. The successes of Nasser aside, Egypt is suffering today from trade and budget deficits, inflation, foreign debt, unemployment, dependence on foreign aid, failing state industries, under-utilized potential in agriculture as well as in industry, crises in health care, education, housing and transportation, among other problems (see Tables 16.3 and 16.4). The need is immediate for some solution to all these problems, or at least to as many of them that can be addressed as possible. The inconclusive debate over ‘socialism or capitalism’ (or other), the continuing support for economically-irrational but socially-popular policies (massive subsidies; penalizing agriculture to appease urban interests; free education; guaranteed employment), the bureaucratic and political resistance to reform, indeed the minuscule steps taken towards privatization, all suggest that Egyptian socialism is not being dismantled.


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What appears to be occurring instead is that, much as Sadat failed to ‘undo’ socialism with his attempt at a capitalistic opening, so too do we find current leaders adding another layer of policy on top of infitah, (open door policy) which was added to the base of the current system—Nasserist socialism. Instead of one policy alternative displacing the previous one, the legislative, bureaucratic, and political layers have been piled on top of, and interspersed with, one another, creating legal and bureaucratic confusion, continued uncertainty and indecisiveness. Now, Mubarak and his government have inherited the Table 16.3 Performance evaluation of 356 SOEs in 1989 Type of industry

Surplus No. of Cos E£ million Deficit No. of Cos E£ million Net surplus (deficit) (E£ million)

Agriculture and land reclamation Transport Supply and domestic trade Cotton Housing and construction Medicine Tourism Culture Communications Spinning and weaving Food Chemical Engineering Metal Mining Oil Electricity Military Total Source: Al-ahram

9

50.8

26

130.6

(79.8)

17 27

67.5 153.5

21 16

77.5 75.6

(10.0) 77.9

3 12 4 3 2 – 13 13 18 5 4 2 10 2 5 149

5.9 15.4 12.6 6.1 4.8 – 124.0 292.2 71.1 66.2 244.1 3.1 138.0 5.5 16.8 1,277.6

9 36 7 5 1 1 18 6 9 14 5 7 2 10 13 206

13.0 407.1 37.3 1.1 1.1 1.8 127.8 68.2 146.3 82.1 126.1 35.7 33.3 79.9 78.9 1,514.4

(7.1) (391.7) (24.7) 5.0 3.7 (1.8) (3.8) 224.0 (75.2) (15.9) (118.0) (32.6) 104.7 (65.4) (62.1) (236.8)

failure of infitah as well as the failures of Nasser’s socialism and are thus dealing with the worst of both worlds (capitalist and socialist). The challenge for Mubarak is to make a decisive break with these failed systems of the past and present and to propose a clear alternative system of economic decision-making and management. Such an alternative need not be based on massive privatization or total capitalist control of the economy. Indeed, many western and eastern European nations have been pursuing such an alternative since the end of the First World War. That alternative for Egypt in the 1990s and into the twenty-first century may very well be the social-democratic experiment and the welfare state. As labour, socialist, and communist parties in Britain, France, West Germany, Poland, Hungary and elsewhere have reconciled their desires for socialist economies with the realities of a capitalist world system, so too might Egypt.

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Table 16.4 Economic indicators (US $ millions) 1982

1983

1984

1985

1986

GDP* 26,400 27,920 30,060 30,550 30,850 Trade balance −3,715 −3,823 −8,400 −8,200 −8,100 Budget balance −5,078 −3,376 −3,755 −4,830 −5,060 Sources: World Development Report; USAID; IMF; OECD Note:*Figures on gross domestic product vary from one source to another: USAID reports GDP at 20,400 (1984), 21, 300 (1985), and 22,100 (1986); US Dept. of Commerce reports that estimates of GDP ‘are especially unreliable. It is possible that actual activity is 25–30 per cent higher than reported’ Other selected economic indicators Estimated inflation, 1984–8 External debt, 1990 Debt service ratio GNP GNPPC US aid as % of GNP Source: USAID

20% (urban) US $50 billion 21.3% (1986) US $39.5 billion (1987) US $760 (1986) 6.43% (1987)

25% rural 34.1% (1978) £390 (1978)

Indeed, President Mubarak’s May Day speech seems to have suggested just such an alternative for Egypt: It is nonsense to talk about the inevitability of choosing between the socialist doctrine with its categorical economic and political concept and the capitalist doctrine with its known theories and applications. It is now certain that new concepts without this rigid division between these two doctrines will emerge.16 Despite such a moderate viewpoint, the continuing dominance of the public sector will remain unchanged and the policies promoted by the government will likely only be ‘tinkered’ with, not fundamentally altered. Whether capitalist or socialist, the most important concern is that the system is clearly in a state of crisis and is in need of reform. Privatization, in various forms, is being touted by numerous actors within and outside Egypt as one element in the reform process. Indeed, with limited oversight by the state, privatization and other reforms can help resolve some of the problems facing Egypt for the immediate benefit of the state (and its budget, debt, and other problems) and the private sector, as well as the more medium-term benefit of consumers, labour, students, patients, farmers—in other words, much of Egyptian society. Nasser continually asserted that he would not sacrifice one generation of Egyptians for the next. Now it is time to save the current generation as well as their successors by reforming a system that has for too long been in crisis. NOTES 1 Khaled F.Sherif (1990) ‘Egypt’s cross sectorial privatization programs: the government is thinking big!’ Business Monthly (Magazine of American Chamber of Commerce in Egypt), 9.


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2 Khaled Sherif and Regina Soos, (forthcoming) ‘Egypt’s liberalization experience and its impact on state-owned enterprise industrial performance’, in I.Hank and D.J.Sullivan (eds) The Politics of Privatization in the Middle East, Bloomington, Indiana University Press. 3 Ibid. 4 ‘President Mubarak Gives May Day Speech’, Foreign Broadcast Information Service, 3 May 1990:7. 5 Ibid: 11–12. 6 K.Sherif (1988) The Politics of Liquidation, Master’s thesis, American University in Cairo, 28. 7 Ibid., 99. 8 For an overview of where US AID stands on privatization, see Privatization (concept paper), June 1987, USAIDCairo, Office of Finance and Investment. 9 Sherif (1988) op. cit., 117. See al-Ahaly, 4, 6, 8, 9 May 1986 and Al-Sha’ab 10, 12, 13 May 1986. 10 Some of the specific reforms accomplished include: increasing procurement prices for rice, sesame, soybeans, wheat, lentils and sugar-cane by 25 per cent, but not freed up completely; removing delivery quotas for all crops except for cotton, sugar-cane and 50 per cent of rice: terminating cropping quotas for corn, broad beans, and wheat—but not for cotton, sugar-cane or rice; and increasing cotton procurement prices 20 per cent, still leaving local cotton prices at half the world market prices. Procurement prices are at least 25 per cent lower than the open market price in the immediate post-harvest period (Simon Commander, The State and Agricultural Development in Egypt Since 1973 London, the Overseas Development Institute, 1987, 182). 11 Project funding has yet to be determined, but several AID officials suggest that it may reach and exceed $100 million. 12 National Democratic Party of Egypt (1989) waraqahc amalhawl tatwiir al-qitaac al-caam (Working paper on the development of the public sector), 11 November, 5. 13 K.F.Sherif (1990) ‘Does Privatization violate Egypt’s constitution?’ Middle East Times viii (43), 11. 14 Sherif (1988), op.cit., 143. 15 It is inordinate in that many of these structures are inefficient and thus undeserving of the power they hold over the economic concerns they control, whether they be agricultural, industrial, energy, health or social concers. 16 Mubarak, op. cit., 5.

REFERENCES Atherton, Cliff and Windsor Duane, (1987) ‘Privatization of Urban Public Services’, in Calvin A.Kent (ed.) Entrepreneurship and the Privatizing of Government, New York, Quorum Books. Aylen, Jonathan (1987) ‘Privatization in Developing Countries’, Lloyds Bank Review 163, 15–30. Burink, Franke (1987) ‘Privatization in Europe’, in Calvin A.Kent (ed.) Entrepreneurship and the Privatizing of Government, New York, Quorum Books. Harik, Iliya and Sullivan Denis J. (eds) The Politics of Privatization in the Middle East, Bloomington,Indiana University Press, forthcoming. Kent, Calvin A. (ed.) (1987) Entrepreneurship and the Privatizing of Government, New York, Quorum Books. Lovik, Lawrence W. (1987) ‘Bureaucracy, Privatization, and the Supply of Public Goods’, in Calvin A.Kent (ed.) Entrepreneurship and the Privatizing of Government, New York, Quorum Books. Maglis al-Shac-b (People’s Assembly of Egypt), Parliamentary proceedings and debates over privatization [various dates]. El-Mahgoub, Rifaat and Rachid, A.R.H., (1989) ‘Privatization and development; the Egyptian perspective’, Review (Indiana University, School of Public and Environmental Affairs) 10 (2), 35–8. Naggar, Said (ed.) (1987) Adjustment Policies and Development Strategies in the Arab World, Washington, IMF. Naggar, Said (ed.) (1989) Privatization and Structural Adjustment in the Arab Countries, Washington, IMF. Natiónal Democratic Party of Egypt (1989) waraqahc amal hawl tatwiir al-qitaac- al-caam (Working paper on the development of the public sector) 11 November.

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Ramanadham, V.V. (ed.) (1989) Privatization in Developing Countries, London, Routledge. Sherif, Khaled F. (1988) The Politics of Liquidation, Master’s thesis, American University in Cairo. Vernon, Raymond (ed.) (1988) The Promise of Privatization: A Challenge for American Foreign Policy, New York, Council on Foreign Relations. Wilson, Ernest J. (1986) ‘The public-private debate’ Africa Report July-August 93–5.

17 Privatization in Nigeria V.V.Ramanadham

Nigeria’s large public enterprise sector has been under a series of reform measures over the last quarter of a century. However, it is widely alleged that it is ‘without exception…infested with problems such as confused and conflicting missions, political interference in operating decisions, misuse of monopoly powers, defective capital structures, bureaucratic redtapism in their relations with supervising ministries, mismanagement, corruption and nepotism’1 And public enterprises, on the whole, have been a source of financial difficulty for the public exchequer. THE OBJECTIVES The structural adjustment programme which Nigeria has worked out with the World Bank and the International Monetary Fund has, among its basic objectives, the lessening of unproductive investments in the public sector, the improving of its efficiency, and the intensification of the growth potential of the private sector. And the major strategies to be adopted in realizing the objectives include the pursuit of appropriate pricing policies, especially for petroleum and public enterprise outputs, and encouragement to rationalization and privatization of public enterprises. Among the actions that translate the strategy into practice, an important place has been given to overcoming public sector inefficiencies through improved public expenditure control and speedy privatization and commercialization of public enterprises. Besides, attention is bestowed on relieving the national debt burden and on attracting a net inflow of foreign capital through measures that include debt conversion.2 The objectives of privatization were specified as follows in an official document in 1988.3 (i) to restructure and rationalize the public sector in order to lessen the dominance of unproductive investments in that sector; (ii) to re-orientate the enterprises for privatization and commercialization towards a new horizon of performance improvement, viability and overall efficiency; (iii) to ensure positive returns on public sector investments in commercialized enterprises; (iv) to check the present absolute dependence on the Treasury for funding by otherwise commercially oriented parastatals and so, encourage their approach to the Nigerian Capital market; (v) to initiate the process of gradual cession to the private sector of such public enterprises which by their nature and type of operations are best performed by the private sector. At the outset one has to note that Nigeria uses two distinctive terms, privatization and commercialization. The former refers to divestiture and can be ‘full’ or ‘partial’. Commercialisation involves no divestiture. It can be partial when the enterprises concerned are expected ‘to generate enough revenue to cover their

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PRIVATIZATION IN NIGERIA

operating expenditures’, capital grants being offered by the government to finance their ‘capital intensive projects’. Or, there can be full commercialization, when the enterprises concerned are expected to operate profitably on a commercial basis and be able to raise funds from the capital market without government guarantee. They should adopt ‘private sector procedures in running their businesses’ and, subject to the general regulatory powers of the Federal Government, fix prices and ‘capitalize assets’. While it is a matter for appreciation that both divestiture and non-divestiture measures of privatization are considered as appropriate options, there is room for three comments. First, full privatization or partial privatization in the sense of divestiture does not necessarily guarantee the good results of efficiency improvement in operations, nor does it necessarily bring about competition in the sector concerned. While the measure of privatization might be well intended, the results might not be the intended ones. Hence it would be necessary for the government to ensure, as far as possible, that the privatized enterprise operates in a situation of competitive markets. Second, the criteria of commercialization, as defined in the official documents, have a financial slant, without underscoring the more essential objective of efficiency improvement. In an extreme case, a commercialized enterprise can improve its financial record through price autonomy and the adoption of private-sector behaviour biased towards choosing the good markets. This would be the easier, the more monopolistic the enterprise tends to be. No emphasis is stipulated on efficiency and cost economies in such a way that the consumer derives the benefit of low prices and good service while the enterprise and the government benefit from good profits. Third, the rationale of identifying an enterprise for full or partial commercialization, as against divestiture, is linked with the element of perceived ‘publicness’ associated with it. Unless this is identified and quantified in reasonably satisfactory terms, a mere decision to commercialize an enterprise fully or partially might be in the nature of a vague notion. What is important is to translate the ‘extra-enterprise objectives’ associated with a given enterprise into operational guidelines useful to managers and available, transparently, to public understanding.4 A look at the lists under the different categories of divestiture and commercialization, provided in official documents, shows that the larger and more important enterprises come under commercialization, either partial or full; for instance, Nigerian Railway Corporation, Nigerian Airport Corporation, Nigerian Electric Power Authority, many River Basin Authorities, Nigerian National Petroleum Corporation, Nigerian Telecommunicastions Ltd, Nigerian Ports Authority and Nigerian Coal Corporation. (A full list is contained in Appendix 1). It should not be for the Technical Committee on Privatization and Commercialization (TCPC) to delineate the nature of and limits to commercialization in individual cases as it goes along. The government ought to come out with clear statements relevant to individual enterprises (see the third section below for further comments). True, the government has begun to set the stage for the commercial working of public enterprises. For instance, the role of the supervising ministry is sought to be defined; the directors’ and managers’ roles and powers are being streamlined; and the procedures and criteria for the appointment of directors are being improved. These are but a small part of the total need for reform. The fundamental requirement is to define the non-commercial elements, if any, desired to be preserved in the operations of individual public enterprises. The memorandum-of-understanding or performance-contract technique is helpful in this respect. Emphasis has been placed on employing this technique. The performance contract which governs ‘the financial relationship’ between the government and a public enterprise post commercialization, is conceived as a ‘justiceable agreement’ supported by a corporate plan. It will contain inter alia, specific, long-term objectives of the enterprise, agreed performance criteria, and penalties for under performance and rewards for over-performance.5 It will be helpful if the performance contract concentrates on an agreed and transparent definition of the elements of ‘publicness’ of an enterprise and translates it into the detailed

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numbers which make up the contract. It is useful to note that the way it has been employed in several other countries—for example, India, Pakistan and West Africa—does not fully meet this basic requirement.6 IMPLEMENTATION The arrangements for the implementation of privatization policies in Nigeria have some distinctive features. In the first place, there has been full political commitment to policies of privatization and commercialization ‘as an integral element of the structural adjustment programme’, in the words of the President of Nigeria.7 The prevalent political system (namely, military rule) must have made this relatively easy. Second, a specific law was passed in July 1988, entitled ‘Privatization and Commercialization Decree No. 25’. It helped give the policies a clear status from the standpoint of implementation and dealt with various pertinent issues, including the establishment, functions and powers of the TCPC, the categorization of public enterprises into four groups—(i) full privatization; (ii) partial privatization; (iii) partial commercialization, and (iv) full commercialization—and the definitive indication of certain broad techniques of privatization. For example, all shares of enterprises to be issued shall be offered for sale in the Nigerian capital market; all share offers shall be by public issue except under the government’s decision to the contrary in specific cases; not more than 10 per cent of the shares on offer shall be reserved for the staff of the enterprise; and in the case of over-subscription no individual shall be allowed to hold more than 1 per cent equity in any one enterprise. There are grounds on which one can criticize these provisions; but the point is that they are clear and render the operations of the TCPC transparent and fully law-mandated. Third, the top agency entrusted with implementation is rightly required to take charge of both divestiture (termed ‘privatization’ in Nigeria) and non-divestiture options (termed ‘commercialization’ here) in redefining the public-private roles in the national economy. This arrangement has the advantage of a common agency taking a comprehensive look at the available options, without being limited— as in some other countries—to divestiture actions only. This theoretical merit is, however, weakened by the fact that, instead of being empowered to advise the government on the application of divesture and non-divestiture options to individual cases, the TCPC is provided with a ‘neat’ list, by law, of enterprises to be dealt with under each option. The TCPC does not have to do elaborate homework on choosing appropriate options; hence it can operate strictly as an implementing agency. But the technical process of determining what option suits a given enterprise has been short-circuited, on the whole. It would have been a good arrangement to expect the TCPC to give technical advice to the government in this matter, on which, along with advice from the sectorial ministry concerned and the finance ministry, the government could take the final decision. As things stand, there seems to be no way in which the full or partial privatizations contemplated, as per the respective lists (i) to (iv), can be deviated from during the tenure of the TCPC (ending in 1992). But refinements in the application of options can—and ought to—be attempted from now on. These can be operative after 1992 (except for the ‘full-privatization’ cases, which will have been a matter of history by then). Fourth, the work of the TCPC has been facilitated by the appointment of many subcommittees, each entrusted with diagnostic work on certain major enterprises taken up for commercialization, or with some special task—for example, cross-debts reconciliation, and privatization preparation. Fourteen subcommittees have been at work so far. Each of them is chaired by a member of the TCPC. This makes for convenience in information flow in either direction. The subcommittees are given clear terms of reference covering all salient factors relevant to the privatization of the enterprises concerned. Appendix 2 illustrates

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this point, with reference to the Privatization Preparation Subcommittee for the Nigeria Paper Mills and Nigerian National Shipping Lines. Further, technical advisory groups consisting of competent financial institutions are appointed to lead teams of experts in diagnostic studies; and financial advisers, drawn generally from merchant banks and accountancy firms, are appointed to prepare briefs on capital restructuring of selected enterprises. It is claimed by the TCPC that all the professional advisers drafted into the exercise are Nigerians. (Incidentally, Nigeria is one of the few countries in Africa where indigenous technical expertise is available in several areas of management and accountancy). Fifth, the TCPC’s actions have been completely transparent. Private placements have been few, on the whole. Thus a fertile area for suspicious pricing is nearly absent. Even the sale of the non-water assets of River Basin Development Authorities has been effected through competitive bids. The prices of share offers are in accordance with determinations by the Securities and Exchange Commission as per Decree No. 29 of 1988; and the TCPC has to obtain ‘prior approval’ of the prices from the government, as per Section 4 (4) of Decree 25 of 1988. Some allegations of ‘fraudulent underpricing’ have been raised against privatizations at the state government level—for example, in Cross River State—but not against the TCPC.8 At this point it would be relevant to note that a strict code of conduct has been worked out for the members of the privatization subcommittees, so as to provide against conflicts of interest and unfair gains through inside information. Appendix 3 presents the code. By the end of 1990 nearly half of the 110 enterprises selected for privatization were privatized; and some forty-four projects covering non-water assets of River Basin Development Authorities were sold, with a hundred more projects awaiting government approval for sale. It is estimated that over 400,000 shareholders have participated in the divestiture transactions. Almost all share offers were over-subscribed, by as much as seven times in some cases. Applicants dominated in the range of 200 to 1,000 shares. In order to popularize and broaden share ownership, the minimum to be applied for was reduced from 200 to 100 and multiples of fifty thereafter; and to prevent large acquisitions the TCPC has taken the additional precaution of arranging with the capital market authorities to restrict nominal share transfers within a five-year period. Divestiture through public flotation has been the major channel adopted by the TCPC in transferring public enterprise ownership to private hands. There have been a few cases of private placements where the government’s ownership is too small or the track record of performance is unsuitable for listing the enterprises in the Nigerian Stock Exchange. Clear guidelines are formulated to facilitate the transactions and make them transparent. For instance, an issuing house handles the offer of shares, assisted by a solicitor and a reporting accountant, and is expected to find 500 to 1,000 share-holders, spread over different regions and income groups. No single shareholder other than the ‘core group’ can hold more than 1 per cent of the shares offered. The ‘core group’ refers to persons with demonstrated ability in the sector concerned or to the employees of the enterprise forming themselves into a co-operative. This group may be offered 25 to 40 per cent of the shares. Yet another method followed by the TPCC consists of the stripping of the assets of an enterprise with a view to repaying its debts and selling the restructured entity as a going concern. Some nine companies—ranging over root crops, fish, cargo handling, boat-yard, water transport, grains production and livestock—have been brought under this method. Assets of the River Basin Development Authorities, which turned out to be ‘extraneous’ in purpose consequent on a redefinition of their role in water resources development, have also been sold away. These ranged over rice mills, fish ponds, poultry, piggeries, feed mills, and so on. The measure, incidentally, represents the restructuring of enterprise objectives with a view to achieving efficiency gains. In disposing of the assets tenders are called for. The ‘reserved price’ is fixed on the basis of reports by estate valuers, which are again scrutinized by two top-class firms of estate valuers

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in order to ensure fairness and readability. Further, some members of the subcommittee concerned with the sale have a final say in the matter. A CRITICAL REVIEW Nigeria is among the countries where privatization through divestiture has been proceeding successfully. The divested shares relate to fairly profitable companies—insurance companies, in particular—and to small enterprises. In fact as many as thirty-seven out of the forty-nine companies chosen for full divestiture are joint enterprises to start with; the government had minority ownership in eighteen of them. Turning to the twenty-five enterprises meant for partial divestiture, the government intends to reduce its interest to minority ownership in all but probably four cases (of banks). The question arises: how will the government behave in exercising its ownership role? Does it exert control disproportionately with its ownership interest? If it does, the benefits of partial privatization will be correspondingly conditioned, in the sense that the enterprises concerned might not be able to operate significantly under market disciplines. A similar question seems already to be agitating the public mind in respect of the privatized insurance companies, to which the ‘golden share’ applies. Strictly, this is intended as a ‘monitoring mechanism … without the control or meddlesomeness in the operations’9 of the companies which belong to a strategic sector from the standpoint of capital formation and resource mobilization. It is considered to be necessary as long as there exists foreign domination over the insurance companies. The golden share, which does not receive any dividend, will be held for five years in the first instance and may be extended for another five if the public interest so warrants. The golden shareholder will have the right to be consulted on changes in the segment of foreign equity holding and in the memorandum and articles of association of the company. There is an important question of principle here. The golden share is held by the TCPC and not the ministry which is responsible for governmental interface with the insurance industry. There is no way in which the TCPC can make judgemental determinations which the government alone can or must do in respect of the public interest relevant to the insurance sector. Problems can arise in the system of communication between the ministry concerned and the TCPC. In any case regulatory bodies dealing with the insurance industry are unlikely to be under direct formal relationship of dialogue with the TCPC. No doubt provision can be made for it; but that is likely to turn out to be an inefficient system. Further, it cannot wholly take the place of—or replace—the government’s own relationship channels with the insurance industry or its regulatory agencies. The argument can apply to other sectors as well. It would, therefore, be desirable for the government to examine the fundamental nature of the problem raised here and decide, before it is too late, that the golden share would be held by the ministry concerned. This brings us to the more general point that the functions shouldered by the TCPC are far too wide. The actual letter of the law— Section 4 (1) of Decree 25 of 1988—does not at once prompt this conclusion (Appendix 4 shows the TCPC’s functions as per that section). In practice, however, its involvement seems to have extended to a questionably wider range of matters. Let us illustrate this with reference to the budgetary allocations requested by public enterprises. The 1990 Budget required public enterprises to justify their allocation requests ‘with the TCPC before releases were made’ by the government. In order to cope with this function the TCPC has set up a new department in its Directorate of Finance and Investment. This department is charged with the following responsibilities:10

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(a) Determination of the form and content of information to be generated by the enterprises to facilitate rational evaluation of performance. (b) Negotiating with the Planning and Budget Office in the Presidency and the supervising Ministry on a case-by-case basis the extent of subsidy needed or the deployment of surplus earned by the commercialized enterprise. (c) Monitoring the expenditure of resources made available to Implementation Committees for the rehabilitation of the physical facilities of affected enterprises. (d) Economic evaluation of requests from affected enterprises for releases against budgetary allocations. (e) Ensuring that public enterprises are managed in accordance with sound commercial principles and prudent financial practices through provision of guidance for budgeting, accounting and administrative procedures. (f) Receiving and analysing periodic and annual reports and preparing inter-industry comparisons. (g) Co-ordinating inter-organizational policies and activities to prevent conflicts. (h) Arbitration between organizations to ensure optimum use of resources and particularly to reduce or remove duplication of efforts. Almost every one of the foregoing responsibilities is onerous and calls for not only extensive specialist skills in the context of many sectors of activity but a capacity to make judgements on the public interest implicit in a request by an enterprise for funds by way of either subsidy or capital expenditure. ‘Monitoring the use of resources’ and ‘economic evaluation’ are not easy items of work, either. Ensuring ‘optimum use of resources’ can be yet another Pandora’s box, for the concept of the ‘optimum’ transcends financial criteria and subsumes social criteria associated with the performance of individual enterprises; strictly it can even call for some minimal analysis of the use of resources in a given enterprise as part of a package of resource investments in related fields of public or all enterprises.11 Each one of these functions is important in itself; and someone has to undertake it. It is doubtful if the TCPC is the right agency in respect of many of them; to be loaded with all of them is certainly an ambitious approach that might produce weak results, and give rise to endless explanations and alibis. Already problems have arisen. The Ministry of Budget and Planning did not liaise with the TCPC; and funds were released, though the TCPC repeatedly drew its attention to the budgetary requirement. One should go to the fundamentals of the problem. It is not a procedural problem, namely, that there is a budgetary requirement which must not be overlooked. It is, on the contrary, a substantive one, namely, that the whole issue of governmental allocations of funds to a public enterprise—the size, the purpose, the rules regarding the spending, and the quantification of the returns (or outputs) expected— is inextricably linked with the ‘publicness’ of the enterprise concerned. What is warranted is a value judgement properly quantified to the satisfaction of the sectorial ministry, the Finance Ministry and the enterprise, and not a simple rule of logistics or matter of procedure. It would be in the interest of the TCPC not to get bogged down in such areas of work as are not just difficult but ‘extraneous’ to its main tasks. It has enough work as a privatizing/ commercializing apex agency. It ought not to—or be required to—make excursions into other areas, in a probably amateurish manner, triggering clashes with other wings of the government. Another example of peripheral areas of activity in which the TCPC has involved itself is the identification of ‘spin-off’ industries which could be developed around the locations of major enterprise in the steel, petrochemicals, motor, energy, and so on, sectors, which are being divested or commercialized. This kind of work is best under-taken under the auspices of the sectorial ministries concerned, or of an industrial planning agency, if one exists. It would amount to a dissipation of the TCPC’s energies far outside its main remit. No doubt expertise can be bought; but there would be no systemic advantage in the TCPC treating

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itself as the major actor in the promotion of auxiliary industries and industrial linkages. Many problems, not only of technical detail, but of policy significance, arise in this area. Locational concentration, interindustry relationships and integrations, and availability of investment resources are some of the serious issues one encounters. ‘Monitoring the smooth transition’ of a public enterprise to the private sector is another apparently reasonable concern of the TCPC. On full analysis, it is doubtful if the TCPC would be the right agency for such a task. Though apparently related to privatization, this is in fact linked with several segments of governmental interface with the private sector. There is, in the first place, the need for technical, sector-specific regulations, which an agency with technical expertise in the sector concerned should devise and apply. There are the organizational relationships between promoters, shareholders and managers, which corporate laws would take care of. Then we have economic issues such as monopoly and concentration of economic power, which specific bodies set up for the purpose have to deal with. Finally, matters of the public interest, which go beyond the above-mentioned items, have to come under the attention of appropriate government departments or public commissions. These include foreign control of ownership, technology development, and full accounting for foreign exchange flows. None of these concerns can be claimed as proper remit for the TCPC. The earlier this is realized, the better for the evolution of right public regulation of economic activities, consequent on privatization. Questions of distributional equity have not emerged as a tough problem yet, partly because divestitures have been small-sized so far and strict limits are imposed on individual ownership of equity under the privatization Decree. The regional dimension of the problem has been in evidence, however. From the available statistics on the privatization of insurance companies, Lagos clearly emerges as the predominant region to which the share applicants and allottees belong, accounting for about 37 per cent of the shares sold in respect of eleven companies covered in the TCPC’s Fourth Progress Report (May 1990). States like Ogun, Bendel, Kano and Imo accounted respectively for 10,7,7 and 6 per cent; and at the other end come states like Sokoto and Plateau with 0.2 per cent and 0.3 per cent. There were certain issues in which the allotment skewness was particularly noticeable in favour of Lagos—for example, 51 per cent of the total in Prestige Insurance Co. Ltd (with the next region, Kaduna, having got 14 per cent), 62 per cent in Sun Insurance Co. Ltd (with the next region, Ogun, having got 8 per cent), 54 per cent in Crusader Insurance Co. Ltd (with the next region, Kano, having got 8 per cent), 67 per cent in Guinea Insurance Co. Ltd (with the next region, Ogun, having got 17 per cent); and 55 per cent in Niger Insurance Co. Ltd (with the next region, Ogun, having got 10 per cent). The skewness in the regional spread of privatized share ownership is unmistakable. When bigger divestitures follow, this issue will warrant careful attention; or else criticism on the ground of wealth concentration in certain regions will flourish. Allegations from the northern states that the southern states (Lagos in particular) accumulate the benefits of ownership privatization in disproportionate terms, have to be watched carefully, not only on economic but on ethnic grounds also. Let us turn to an issue which has not yet been considered in depth in Nigeria. The TCPC received divestiture proceeds amounting to 883 million naira by November 1991—exclusive of expenses of sales, particularly through public offers. The money stays with the TCPC, invested in treasury bills at a low rate of interest. The TCPC is expected to offer recommendations to the government on the best use of the funds. Without going into an elaborate discussion on this point,12 one may look at the following options of utilization—either in any one direction or in a combination of directions: (a) to repay public debt; (b) to meet the costs of restructuring public enterprises; (c) to meet the costs of labour lay-offs;

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(d) to undertake commercial investments; (e) to finance other capital expenditures—for example, social services and defence; (f) to facilitate current expenditures; and (g) to introduce tax reductions. The last two are in the nature of recurring transactions which it would not be proper to finance from the capital receipts originating in divestitures. The first channel would be a good one, for it represents, properly, a countervailing transaction, namely, that a debt contracted —directly or indirectly—by the government for investment in a public enterprise, is sought to be repaid when that investment has been divested. Options (b) and (c) are superior to (f) and (g) but imply a reduction in the net receipts of the government—a factor to be taken into account while estimating the direct financial benefits of divestiture of the public exchequer. Option (d) represents investment rotation in the public sector. While a new governmental investment can have justification alongside a divestiture, the fact that it apparently counters the policy shift in favour of the private sector has to be recognized. The investment should be properly explained to the public, lest they get wrong signals of government policy. Option (e) calls for the application of suitable criteria in respect of the investments concerned, for the ready availability of cash resources resulting from divestiture might add to the government’s temptation to undertake the expenditures. There is a whisper in Nigeria already that civilian rule, which is round the corner, might complicate the decisions on the use of divestiture receipts.13 CONCLUSION It is assumed that privatization, on the scale now contemplated, will be completed by 1992 and that the TCPC will be succeeded by a Bureau of Public Enterprises. Conceptually, the process of change in the direction of marketization, which privatization essentially signifies, can never be completed by a given date. There is room for the process to continue over time. In the Nigerian situation, where a great proportion of public enterprise is expected to stay under public ownership, there will be continuous need for examining from time to time: (i) which enterprises merit being divested either partially or fully, instead of staying on in the commercialized categories; (ii) which enterprises now categorized as those to be partially commercialized merit being shifted to the category of full commercialization; and (iii) which enterprises expected to continue in the commercialized categories merit being exposed to competition from the private sector, through policies of liberalization and deregulation; or, where that is improbable, merit being forced into simulated competition within the public sector itself. As of now divestiture and commercialization have both been carried out through local capital and expertise. As the range of activities expands, it may be necessary to introduce foreign capital and technical know-how in order to achieve the most successful results under the divestiture as well as the non-divestiture options. Questions of national response to foreign participation in economic activities—as full or partial owner or as significant technical collaborator—will have to be faced. It would be desirable for the government to exercise thought on this matter from now on. A word now on the many public enterprises at the state government level. These call for privatization too —rapidly perhaps, considering that they are generally small in size, and more easily amenable to private takeover than the railway or electricity or port enterprises might be. There do not seem to be any clear

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guidelines in respect of the state governments’ actions in this area. It would be helpful to work these out, not so rigidly as to restrict a state government’s innovativeness but to ensure the common application of criteria of choice among privatization options, fairness and transparency of transactions, and the thrust towards efficiency as the underlying motivation. Finally, if the successor to the TCPC were named as Bureau of Public Enterprises (or given a designation resembling that term), one has to consider carefully the functions to be assigned to it. It suggests itself as a focal point within the government in public enterprise matters—a concept which, on critical analysis and empirical review, turns out to be less attractive than at first sight. It can be a governmental agency given the limited function of looking at the working of performance contracts—once these are arrived at. It can be the apex of privatization policy and implementational direction. It can be a body charged with monitoring the results of privatization. The government has to be logically clear on what its precise function or scope of concerns should be. To visualize it as an agency responsible for all these things will be both conceptually unsound and practically self-defeating. APPENDIX 1 Table 17A.1 Public enterprises to be privatized or commercialized CATEGORY I ENTERPRISES IN WHICH EQUITY HELD SHALL BE PARTIALLY PRIVATIZED Enterprises

Development banks Federal Mortgage Bank of Nigeria

Present federal government holding Maximum federal government (%) participation as % of equity (after privatization) 100

Nigerian Industrial Dev. Bank 100 Limited Nigerian Bank for Commerce and 100 Industry Limited Federal Savings Bank 100 Oil-marketing companies Unipetrol National Oil and Chemical Marketing Co. Limited African Petroleum Limited Steel-rolling mills Jos Steel-Rolling Mill Katsina Steel-Rolling Mill Oshogbo Steel-Rolling Mill Air and sea travel companies Nigerian Airways Limited

Not more than 70% by the federal government and its agencies. Not more than 70% Not more than 70% Not more than 70% by the federal government and its agencies.

100 60

Not more than 40% Not more than 40%

60

Not more than 40%

100 100 100

Not more than 40% Not more than 40% Not more than 40%

100

Not more than 40%

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CATEGORY I ENTERPRISES IN WHICH EQUITY HELD SHALL BE PARTIALLY PRIVATIZED Enterprises

Present federal government holding Maximum federal government (%) participation as % of equity (after privatization)

Nigerian National Shipping Line Limited Fertilizer companies Nigerian Superphosphate Fertilizer Company Limited National Fertilizer Company Nigeria Limited Paper Mills Nigerian National Paper Manufacturing Co. Ltd Nigerian Newsprint Manufacturing Company Limited Nigeria Paper Mills Limited Sugar companies Savannah Sugar Co. Limited Sunti Sugar Company Limited Lafiagi Sugar Co. Limited

100

Not more than 40%

100

Not more than 40%

70

Not more than 40%

86.5

Not more than 40%

90

Not more than 40%

90

Not more than 40%

75.4 90 70

Not more than 40% Not more than 40% Not more than 40%

Cement companies Ashaka Cement Company Limited Benue Cement Company Limited Calabar Cement Co. Limited Cement Company of Northern Nigeria Limited Nigerian Cement Company Limited, Nkalagu

72 39 68 31.53 10.72

30% 30% 30% 30% 10%

CATEGORY II ENTERPRISES IN WHICH 100% OF EQUITY HELD BY THE FEDERAL GOVERNMENT SHALL BE FULLY PRIVATIZED (exclusive of those privatized by the supervising ministries) 1 2 3 4 5 6 7 8

Nigeria Hotels Limited Durbar Hotels Limited Aba Textile Mills Central Water Transportation Co. Limited National Cargo Handling Limited Nigerian National Fish Company Limited Nigerian Food Company Limited National Grains Production Company Limited

51% 100% 70% 100% 100% 55% 56% 100%

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CATEGORY II ENTERPRISES IN WHICH 100% OF EQUITY HELD BY THE FEDERAL GOVERNMENT SHALL BE FULLY PRIVATIZED (exclusive of those privatized by the supervising ministries) 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

National Root Crops Production Company Limited and other such food production companies Nigerian National Shrimps Company Limited New Nigerian Salt Company Limited National Fruit Company Limited National Salt Company Limited, Ijoko Specomill Nigeria Limited South East Rumanian Wood Industries Limited, Calabar Nigerian-Rumanian Wood Industry Limited,Ondo Nigerian Yeast and Alcohol Company Limited, Bacita Nigerian Film Corporation Opobo Boat Yard Ore/Irele Oil Palm Company Limited, Ondo Okomu Oil Palm Company Limited, Bendel Road Construction Company of Nigeria Limited Impresit Bakolori Nigeria Limited North Breweries Limited, Kano West African Distilleries Limited Nigeria Engineering Construction Co. Limited Tourist Company of Nigeria Ltd. (Owners of Federal Palace Hotels) Electricity Meters Company Limited, Zaria American International Insurance Co. Limited Guinea Insurance Company Limited Sun Insurance Company Limited United Nigeria Insurance Company Limited United Nigeria Life Insurance Limited Niger Insurance Company Limited Mercury Assurance Company Limited Crusader Insurance Company Limited Royal Exchange Assurance Company Limited NEM Insurance Company Limited Law Union and Rock Insurance Company Limited

100%

86% 100% – 100% 60% 16.27% 25% 51% 100% 35% 60% 60% 60% 60% 50% 100% 60% 100% 60% 49% 25% 49% 42% 33% 100% 40% 49% 49% 47% 39%

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40 41 42 43 44 45 46 47 48 49


Prestige Assurance Company Limited British American Insurance Company Limited West African Insurance Provincial Co. Limited Kaduna Abattoir and Kaduna Cold Meat Market Ayip-Eku Oil Palm Company Limited Ihechiowa Oil Palm Company Limited Sokoto Integrated Livestock Company Limited Motor Engineering Services Company Limited Flour Mills of Nigeria Limited Nichemtex Industries Limited

CATEGORY III PARTIAL COMMERCIALIZATION 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Nigerian Railway Corporation Nigerian Airport Authority National Electric Power Authority Nigerian Security Printing and Minting Co. Ltd Anambra Imo River Basin Development Authority Benin-Owena River Basin Development Authority Chad Basin Development Authority Cross River Basin Development Authority Hadeija Jama’ are River Basin Authority Lower Benue River Basin Development Authority Niger Delta Development Authority Niger River Basin Development Authority Ogun-Oshun River Basin Authority Sokoto-Rima Basin Development Authority Upper Benue River Basic Development Authority National Provident Fund Ajaokuta Steel Company Limited Delta Steel Company Limited Nigerian Machine Tools Limited Federal Housing Authority Kainji Lake National Park Federal Radio Corporation Nigerian Television Authority News Agency of Nigeria

49% 49% 40% N/A 60% 60% 80% 100% 12% 10%

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CATEGORY IV FULL COMMERCIALIZATION 1 Nigerian National Petroleum Corporation 2 Nigerian Telecommunications Limited (NITEL) 3 Associated Ores Mining Company Limited 4 Nigerian Mining Corporation 5 Nigerian Coal Corporation 6 National Insurance Corporation of Nigeria 7 Nigerian Re-Insurance Corporation 8 National Properties Limited 9 Tafawa Balewa Square Management Committee 10 Nigerian Ports Authority Source: The Presidency. Technical Committee on Privatization and Commercialization (1988) Guidelines on Privatization and Commercialization of Government Enterprises, Lagos, 6–9.

APPENDIX 2 Privatization preparation subcommittee for the Nigeria Paper Mills and Nigerian National Shipping Lines Terms of reference 1 To prepare the enterprises for privatization having regards to: (a) The present financial and operational conditions of the enterprise. (b) The need for a corporate financial structure which ensures adequate operating capital at optimal production operating level. (c) The condition of operating plant and equipment and the need for any rehabilitation work prior to privatization. 2 To examine the existing management information systems in the affected enterprises in the context of its relevance and efficiency to meet the needs of internal decision-making and external reporting obligations. 3 To review the present operating/commercial policies of the enterprises and advise possible areas of improvement. 4 To assess the existing organizational and management structures of the affected enterprises in the context of the need for an effective and efficient management of the enterprise post-privatization. 5 To develop scientific performance measurement criteria as a basis for assessing the performance of management. 6 To assess the ability of the present management to manage the enterprise effectively post-privatization and make appropriate recommendations.

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7 To make any other recommendations in furtherance of the objectives of achieving a result-oriented, cost effective and accountable management. 8 To submit a report to the TCPC not later than 30 July 1990. Source: The Presidency (1990) Technical Committee on Privatization and Commercialization, Fourth Progress Report May, Lagos, 85–6. APPENDIX 3 Code of conduct for members of subcommittees for the privatization of certain enterprises through sale of assets All members are expected to subscribe to the following code of conduct: (i) No company or institution in which a member is a partner or shareholder or director or in any way directly or indirectly connected shall be a buyer of the assets on sale, (ii) A member shall not put himself in a position where his personal interest conflicts with his duties and responsibilities during his membership of the subcommittee, (iii) A member shall not engage in any business transaction with the affected enterprises, (iv) A member shall not make improper use of any knowledge or information he may acquire during the course of his work, (v) A member shall not buy the shares or assets of the enterprise offered for sale in the course of the privatization exercise. (vi) A member shall observe strict secrecy with respect to all transactions of the subcommittee and matters related thereto and shall not directly reveal any of the matters or any information which may come to his knowledge in the discharge of his duties except when required or authorized to do so by the subcommittee or by a competent Court of Law. Source: As for Appendix 2, p. 84. APPENDIX 4 Functions of the Technical Committee on Privatization and Commercialization (a) advise on the capital restructuring needs of enterprises to be privatised or commercialized under this Decree in order to ensure a good reception in the Stock Exchange Market for those to be privatized as well as to facilitate good management and independent access to the capital market; (b) carry out all activities required for the successful public issues of shares of the enterprises to be privatized including the appointment of issuing houses, stockbrokers, solicitors, trustees, accountants and other experts to the issues; (c) approach, through the appointed issuing houses, the Securities and Exchange Commission for a fair price for each issue;

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(d) advise the Federal Military Government, after consultation with the Securities and Exchange Commission and the Nigerian Stock Exchange, on the allotment pattern for the sale of the shares of the enterprises concerned in accordance with section 7 of this Decree; (e) oversee the actual sale of shares of the enterprises concerned by the issuing houses in accordance with the guidelines approved by the Federal Military Government; (f) submit to the Federal Military Government from time to time, for the purpose of approval, proposals on sale of Government shares in such designated enterprises with a view to ensuring a fair price and even spread in the ownership of the shares; (g) ensure the success of the privatization and commercialization exercise taking into account the need for balance and meaningful participation by Nigerians and foreign interests in accordance with the relevant laws of Nigeria; (h) ensure the updating of the accounts of all commercialized enterprises with a view to assuring financial discipline. (2) The Technical Committee shall perform such other functions as may be assigned to it, from time to time by the President, Commander-in-Chief of the Armed Forces. Section 4(1) of Decree No. 25 of 1988, Lagos NOTES 1 Dr Hamza Zayyad, The implementation of the privatization and commercialization programme’, International Conference on Implementation of the Privatization and Commercialization Programme—An African Experience, November 1990, Lagos (hereafter referred to as IC). 2 For full details, see, The Presidency, Technical Committee on Privatization and Commercialization, Annual Report and Audited Accounts 1988/ 89, Lagos, 10. 3 The Presidency, Technical Committee on Privatization and Commercialization (1988) Guidelines on Privatization and Commercialization of Government Enterprises, Lagos, 2. 4 For a full discussion of the nature and implications for policy of extra-enterprise objectives, see V.V.Ramanadham (1991) The Economics of Public Enterprise, Chapter 3, London, V.V.Ramanadham (1984), Routledge; and on the idea of the ‘publicness’ of a public enterprise, see The Nature of Public Enterprise, Chapter 2, Croom Helm, London, 1984. 5 The presidency, TCPC (1990) Fourth Progress Report, Lagos, May 45. 6 For an elaborate account of the memorandum of understanding, see Memorandum of Understanding: An Approach to Improving Public Enterprise Performance, Prajapati Trivedi (ed), International Management Publishers, New Delhi, 1990. 7 General Ibrahim Badamsi Babangida, President of Nigeria, Keynote Address to IC, Lagos, November 1990. 8 Francis Okafor (1990) The socio-political dimension of privatization and commercialization’, 1C, Lagos, November 1990. 9 The Presidency, TCPC (1990) Fourth Progress Report, op. cit., 28–9. 10 Ibid, 5–6. 11 For a further discussion on the rationale of public enterprise, with which the present argument is linked, see V.V.Ramanadham (1991) op. cit., Chapter 1, 11. 12 For a full discussion see V.V.Ramanadham (1989) Public Enterprise and Income Distribution, Chapter 6, London Routledge. 13 Alhaji Mohammed Hayatu-deen fears possible re-emergence of another era of ‘free-spending’under the ‘incoming administration’, ‘The macroeconomic implications of privatization and commercialization’, IC, Lagos, November 1990.

18 Privatization in Zambia E.C Kaunga

PUBLIC ENTERPRISE SITUATION IN ZAMBIA Introduction Like most other countries which have adopted the mixed economic system, the Zambian economy since 1968 has been characterized by the emergence of a large public enterprise sector. In relative terms, much of the economic activity (about 80 per cent) is undertaken by the parastatal sector with the private sector, accounting for the remaining 20 per cent. The activities of the parastatal organizations are spread across almost all sectors of the economy including mining, energy, industry, agriculture, transport, trade, communication, tourism and construction. Most of these companies fall under the umbrella of a large conglomerate: The Zambia Industrial and Mining Corporation Limited (ZIMCO), a state-holding company charged with the responsibility of supervising and monitoring the parastatals under its wing and undertaking economic investment activities on behalf of the government. Under ZIMCO are several subholding companies based on sectors such as ZCCM (Mining), INDECO (Industry) NHDC (Hotels and Tourism) and NIEC (Trading). There are some parastatal organizations outside the ZIMCO group. These are controlled directly and supervised by their sector ministries through their established boards of directors. There are also companies which are owned by the United National Independence Party (UNIP) which are supervised by the holding company, Zambia National Holdings Limited. The focus in this paper will be restricted to the activities and operations of the ZIMCO group of public enterprises. Some of the major non-ZIMCO companies are the following: State Lotteries Board Dairy Produce Board (to be transferred to ZIMCO) National Savings & Credit Bank (being transferred to ZIMCO) Zambia National Tourist Board Zambia National Holdings Ltd Duly Motors Ltd E.W Tarry’s Ltd Motor Holdings

PRIVATIZATION IN ZAMBIA

273

Mulungushi Textiles Ltd Codeco Ltd Airport Farms Ltd Chanyanya Rice Project Makeni Tayloring Workshop Builders Brigade Small Industries Dev. Organization (SIDO) Small Enterprise Promotions Ltd (SEP) Nature and extent of public enterprise In the Zambian context, a public enterprise (parastatal organization) is a quasi-autonomous governmental body outside the regular civil service structure and generally with wide latitude to conduct its own internal operations. This sector is comprised of boards and corporations set up by parliamentary statutes and wholly owned by government and companies established under the Companies Act in which government has some controlling interest (that is, 51 per cent and above). Parastatal companies currently constituting the ZIMCO Group have undergone structural reorganizations since the Economic Reforms of 1968–9 leading to government acquisition of 51 per cent shareholding in formerly largely foreign-owned private firms in the country. In the industrial sector, the Industrial Development Corporation Ltd (INDECO) exists to actively participate in the industrialization efforts of the country. The organization is presently responsible for companies, numbering about forty-three engaged in many industrial activities. With the acquisition of majority shares in the mining sector, the Mining and Industrial Development Company (MINDECO) was created in 1970. This was in existence until 1979 when the Zambia Consolidated Copper Mines Ltd (ZCCM) was created following the merger of the two giant mining companies (RCM) and (NCCM). The holding company in this sector has a number of subsidiaries and has since diversified into several non-mining activities. In the finance sector the Finance Development Corporation Ltd (FINDECO) was created to oversee the development and operations of institutions in this sector such as banks, insurance companies, and so on. The ZIMCO group structure has undergone a substantial metamorphosis from the early days. The many structural reorganizations have been aimed at establishing a streamlined organizational set-up, providing a reasonable balance between central supervision and monitoring at holding company level on one hand and sufficient autonomy with accountability at operating company level on the other. In the structural evolution outlined below the central factor is a movement away from close linkage between ZIMCO companies and government ministries to a set-up whereby parastatals operate within a commercial setting. From its inception ZIMCO, as the major holding company for the government’s state participation in the industrial and commercial sectors, was initially put under the control of the Ministry of State Participation with the President as head of both (ZIMCO and the ministry). Later on a new structure was introduced whereby each parastatal holding company was linked to the particular ministry responsible for its respective sector. In 1979 a major structural reorganization of the ZIMCO group was announced by the President. Under this Cabinet Ministers were removed from direct involvement in the running of ZIMCO companies and instead an Executive Directorate was created at ZIMCO Head Office to be accountable for the Group’s operations.

274

E.C KAUNGA

Initially five sectorial executive directors were appointed to take charge (as chairman of boards of directors) of companies in the respective sectors, namely, agriculture, energy, transport, manufacturing and corporate planning and administration (looking after the financial sector). As part of this reorganization the ZCCM holding company came into being following the dissolution of MINDECO and the merger of the two mining companies RCM and NCCM. INDECO also underwent some changes with the elimination of subsectorial divisions. Since the last major reorganization of 1979 the group has continued to grow in size with new companies being added to the conglomerate such as Zambia Railways, Posts and Telecommunications Corporation Ltd, Zambia Airways, Zambia National Broadcasting Corporation, Zambia Engineering and Contracting Company Ltd and Engineering Services Corporation. In a few cases there was a deliberate move by the government to convert what were previously government organizations into companies incorporated under the Companies Act with the objective of making their operations more commercially oriented. The Appendix gives a listing of the ZIMCO group compa Table 18.1 The size structure of public enterprises Mining Industry Agricult ure

Engery Transpor Finance Trading Commu Hotels Real t nications Estate

Size by 20,946 2,122 1,087 2,163 1,502 2,221 total assets Kwacha (m.) No. of 10 45 8 7 10 7 enterpris es Source: ZIMCO Ltd, Group Annual Performance Review 1988–9.

1,521

175

434

42

10

2

3

2

Others 11,301

Table 18.2 Holding company status Holding company

No.of subsidiaries (% share of equity)

100%

50–100%

ZIMCO Ltd 64 INDECO Ltd 27 NIEC Ltd 10 ZCCM Ltd – Source: ZIMCO/INDECO Annual Reports 1989.

25–50%

15 10–15 5–10 0–5 0–(5)

1 1 3 3 3

0 0 2 12 4

ANTHONY BROWNE

% Return on capital employed

Commonwealth

State

(5)–(10) (10)–(15)

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