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Annual Privatization Report 2005 - Developing Nations

January 1, 2005

Developing Nations


Privatization Aids Rwanda's Rebirth

In 1994, nearly a million of Rwanda's 8 million citizens were slaughtered in ethnic violence between the Tutsi and Hutu tribes. Perhaps many people wondered if anything good ever happens in this poor and benighted place.

Touring the genocide memorial site leaves one both angry and humbled. It illustrates the danger of a people surrendering their minds to their leaders. It depicts the extent to which politicians can go to attain their objectives. But behind this heavy cloud of sorrow, a peaceful Rwanda is emerging; it will certainly take years for the wounds to heal. A new Rwanda, with clean and safe cities has emerged from the ashes.

Rwanda, in the heart of Africa, is engaged in the continent's most ambitious privatization campaign. It may be the most ambitious and systematic of any country anywhere. After experiencing the kind of stifling, socialist rule that consigned virtually all of Africa to grinding deprivation for ages, this is a country that is now embracing the private sector with deliberate policy and enormous enthusiasm. Private businesses, schools, and universities and tour farms are competing with state-owned facilities.

Tea is a top Rwandan export and it too is going private. Ten tea factories exist in Rwanda—nine owned by the government and one, Sorwathé, in private hands. With only 10 percent of the national tea plantation acreage, Sorwathé produced 17 percent of the nation's black tea in 1999 and boasted a yield that was more than double the national average per acre. In 2003 the government began a program that will soon culminate in the sale of all nine of its tea factories and most, if not eventually all, of its tea plantations.

Since the privatization drive started in 1996, other assets sold by the Rwandan government include its hotels, a fruit-juice factory, a printing firm, and companies that make insecticides, tobacco products, sugar, dairy products, processed fish, and coffee. Among many others slated for the auction block over the next couple of years are chicken hatcheries, paper mills, rice products, the national telecommunications company, and even all water distribution and electricity generation. Robert Bayigamba heads the government's Privatization Secretariat. He says Rwanda will remain on this path until it creates a genuine free market economy complete with something else it has never had before—a stock market.

Africa earned the moniker "Dark Continent" because of its reputation for tyranny, isolation, and deprivation. To outside observers, Africans seemed incapable of or uninterested in the improvement of their situation through enterprise and private property. But the Rwandan case illustrates the fact that, despite the past traumatic experience, individuals are rising up to change their economic circumstances for the better.

By: James Shikwati, Director of Kenya's Inter Region Economic Network and Coordinator of the Africa Resource Bank


Privatization in Egypt

Egypt's privatization program was identified as one of the keystones in its economic reform process in the early 1990s, when the country was trying to fit into a rapidly changing world environment. Partly, the privatization process was mandated upon Egypt with IMF assistance in 1991, when one of the conditions under which the loans were provided was a requirement to privatize. Yet, more importantly, poorly performing state-owned enterprises (SOEs) were a drag on the economy, accounting for roughly 40 percent of GDP during the 1980s. The SOEs required substantial financial resources to keep them afloat, yet the government could no longer provide the resources.

Although there was a general realization of the need to restructure, the process wasn't an easy one to implement. Government insiders, who were heavily involved in exploiting public enterprises, were not interested in changes. Also, employees and managers also resisted changes—privatization of the overstaffed SOEs was bound to leave a large number of them unemployed.

Egypt, unlike some developing countries that rushed into large-scale privatizations, focused on a gradual approach. Originally, the government offered 316 companies for privatization. A total of 133 companies were fully privatized by 2003 and another 55 were partially privatized, resulting in proceeds of $3.4 billion. The largest portion of the proceeds (45 percent) went to the Ministry of Finance, over 30 percent went to SOE debt settlements, 18 percent was used for early retirement pensions, and less than 5 percent was spent on restructuring. The government employed several different privatization techniques: 28 percent of companies were privatized through shares offered on the stock market, 26 percent through sale to the Employee Shareholder's Association (ESA), 24 percent by the means of liquidation and asset sales, and 22 percent through the sales to anchor investors.

After the initial privatization boom in the late 1990s, the process stagnated. The government still retains control over big and important enterprises and has been only willing to give up ownership rights to smaller companies. There is also a concern about how the government is spending the privatization proceeds. Statistics suggest that funds are often used simply to finance the money-losing SOEs.

Yet there are positive developments as well. Privatization and the subsequent improvement in the investor climate aided a creation of a strong stock market. The number of companies listed jumped to 1,100 in 2003 from less than 700 in 1991, and the market capitalization of those companies rose from $3.2 billion in 1992 to almost $20 billion in 2003. The number of loss-making SOEs decreased by more than 50 percent, and the rise in the return on investment was four-fold. And the effect of privatization on the labor market has not been negative. Many of the 500,000 who lost jobs in privatizations took early retirements and others have obtained new jobs in the private sector. In some cases companies even increased their employment after privatization as they took on new markets and new opportunities. The financial burden of the under-performing SOEs was reduced and privatization had a positive effect on the development of markets, competition, investment climate, and trade. The key now is to build on the experience, reduce government control in several areas, and privatize on a larger scale.


Restructuring State-Owned Firms in Zambia

Zambia represents a classic case of the pitfalls of the state-led approach to development, a model that brought the country a bloated public sector and the attendant fiscal problems. The government of President Frederick J. T. Chiluba, who was elected in October 1991, initiated a structural adjustment program with privatization as a central component of the reform effort. The program targeted 90 percent of Zambia's SOEs for privatization within five years and the remaining SOEs were to be restructured. Progress in privatization, however, has been slow from the start, with opposition building and the government lacking a strategy to build public support for the process.

The economic decline attributable to state-owned firms could be traced back to the early 1970s, when Kenneth Kaunda nationalized the copper-mining industry and used the revenues from this operation to create a large holding company, the Zambia Industrial and Mining Corporation (ZIMCO), that assumed control over 120 SOEs. By the early 1990s, the public sector came to control nearly the entire Zambian economy—80 percent of the industrial workforce was employed, directly or indirectly, through the public sector, and SOEs accounted for 80 percent of industrial output and generated 93 percent of Zambia's foreign exchange. The copper mines alone provided 80 percent of the country's foreign exchange, despite having outdated technologies that reduced productivity.

The dominant role of the public sector created serious economic distortions. Tight wage and price controls disrupted supply and demand. Financial restrictions, trade barriers, and extensive local regulations were used to restrict competition and create SOE monopolies. The majority of these companies lost money and were kept afloat by direct government subsidies, creating an enormous budget deficit and preventing the private sector from gaining access to domestic capital. The tide of debt forced the new Chiluba government to adopt a structural adjustment program under the auspices of the World Bank.

Yet, despite the overwhelming need to reduce the size of the public sector, progress in the early stages of the Zambian privatization was slow, largely because of an original strategy that emphasized reforming and restructuring SOEs rather than an actual transfer of ownership. The government maintained ownership of the firms as a means of controlling employment and the movement of foreign exchange, using management contracts and restructuring to attempt to improve profitability. This strategy led to delays in the overall reform of the economy, as Zambia's fiscal imbalances worsened due to the continued payment of subsidies, assumption of further losses, and loss of revenues from actual divestitures. An addition, by not divesting, the government prevented the firms from obtaining new technologies and investment and left them susceptible to politically motivated decisions, factors that dampened efforts to improve their operating efficiency.

Eventually, the government realized the futility of attempting to reform SOEs that continued to realize huge losses. The new privatization program was introduced and it quickly gained speed and vitality by focusing on actual transfers of ownership, with emphasis on enhancing the participation of Zambian individual investors as much as possible.

The first step in the privatization process was the Privatization Act of 1992, which was passed by the Zambian National Assembly. The Privatization Act established the Zambia Privatization Agency (ZPA), which replaced the steering and technical committees from the previous government and the purpose of which was to plan and coordinate the privatization activities. The agency was not a government entity; rather, it was created to ensure the private-sector participation in the privatization process. The government appointed only three members (out of 12), and the rest were the representatives of private-sector organizations such as the Federation of Employees, Confederation of Chambers of Commerce and Industry, and the Bankers Association of Zambia. The law also specified activities of the ZPA; specifically, it ensured that all operations as well as enterprise-bidding must be concluded in a fair and transparent manner. The Act was constructed to protect small investors—it prohibited insider trading and government officials by law were required to state publicly their interest in a company so they would not be able to take advantage of their privileged access to information.

The privatization process was done in several stages. First, ZPA chose the companies to be privatized. There were a number of privatization techniques to be used, all of which were included in the Privatization Act: public offering of shares, private sale of shares through negotiated or competitive bids, issue of additional shares to dilute state ownership, sale of selected assets, reorganization/breakup of the SOE, management/employee ownership, as well as lease and management contracts. The next step was publishing the privatization note on the chosen SOE in the Government Gazette and acceptance of the applications from the potential investors, the purpose of which was to ensure that only those capable of running the privatized company would participate in the process. After approving investors for participation in the bidding process and providing them with the necessary evaluation reports, ZPA allowed anywhere from one to three months for potential investors to further investigate companies for sale and prepare their bids. After accepting and evaluating the bids, ZPA chose the investor and signed a sales contract. After the contract was signed, to ensure fairness of the process and transparency, ZPA published all the information regarding the process (participants and their bids, as well as prices of share and other relevant data) in the Government Gazette.

Originally, the government decided to offer 150 state-owned firms for sale. As of 1992, bids for the first group of 19 small companies were closed. It was hoped that initiating the process with small companies would enable Zambian officials to develop the expertise necessary to divest the more complex, larger companies. In the early stages the process was slow, mainly due to concerns that privatization would put a lot of people out of work. However, the effect of the privatization on employment has been minimal, in fact, in some cases privatization worked to the benefit of workers. If companies were not privatized their growing financial burden could necessitate liquidation. In this case all company employees would be out of work.

As the benefits of privatization became more evident and the public support for the program strengthened, the process slowly picked up by the mid-1990s. The major signal that privatization was real was the closing of the country's giant ZIMCO. By 1997 167 companies had been privatized and by January 2003 the number grew to over 250. An additional 24 companies are currently slated for privatization.

The privatization program in Zambia has achieved some impressive results and it is considered to be one of the most successful on the continent. Most of the enterprises (97 percent) became successful profit-making companies within a few years after privatization and they have also attracted foreign capital. The privatization program has stimulated economic activity in many sectors, especially agriculture. It helped reduce budgetary pressures on the government and through increased economic activity helped spur growth. In 1993, the year after the privatization program was launched, Zambia reversed years of negative economic growth and achieved a real GDP growth of 5.1 percent. Throughout the 1990s and into the 21st century Zambia enjoyed relatively stable economic growth.

The preceding have been excerpted from Privatizing State-Owned Companies by John D. Sullivan, Ph.D., Jean Rogers, and Aleksandr Shkolnikov. The report is a product of the Center for International Private Enterprise and is available in its entirety online.


Trade or Aid?: What's the best way to help the world's poor?

The world may never really know how many hundreds of thousands of lives the Asian tsunami claimed. The tragedy spurred a massive relief effort, and it also renewed old debates about how to help the world's poor.

A recent UN report suggested that rich nations should double the amount they currently give to developing nations. The report noted that, while the tsunami received great attention, other, larger, less publicized tragedies persist. Take for example, the scourge of malaria, which the lead author of the UN report calls the "silent tsunami." Each year roughly three thousand people die from malaria, and most of the dead are African children. Would more aid improve conditions in Africa?

James Shikwati worries that more aid would actually undermine Africa's pursuit of progress. Shikwati is Director of Kenya's Inter Region Economic Network and Coordinator of the Africa Resource Bank. He has observed how different approaches to helping Africa's poor have yielded different results. He argues that trade, not aid, is what Africans need more of.

Recently, PW's Ted Balaker interviewed James Shikwati.

Pic of interview subject: http://www.utoronto.ca/jcb/genomics/images/ACTSimages/james_shikwati.jpg


Do you think wealthy nations should give more aid to poor nations?

Wealthy nations should not give more aid to poor nations without taking an audit of the previous aid initiatives. A lot of what wealthy nations call aid has tended to benefit the wealthy nations in form of tied aid at the expense of poor nations.

Has foreign aid improved conditions in Africa?

Foreign aid has politicized life in Africa making conditions even worse. Jostling for what politicians call the 'national cake' is a common phenomenon. Instead of Africans solving their own problems, they leave everything to the donors.

Poor nations need to surface their own entrepreneurs in order to solve their problems. Poor nations need to urgently take ownership of the problems afflicting them—what wealthy nations do is take over issues that affect poor nations leading them to be complacent. Aid is doing more harm to the poor nations in the long run; it encourages corruption both local and international, it kills the private sector and promotes a politically driven private sector and increases dependency.

What has improved conditions?

Open information flow, open travel, open trade is slowly opening the eyes of Africans to the benefits in a competitive world. Investors' attraction is another aspect that has helped streamline institutions in Africa. Governments are quickly learning that to get local and international investors a good business environment is needed. This is slowly putting Africans on the path of productivity.

What should rich nations do to help the world's poor?

Rich nations if they want to genuinely assist poor nations must leave the poor nations alone. They must open up for trade, open up for travel—that is, lift their extreme visa requirements because travel will expose Africans to more productive culture in the rich nations. Former colonial governments must lift their undue influence on their previous African colonies that has hampered efforts to create an African regional market leading to intra-Africa travel restrictions too. An African regional market will serve as a springboard to enable Africans to fit competitively in the global market. The rich nations should not interfere with private investors who might choose to invest in Africa; they should not interfere with private initiatives to develop Africa.

The UN reports that each month 150,000 African children die of malaria because they don't have bed nets to keep mosquitoes out. What should be done about this?

African children and adults alike are perishing because of malaria, however because of aid-driven policies, Africans have been forced to use bed nets even when the evidence indicates that they are failing. This is the best illustration of how donors arm-twist poor nations in order to achieve their own ends.

Wealthy countries should know that poor countries do have solutions to their own problems but they have been suffocated with aid. They need freedom from aid in order to trade.

Foreign aid can come from other governments or from private donations. Do you see any difference in the effectiveness of government aid versus private aid?

Government-to-government aid is the worst culprit in the aid fiasco. It's difficult to monitor what governments do with the aid. In poor nations, it helps subsidize poor policies, encourages corruption and political cronyism and simply makes leaders lose focus. Private donors have incentives to see it work because it is their own money as opposed to government funds, which are basically public officers in wealthy countries spending taxpayers' money. It is common knowledge that nobody spends somebody else's money as careful as he spends his own.




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