Privatisation: A Global Perspective

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

MATTHEW BISHOP AND DAVID THOMPSON

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.

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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

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MATTHEW BISHOP AND DAVID THOMPSON

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

PRIVATIZATION IN THE UK

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.

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MATTHEW BISHOP AND DAVID THOMPSON

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.

PRIVATIZATION IN THE UK

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

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MATTHEW BISHOP AND DAVID THOMPSON

‘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

PRIVATIZATION IN THE UK

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.

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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.

PRIVATIZATION IN THE UK

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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,

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MATTHEW BISHOP AND DAVID THOMPSON

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

PRIVATIZATION IN THE UK

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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

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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

PRIVATIZATION IN THE UK

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

MATTHEW BISHOP AND DAVID THOMPSON

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.

PRIVATIZATION IN THE UK

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.

PRIVATIZATION IN GREECE

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

PRIVATIZATION IN GREECE

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

<100

100–500

500–2000

2000–5000

>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%

<25%

ETVA1

12 16 23 53 ETEVA2 3 4 8 46 Commercial Bank of 7 11 5 14 Greece3 National Bank of 2 16 28 53 Greece3 Ionian Bank3 – 1 4 21 Agricultural Bank of 3 32 17 16 Greece4 IRQ5 5 25 2 3 Total 32 105 87 206 Sources: 1 Annual Report 1989 2 Annual Report 1989 3 Economic Bulletin of the Commercial Bank of Greece (data for 1987) 4 Agricultural Bank of Greece, Department of Agricultural Industries 5 Industrial Reconstruction Organization (IRO) Notes: Figures give number of enterprises in each bracket of ownership Fifteen (15) other public enterprises (of which 7 are banks) are partly controlled by the above holdings with minority individual participations

organizations hold majority equity in 137 enterprises and minority in 293 enterprises (32 per cent and 68 per cent respectively). In some of the latter, minority holdings of the state-owned banks and IRO may add up to more than 50 per cent and so jointly make the enterprises ‘public’. It must be pointed out that two of these holdings (ETEVA and Ionian Bank) have, as a strategy, to participate with minority equity holding in enterprises which mostly belong to the private sector. The other three banks (Commercial, National, Agricultural) have a large number of subsidiaries and play a more active role in the management of these enterprises. It is a policy of these banks to withdraw gradually Table 2.7 Public equity ownership Public equity ownership

Number of public enterprises

100% 99 50–100% 105 25–50% 47 <25% 114 Sources: Data from the holding companies; Economic Bulletin of the Commercial Bank; Ministry of National Economy, General Secretariat of Public Enterprises

from these investments. Many of these subsidiaries have financial problems (‘problem firms’). The Agricultural Bank in particular owns many companies in which ‘co-operatives’ have also considerable equity proportions. Last year the Agricultural Bank began a process of selling these companies to private companies and/or to other organizations including co-operatives.

PRIVATIZATION IN GREECE

29

The IRQ controls mainly ‘problem firms’ which were taken over by the state during the last decade. It was created in 1984 with the purpose of revitalizing such firms and saving jobs. More recently, it has adopted a policy of transferring all these firms to the private sector or liquidating those which are considered as commercially non-viable. The remaining public enterprises (utilities, banks and others) are mostly directly owned by the government and are supervised by respective ministries. Implicit state ownership exists in certain banks whose equity is distributed to pension funds; the government, however, exerts strong control on these banks, appointing their top management. Taking joint equity holdings into account, the general structure of state ownership is indicated in Table 2.7. The state at large owns 204 firms and participates in another 161 firms. It is evident that the state has a very significant presence in the business sector, with minority participation in many private firms. The profitability structure of public enterprises Table 2.8 gives an indication of the Return on Equity (RoE) of public enterprises. Most of the enterprises were running at a loss. A small proportion has satisfactory returns close to, or above, the inflation rate. This provides an indication about the serious performance problems of most public enterprises. In fact, the total public enterprises sector is in the red. The deficit of public enterprises in 1989 was Table 2.8 Return on equity (RoE) of public enterprises Return on equity (RoE)

Number of public enterprises (PE)

Above 20 15–20 10–15 5–10 0–5 Negative Negative net worth Negative net income Sources: ICAP Financial Directory (1991); Data for 102 enterprises were available

13 5 7 7 13 41 16

Table 2.9 Profits (losses) of public enterprises (1989) Enterprises directly controlled by Enterprises controlled by holdings Total ministries Deficit 127.5 27.0 154.5 %GNP 1.4 0.3 1.7 % Total deficit of the public sector 8.2 1.7 9.9 Sources: ICAP Financial Directory (1991); Ministry of National Economy, General Secretariat of Public Enterprises Note: IRO deficit is not included (39 billion Dr). For some enterprises data were provisional estimates

30

SPIROS K.LIOUKAS

close to 10 per cent of the total deficit of the public sector and 1.74 per cent of the gross national product (GNP) (Table 2.9). Most of the deficit comes from enterprises directly controlled by ministries rather than from enterprises controlled through holdings. There are four sectors with severe problems: utilities and other directly-controlled enterprises, textiles, transportation equipment (mainly defence industries), and mining and metal products. Food products, paper, appliances and tourism sectors have also serious problems. As shown in Table 2.10, only a few sectors had profits, notably banking, petroleum and business services. In the textiles sector the losses of Peiraiki-Patraiki which belongs to IRO are large. Shipbuilding and aerospace industry accounts for most losses in the transportation equipment subsector. Table 2.10 Profits (losses) of public enterprises by sector (1989) Sector

Directly-controlled (million drachmas)

enterprises Enterprises controlled by holdings (million drachmas)

Manufacturing Food products and beverages (14/26)1 – (2,495.8) Textiles (12/1 4) – (15,335.1) Wood and cork – (609.2) Paper (4/5) – (1,692.9) Printing and publishing – (279.9) Plastics and rubber – 49.4 Chemicals 642.3 (240.1) Petroleum and coal 4,590.3 Non-metallic minerals mining (11/12) (7,299.7) Basic metals and metal products (4/11) (7,393.7) (8,976.6) Machinery and appliances and (1,864.8) electrical equipment (3/6) Transportation equipment (2/7) (758.3) (13,907.4) Commerce; Commercial enterprises (2/4) (58.5) Business services etc. (13/24) 63.2 1,870.0 Banking, insurance 26,821.7 Tourism (4/6) (1,059.8) Utilities (91,901.1) – Other public enterprises (71,819.7) – Miscellaneous (3/9) 205.7 (321.5) Total (166,371.3) 28,563.0 Sources: ICAP Financial Directory (1991); Ministry of National Economy, General Secretariat of Public Enterprise Note: 1 The first number denotes enterprises included in the table: the second denotes the total number of enterprises with state majority. Numbers in brackets denote a negative figure.

In the banking and insurance sector, only the banks had considerable profits, even though some of them had unsatisfactory financial ratios. Eight out of thirteen utilities had losses in 1989, with railways having 27 billion Dr. deficit and Athens transport a total loss of 33 billion Dr. Olympic Airways had also large deficits.

PRIVATIZATION IN GREECE

31

The pressure on the public exchequer is immense. An indication of Table 2.11 Reasons for state ownership Reasons Total sample %

Percentage of PEs considering the particular reason as very important PEs under ministerial ‘Problem’ firms % control %

Bank subsidiaries %

State banks

Serves state’s 49 52 50 38 objectives and strategic choices Pursuit of social goals 43 41 75 43 and policies Prevention of 6 – 38 5 bankruptcy and job losses PE is physical 6 10 – 5 monopoly Other reasons 16 3 – 38 Sources: The data are based on replies from 65 PEs to a questionnaire. The research was conducted in 1986.

71

14 –

– 29

this is the huge size of public enterprise loans which had been guaranteed by the government in the past and could not be serviced by the enterprises themselves. They totalled 350 billion Dr. by the end of 1990. The banks which provided the loans were repaid by the government through bonds especially issued for that purpose. The financial burden caused by overborrowing problem firms is a major issue in the privatization plans. Many of these enterprises cannot be sold before the problem of accumulated debts is resolved. And according to European Community regulations, the solution sought should not distort competition in the respective sectors. Reasons for state ownership and market competition The general objectives of public enterprises as laid down in their statutes involve commercial, business-type considerations as well as national and social goals of a non-commercial character. It is interesting to consider the reasons for which public enterprises were created or remain in the public sector. Table 2.11 suggests that pursuit of social goals and national objectives has been a very important factor. Prevention of bankruptcy and of job losses was an important reason in the take-over of problem firms. Privatization policies depend largely on market competition and the Table 2.12 Competition faced by public enterprises Competition

PEs under direct ministerial ‘Problem firms %’ Bank subsidiaries % State banks % control %

No competition Weak competition Considerable competition Intensive competition

46 27 4 23

– – 22 78

24 5 38 33

– – – 100

32

SPIROS K.LIOUKAS

Competition

PEs under direct ministerial ‘Problem firms %’ Bank subsidiaries % State banks % control %

100 100 100 Source: Replies from 65 PEs to a questionnaire. The research weas conducted in 1986

100

liberalization of markets in general. So it is important to consider the extent of competition faced by public enterprises. It appears from Table 2.12 that banks, problem firms and the majority of enterprises controlled by state banks face considerable or intensive competition in their market environment. Competition is weak or absent in most enterprises which are directly controlled by ministries (public utilities and others). Divestitures—privatizations The size of divestitures has been small until now; but it is increasing. The last two to three years have mostly been spent on preparations. Considerable social consensus has been built up as all parties have had experience with the relevant problems of sick firms during the last few years. Up to now the IRO has sold four enterprises to the private sector: (a) a plastics firm (2 billion Dr. assets, 200 people employment, RoE=−9.5 per cent in 1989); (b) a marine firm (1.35 billion Dr. assets, 97 people employment, RoE=−2.0 per cent in 1989); (c) a catering firm (8.9 billion Dr. assets, about 800 people employment, negative net worth); (d) a departmental store (4.7 billion Dr. assets, 760 people employment, RoE=−3.6per cent in 1989). It has also liquidated three small firms involved in metal products, textiles and tin foods. Seven other firms have ceased operations and are in a state of ‘informal liquidation’. This means that employees are laid off before the company is sold. The firms involved are in textiles (3 firms), paper, metallic constructions, electric appliances and wood. It is a policy of IRO to sell these firms formally ‘live’ and as corporate totalities; there are, however, exceptions as in some cases the firms have to be broken up and sold out in pieces following unsuccessful attempts to find buyers (for example, the textile firms Peiraiki-Patraiki and Athena). Problems exist in co-ordinating all creditors and in keeping the corporate names during the lengthy liquidation processes. Previous owners have intervened in certain enterprises with legal claims on ownership. The government plans to sell all IRO enterprises and to dissolve the IRO. One of the large IROcontrolled firms to be sold is Hraklis, a major cement producer and exporter. Its sale is contentious as the opposition considers the firm to be of strategic importance to the economy. ETBA, an investment bank, has also liquidated twelve of its subsidiaries, involved in various manufacturing and trading activities, while seven others went bankrupt in 1989. A process is also under way to privatize many of its subsidiaries (about fifteen firms). The other holdings have also started a programme of divestitures. The Agricultural Bank announced that eight of its subsidiaries are under liquidation, while thirty-five other firms will be sold out. These are mainly firms in the food, food processing and agricultural products industries, some of which are controlled jointly with co-operatives. The National Bank has also announced a plan for selling out seven of its firms involved in beverages, wood, cement, metal pipes and furniture, shipbuilding, banking and insurance. The Commercial Bank is advancing the privatization of a smaller bank, a large shipbuilding company, and an engineering consulting-construction firm. Partial divestitures have also taken place by these holdings selling their shares in enterprises in the Stock Exchange.

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PRIVATIZATION The thinking on privatization The most important reasons or circumstances that have prompted the thinking in favour of privatization are the accumulated public sector deficits and the chronic losses of many public enterprises. During the last decade deficits soared very high. The take-over of ‘problem firms’ in the early 1980s has accentuated the problem. Public enterprise deficits have gradually accumulated and put a great burden on the public exchequer. In 1990 there was a steep increase in loan guarantees which fell off and the government had to provide for their repayment. The difficulties in raising funds to cover the deficits of the wider public sector have prompted a critical argument and was used by the government to secure widespread acceptance of privatization. Important factors, but of lesser significance, were those related to the inefficiency of public enterprises, political ideology and international pressures. Public enterprises have generally figured in public debate as sluggish bureaucracies, inefficient and resistant to change. However, it has also been recognized that some enterprises pursue social and developmental goals for which they are not compensated. After all, many enterprises were created to pursue wider non-commercial objectives. Their deficits are, to an extent, due to the state’s failure to provide compensation for such activities. The tight control exerted by supervising ministries and politicization have been widely recognized as important reasons for their inefficiency. To an extent public enterprises have been used by politicians and party members in power for political purposes, and this has inhibited efforts for their modernization. On the other hand the efficiency of the private sector itself has been questioned; some of its inefficiency has been nationalized, as many privately-owned ‘problem’ firms have been taken over by the state in the last decade. These considerations have weakened the strength of ‘inefficiency’ as a reason for privatization. Political ideology and related international trends have been another reason. The ruling conservative party has advanced the argument of reducing the domain of the public sector and liberating the economy from state control. This, however, was not advanced to the stage of specifying a clear programme of privatization. During its first year in power the government gradually moved into more specific plans, as it faced the problems of public enterprises in all sectors of the economy. Policies and plans appear to emerge through top down pressure, meeting some resistance from the party organization and the politicallyappointed nomenclature which occupied managerial and other posts. Affiliation with other conservative parties abroad and world-wide trends may have had an influence in shaping thinking towards privatization and liberalization. International pressures, especially from the European Community, have had an influence in advancing policies for deregulation and liberalization. The Community policies were important in enhancing competitive structures. Examples are: European Economic Community (EEC) reactions to converting debts of ‘problem firms’ to equity, and dismantling of state monopoly in the provision of terminal telephone equipment, directives for procurement and so on. The loan which the government secured from the European Community in 1991 in order to cover deficits was linked with measures for reducing deficits; special provisions were made in the state’s budget for proceeds to be generated by selling out or liquidating public enterprises. Suggestions made by the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) in their reports have also had a positive effect on changing the attitudes in favour of liberalization policies and privatization. Attitudes towards privatization have turned positive during the last two to three years. Earlier the argument was that of social control, modernization and reform of public sector enterprises. There was a

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protracted discussion on a minimum programme of liquidations of problem firms by the socialist government. But implementation was postponed, partly because of resistance by workers and unions in these industries, and partly because of lack of widespread public support. Preparations were, however, made for compensating workers who would remain unemployed after the closures. Today there is considerable consensus among political parties that some privatization should be promoted. Differences exist as to the extent of the privatization progamme as well as the form and methods of privatization. The conservative government is advancing an ambitious plan of privatizations in all sectors and forms. It has already budgeted for a sizeable amount of funds to be generated from the selling-out of public sector firms. A high-level inter-ministerial denationalization committee was formed in an effort to coordinate and speed up implementation. The committee is chaired by the Minister of National Economy and has as members the Minister of Treasury and the Minister of Industry-Energy-Technology. Its stated purpose is to transfer to private owners or to liquidate firms controlled and managed by the state or its organs, paying particular attention to transparency of actions. A special secretariat was formed in the Ministry of National Economy to aid the process but implementation is decentralized, undertaken by the sectoral ministries, holdings and other organizations. Provisions were passed in a law, securing potential buyers from tax requirements which may arise from operations before the transfer. Independent financial firms and consultants were used for valuations of firms and for the bidding process in order to enhance transparency. The opposition parties have criticized the government for selling out all public sector assets including firms of ‘strategic importance’. Accusations about lack of transparency and promotion of affiliated interests have also been reported in the press, for example, in the case of Olympic Catering. The issue of workers laid off under liquidations has been contentious. Members of the socialist party have publicly accepted the necessity of some privatizations and liquidations, especially for overborrowing firms or firms which operate in a competitive private sector. The coalition of parties on the left has generally been more reserved as to the extent and methods of privatizations. The experience which it gained through participation in short-lived successive governments in 1989–90 has had a noticeable impact in shaping its thinking on the issue of problem firms. So some undefined minimum programme of privatizations may be acceptable along the whole political spectrum. Forms of privatization The government has been criticized as not having a formal plan with specific forms of privatization for enterprises in various situations. The Inter-Ministerial Committee has classified enterprises into three categories: (i) viable enterprises which meet the conditions required to be transferred through the Stock Exchange; (ii) viable enterprises which will be transferred directly, outside the Stock Exchange; this category includes enterprises which need financial restructuring and arrangement of debts before they are sold; and (iii) enterprises which are not viable and will be liquidated as totalities or by asset stripping. A stated policy of government is to eventually transfer all commercial and manufacturing enterprises other than utilities to the private sector. A total transfer of ownership is sought, although in some cases the state may temporarily keep part of the shareholding. For example, Olympic Catering was such a case; part privatization includes an option of total transfer at a later stage. With respect to utilities and enterprises directly controlled by ministries, a plan has been announced to pursue injection of private capital up to 49 per cent, that is, the state will keep majority ownership. Other enterprises, for example, state banks, have sought private capital injection through the Athens Stock Exchange.

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For enterprises in the second category shares can be transferred either to intermediate financial institutions, or directly to the ultimate investor-buyers. In the latter case the transfer can be made either directly through submission of tenders by interested buyers to the sellers and direct negotiations; or indirectly through independent intermediate financial organizations who will search for buyers. Intermediates which have ownership relationships with the seller or are associated with a specific buyer are precluded from this process for reasons of transparency. It is also forbidden for the seller to discriminate among buyers in financing the acquisition. Changes in organizational and managerial structures have also been used. An example is the agreement with Lockheed to undertake the management of the Greek Aerospace Industry for a period of two years. A plan was advanced for Athens buses to break up the existing organization into six area-based firms and to transfer ownership of individual buses to drivers and others. This, however, met with the strong resistance of transport unions and, following some long industrial actions, the government decided to reconsider its plans. Related to such structural changes are provisions for liberalization and competition. It appears that up to now the government has not placed much emphasis on promoting structures that enhance competition in the context of privatization plans. For example, no permits were given to new airlines to compete with Olympic Airways in domestic markets although there is a queue of demands. The debate takes place in terms of transferring whole enterprises to the private sector rather than in terms of restructuring and competition. Contracting-out and leasing-out state assets have not been extensively discussed as forms of privatization yet. Policies have started to be formulated, especially in public administration, for contracting out support services instead of developing their supply in-house. Examples are: monitoring or regional investment plans and EEC programmes, developing information systems, assigning meter reading to private parties (for example, water utility), and assigning the construction and operation of public infrastructure to private firms. Joint ventures with private firms are another form of privatization; an example is the development of mobile telephoning. Regarding contracting-out, reservations are expressed that widespread promotion of such policies will reduce even further the low productivity of public administration. Efforts to introduce market criteria in the areas of investment, pricing, financial targets and discipline, procurement, compensation for non-commercial activities (social, national) and subsidies have not been intensified. These were emphasized in previous years in the reform programmes of public enterprises advanced by the socialist governments. It is recognized, however, that their effect was limited. So scepticism arises as to whether such internal reforms can be more effective than privatization of ownership and control. Noticeable changes were: introduction of cash-flow monitoring by the Ministry of National Economy for enterprises directly controlled by Ministries (‘DEKO’) and imposition of strict borrowing limits; and reduction of state guarantees for loans raised by public enterprises. Thoughts are also prevalent to settle some large debts among public sector enterprises (for example, overdue electricity or oil bills and insurance contributions) by converting them into equity capital. This practice was followed in the capital restructuring of problem firms but has met with objections from the EEC. There is a danger, however, that concentration on ownership transfers will have a negative effect on efforts for enterprise modernization and reform of the regulatory framework. Another form of privatization which has not yet received much attention is employee buy-outs. This may partly be due to the attitude of employees against privatization. Initially there was a strong resistance from them to privatization plans. As the process evolves, however, employees begin to put forward plans for buying-out their firms through employee co-operatives, alone or jointly with other private buyers. As a first phase, employees of certain problem firms, which have ceased operations and are awaiting liquidation, have proposed to undertake the reactivation of these enterprises, paying rent until the transfer of ownership is effected.

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It appears from the above that the ‘Greek model’ of privatization is still in the process of shaping. The forms and methods which will emerge out of the implementation effort will certainly express solutions to the specific realities of the Greek context. As noted in the first part of this paper, only a few relatively small enterprises have been transferred to the private sector until today. Greek society has to realize the magnitude of its constraints as it further advances the privatization process. Problems in implementation The main problems encountered in the implementation of privatization are as follows. (a) Inadequate preparation—piecemeal planning The lack of a well-prepared plan for privatization has been one of the reasons that caused criticism. Changes in government views and plans in the course of action, occasional retrenchment and contradictions, arouse a high level of uncertainty over privatization policy and its methods of implementation. Assertiveness in the selected routes and in their outcome is not high. It appears that the Greek model of privatization is continuously shaped in the course of action and may emerge as a clear model when more and larger enterprises enter the privatization process. Lack of previous experience and limited understanding of the dimensions of Greek complexities may partly explain the limited preparation. Potential buyers, however, may be discouraged by the uncertainty surrounding the plans and terms of privatization. The rules of the game are far from clear. The need for a master plan has been noted by several inside participants and outside observers. (b) Administrative, regulatory and legal constraints The existing administrative limitations, regulatory and legal constraints have caused various problems in the privatization efforts. Protective measures and statutory regulations have to be modified so as to dismantle obstacles to competition and to the transfer of public sector activities to the private sector. This includes changes in provisions defining exclusive rights and public monopolies (for example, in electricity, telephone, bus routes, and so on), adaptation of public accounting to the privatization requirements in order, for example, to allow for state funds from the EEC to be managed by private undertakings, and so on. The legal rights of previous owners of problem firms who have appealed in the European Court against IRO have caused delays and uncertainties, with political implications. Legal rigidities constrain managerial action as, for example, in changing a liquidator when the process has been stalled or in running a shareholders’ meeting when offices are blocked by workers undertaking industrial action. The capacity of public administration to prepare for a potential privatization programme has been limited. The government had to seek assistance from foreign consultants and financial institutions. (c) Corporate restructuring and debts The potential demand for the firms under sale is constrained by problems with their previous debts to banks, insurance organizations and the state. Solutions to these problems through conversion of debts to equity have

PRIVATIZATION IN GREECE

37

implications for the capital structure and for creditors and owners. The European Commission has expressed concern with the competitive impact of such measures. Rearranging obligations requires changes in certain legal and administrative regulations. Today it is difficult for potential buyers to have a clear picture of the obligations which they will undertake together with the company. On the other hand, the burden to the Treasury from bad loans may limit the net contribution of sale receipts in the context of the budget deficit. Problems with employees in companies to be transferred have also been a major concern to the government and buyers for different reasons. (d) Reactions from employees and social groups The reactions of employees and social groups to the privatization plans in some enterprises were very strong. An example is found in the case of Athens buses where the plan was postponed with an expressed intention to be reconsidered. The unions, which are mainly controlled by the opposition, have expressed their opposition to the ‘selling-out’ of the Greek industry. Support to their industrial actions is usually provided by the opposition political parties. (e) Problems with party political support The party organization and nomenclature running the public sector enterprises have been slow in promoting privatization plans. On some occasions they openly objected to the selling-out or liquidation of specific firms, arguing in favour of solutions that maintained the public character of various enterprises. Union members affiliated to the ruling political party have the difficult problem of reconciling the demands of groups of employees with government policies for lay-offs and privatization. The traditional politics and expectations of an elected party to control resources and appointments in most sectors of the economy had to be reconciled with the loss of control that privatization would entail. This implies a transformation in attitudes that may take time to take place. As privatization gains momentum other problems may appear to be critical in the future. One consideration refers to the total amount of private capital that potentially can be extracted from the private sector in Greece. Domestic limits may necessitate a concerted action to bring in foreign capital. Already about two-thirds of buyers who have expressed interest are foreigners. From a business point of view opening in international markets may be a necessity, but this may eventually cause further reactions stemming from deeply-rooted national sentiments. Or, special techniques have to be introduced for safeguarding against the loss of national control. CONCLUSIONS The previous analysis shows that the Greek public enterprises cover a wide part of the corporate sector. This provides considerable scope for a sizeable privatization programme. Privatization as a policy has gained acceptance in the last two to three years in Greece and, consequently, experience is still limited. Early in the last decade the prevailing policies were those of social control and modernization of enterprises, to be restrained towards the end of the decade, and then to give way to privatization in the early 1990s. The privatization process has met considerable administrative and legal problems, and reactions from workers, political parties and nomenclature. Only a few small enterprises have

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been transferred to the private sector so far. Certain forms of privatization other than ownership have not been emphasized yet. Planning has been piecemeal and evolutionary. In the context of these initial efforts a ‘Greek model’ of privatization is gradually emerging from actions as they occur. It is envisaged that the implementation of privatizations will intensify, as it is undertaken in a decentralized manner, by various organizations and holdings. It will gradually get more acceptance as initial problems are solved and experience accumulates. The needs of public sector finance will maintain high pressures on the government for further privatizations. It is important, however, to link privatization of ownership with liberalization of markets and promotion of competition as a regulatory form. Independent regulatory machinery has to be developed which will be free from the traditional pathologies of politicization and state interventionism that are endemic in the Greek economy. It is also likely that the emphasis on privatization will divert attention from enterprise modernization and institutional reform. Earlier reform efforts with respect to enterprise restructuring, autonomy and accountability should be intensified along with privatization. NOTE The paper is based on information and statistics published by various sources, on a survey of press publications during the last year, and on internal reports, presentations in conferences and forum. Thanks are due to Dimitris Tsonos who helped with information collection. The author is, of course, solely responsible for any shortcomings in data and interpretations.

3 Privatization in Turkey N.Bulent Gultekin

INTRODUCTION Privatization appeared on the economic agenda in Turkey with the coming to power of the Ozal government in November 1983. The new government believed that the state should not engage in commercial activities where the private sector could move efficiently. The state’s role should ideally be confined to developing an infrastructure, primarily in energy, transportation, and telecommunications, while maintaining responsibility in public sector areas such as education, health care, and national defence. The government envisioned the privatization of the state economic enterprises (SEEs) as an important part of the shrinking of the state sector in relation to the private sector. This view reflects an important policy shift in Turkey where the state took an active part in the industrialization efforts of the country by founding major enterprises in all areas of economic activity since its foundation as a modern and secular republic in 1923. The Ozal government’s privatization programme had several objectives. The first was to separate the business decisions from the political decisions in the economy, particularly in the sphere of SEEs. The government, as in most countries, proved to be a poor manager for commercial organizations as the economy got more complex. Although most SEEs and their managers contributed significantly to the development of the country, they were extremely politicized during the coalition years of the 1970s. Successive governments used the SEEs as a tool of their patronage policy, which caused serious overemployment, misplaced investment decisions, and continuous budget deficits. There were many attempts during this period to reform the state enterprise sector with little success. The Ozal government believed that privatization of SEEs would solve this problem once and for all. Improved efficiency of privatized enterprises by establishing competitive markets would make everyone better off. A second objective of the privatization programme was to foster the development of capital markets. The Turkish financial markets were dominated by commercial banks, and short-term bank financing was virtually the only source of financing in the country. The privatization programme was expected to increase the know-how in financial markets and encourage savings through financial instruments.1 The third objective was to widen the share ownership in the country. Politically, it was a desirable policy to enable the citizens to have an equity interest in the future of the country. More recently, a fourth objective was added to the list. While it is not officially acknowledged, raising revenues to finance the budget deficit became the most important goal.

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THE STATE ENTERPRISE SYSTEM Enterprises that are owned by the state in Turkey can be classified into three broad categories.2 The first group is called state economic enterprises (SEE). SEEs are joint-stock companies wholly owned by the Treasury. Administratively, a SEE reports to a ministry which is typically responsible for the policy-making and the co-ordination of the activities of SEEs in an industry or a sector. Portfolios of SEEs under a ministry often included a state bank which was to provide financing for the sector.3 Although SEEs theoretically have reasonable latitude for their management decisions, political interference has been common, particularly in pricing and investment decisions. All SEEs were subject to the same rules for auditing and personnel policies and their investment decisions have to be approved by the Supreme Planning Council as part of the annual budget.4 There are about thirty-five such very large enterprises, eight of which are state monopolies. Most large SEEs are organized under a structure similar to a holding company. The second group includes wholly-owned subsidiaries of SEEs and joint ventures with other private parties holding equity participation over 50 per cent. There are more than eighty such enterprises. Privately-owned or contracted enterprises with equity participation of the state through SEEs or their subsidiaries make up the third group. The share of the government is technically less than 50 per cent in these corporations which cover a vast array of industries.5 There are over 200 of this type of enterprise and over fifty of these were joint ventures with domestic and foreign investors or firms. Table 3.1 provides some selected official figures about the SEEs in the manufacturing sector and their relative size in the Turkish Table 3.1 Selected figures on the performance of SEEs in the manufacturing sector in Turkey Selected ratios

1988

SEE’s export/total exports 10.40 SEE’s imports/total imports 33.07 SEE’s employment/total employment 3.70 SEE’s fixed invest./total public fixed 44.70 SEE’s fixed investment/total investment 21.23 SEE’s financing requirement/GNP 2.60 SEE’s borrowing requirement/GNP 2.71 SEE’s financing surplus/GNP 2.50 Foreign project loans/SEE’s borrowing 59.00 Budgetary transfer to SEE’s/GNP 1.00 Budgetary transfer to SEE’s/budget 4.80 expenses SEE’s consolidated profit/GNP 1.10 Source: Study on general investment and financing programme, Public Finance Department. Note: GNP=gross national product.

1989

1991

16.99 32.64 3.60 40.72 14.18 1.64 2.58 2.42 35.85 0.72 3.16

19.33 34.40 3.70 35.89 15.80 1.40 2.36 2.10 41.00 0.45 1.99

0.65 0.10 Under Secretary of Treasury and Foreign Trade,

economy. These official figures do not reflect the importance of the SEEs and the role of government in the Turkish economy adequately.

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The SEEs are mostly very large enterprises in the crucial sectors of the economy. Some are natural monopolies, while others are virtually monopolies because of the very large size of investment required for entry. Table 3.2 summarizes the employment sizes of major SEEs in 1985 at the outset of the privatization programme.6 The SEEs in Turkey, as in most countries, operate over the entire spectrum of industries and they are geographically spread over the whole country. Although most SEEs report profits, as a general rule, only a handful are profitable. Of those profitable, even fewer have positive cash flows because of the massive investment programmes they undertake. Most show profits by artificial accounting. The official figures about profitability of SEEs in Table 3.1 are not reliable. Most large SEEs are vertically and horizontally integrated conglomerates. Such a highly-integrated structure with often fragile financial health causes serious problems for a privatization programme as most enterprises are not ready for immediate or rapid privatization because Table 3.2 State Economic Enterprises and their sizes by employment—1985 State Economic Enterprise

Activity area

Employment

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 18 19 20 21 22 23 24 25

Machines, chemicals and arms Textile, banking Paper and pulp Cement Steel Forest products Mining and banking Coal-mining Coal-mining Electricity Petroleum and refining Petrochemicals Fertilizers Sugar production Meat packing Soils products Milk products Tea production Alcohol and tobacco State farms Feed stock Agricultural equipment Office supplies Railroads Postal office and telephone Airport administration

17,799 42,629 12,463 12,136 31,493 4,639 28,314 36,318 31,318 62,690 17,103 7,553 6,783 31,019 6,722 7,640 2,309 37,120 57,325 12,717 1,464 7,493 1,805 65,177 79,855 3,567

Makina Kimya Endustri Kurumu Sumerbank Seka Citosan Turkiye Demir ve Celik Isletmeleri Orman Urunleri Sanayii Kurumu Etibank Turkiye Tas Komuru Kurumu Turkiye Komur Isletmeleri Turkiye Elektrik Kurumu TPAO Petkim Turkiye Gubre Sanayii Turkiye Seker Fabrikalari Et ve Balik Kurumu TMO Turkiye Sut Endustrisi Kurumu Caykur Cay Isletmeleri Tekel Tarim Isletmeleri Yem Sanayii TZDK DMO TCDD PTT DHMI

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State Economic Enterprise

Activity area

Employment

26 THY State airline 7,243 27 USAS Catering 5,320 28 Turkiye Gemi Sanayii Shipbuilding 5,320 29 Turkiye Deniz Isletmeleri Maritime operations 13,716 Source: Kamu iktisadi Tesebbusleri 1985–1989, Undersecretariat of Treasury and Foreign Trade, Ankara, 1989.

of the immediate need for various degrees of restructuring and reorganization. The enterprises of participation in SEEs and their subsidiaries present a different picture. ‘Participations’ can be classified into two broad categories. The first group includes joint ventures with Turkish and foreign firms. The origins of joint ventures vary. Before the liberalization rules on foreign direct investment, foreigners were allowed up to 39 per cent of a firm. The state was often a partner in these joint ventures along with Turkish investors.7 These firms are for all intents and purposes privately owned and wellmanaged corporations. The state was always a passive investor with a minority position on the boards. Privatization of these firms is nothing more than divestiture of minority shares of the state. If publicly offered, they would provide an invaluable opportunity to develop the capital markets. The second group of the participations includes firms that were set up in the less developed regions of the country to provide employment and to reduce regional differences. These firms were a new breed of stateowned enterprises and constituted the government’s approach to help the less-developed regions by creating a private sector in these areas. The model is to create joint ventures with entrepreneurs and private firms; and once they become profitable, government would sell its shares. Privatization of these enterprises would be a long-term and continuous process. DEVELOPING THE PROGRAMME Legislation The State Planning Office initiated the work on privatization. They prepared an extremely pragmatic legislation that could be a model for other countries. The Privatization Law, a three-short-page but comprehensive document, enables the Council of Ministers to decide on which SEEs are to be privatized. The Council of Ministers authorizes transferral of the ownership of these companies from the Treasury to a newly-created agency called Housing Development and Public Participation Administration (HDPPA). HDPPA, as the sole owner of the enterprise, has the authority to appoint and empower the board of directors to make all necessary decisions to prepare an SEE for privatization. The Privatization Law gave HDPPA the responsibility to prepare the final privatization plan and determine the method of privatization. Final approval of the privatization of an SEE was vested in the Supreme Planning Council, the highest decision-making body for economic policy in the country which also acted as the board of directors of HDPPA. The purpose of delegating the responsibility of privatization activity to a newly-created agency was twofold. First, such a move was expected to remove SEEs from the political influence of ministries. The new agency reported directly to the Prime Minister through the Supreme Planning Council while preparing the SEEs for privatization. The second reason related to the bureaucratic tradition of the country. Turkey has a long tradition of state ownership. The SEEs were the first factories of the new Turkish Republic in the early

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1930s and they symbolized the nation’s aspirations for industrialization. The sale of government property ran counter to this tradition. In addition, most civil servants, in controversial undertakings, are highly risk averse. The Housing Development and Public Participation Administration was an extra budgetary fund8 and was designed to be a dynamic agency by a special law. In addition its chairman, who was at the level of an Under Secretary of State in the Turkish government, was empowered with broad authority. The agency was free of the red tape that restricts most government agencies in personnel and procurement decisions. The original intention was to keep a very small group of highly-qualified technicians as quick decision-makers and delegate most of the work to outside consultants and advisers. The chairman reports to the Prime Minister through the Supreme Planning Council which serves as the board of directors of the agency.9 Once an SEE is turned over to the HDPPA, the agency prepares a new corporate charter to allow the SEE to be managed for all intents and purposes like a private company under the Turkish commercial code. The Privatization Law provided broad powers to the management and the board of directors of the enterprises to be privatized. While there were no formal barriers preventing the board and management of the company from exercising their increased authority and autonomy, in reality old habits, traditions and inertia prevented this. By the time the Privatization Law was enacted in 1986, the State Planning Office had already completed a master plan with the assistance of a small team from an American bank and partial financing from the World Bank. The plan made a list of state-owned companies and divided them into three categories: those that could be privatized immediately, those that needed restructuring before privatization, and those that could not be privatized.10 The Plan attracted more public attention and created more anxiety than was warranted and consequently was ignored entirely later. As the experience in Turkey illustrates, there is need for a strategic plan for privatization. Privatization in any economy is always a difficult complex process. At the beginning, there is usually confusion about what privatization means, even among the policy-makers who instigate the programme. A strategic plan at the outset is helpful to clarify the objectives of the policy-makers and to establish realistic targets. It should not be a detailed plan at the enterprise level or comprehensive sector studies. Those will be done later in more detail when more information is available.11 A strategic plan would describe the sequence of actions and the tasks for the policy-makers so as to outline the wider picture. A privatization programme in a developing country is a large-scale project management task and it should be designed as such. Organizing the process The most difficult challenge was staffing and organizing the new agency for the task. There were two problems at the beginning. The first was the lack of experienced people for the task. This is not unique to Turkey. Privatization uses skills at the cutting edge of corporate finance and financial markets. It is difficult to find people with these skills in the public sector of even a developed economy; and it is certainly much more difficult to find them in a developing economy at the beginning of the programme. Advisers often cannot substitute for decision-makers. An additional problem was the ambiguity of the lines of responsibility and authority in the process. HDPPA was the agency responsible for the privatization programme, along with two other important, but unrelated, activities. The vice-chairman of the HDPPA was directly responsible for the development of the privatization programme.12 He was reporting both to the chairman of the HDPPA and to a state minister who was in charge of the privatization programme at the Cabinet level, while the chairman of the HDPPA was reporting directly to the Prime Minister. In other words, three people, all reporting to the Prime

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Minister, were in charge of the programme in different capacities. Such a situation was not stable and it took several years to settle. The lesson from this experience is that the importance of organizational capacity and clear lines of authority for quick decision-making cannot be overemphasized for successful implementation of a privatization programme. Privatization is both a technical and a political process. There is no clear-cut way to separate the two. The agency in charge of privatization and its staff should be competent to manage an army of advisers and act in a timely fashion when decisions are needed on a variety of technical issues. Ideally, a privatization agency should not do anything internally which it can contract out. In some sense, privatization should start at the agency itself. It should act like a project manager and make sure that everyone adheres to the timetable. The management of the process must take political factors into consideration, as well. There is usually an incipient resistance against such a new agency within the traditional bureaucracy. There is usually no consensus or even a clear understanding about the privatization programme within the government and the ruling party.13 Most SEEs have serious financial and management problems requiring substantial financial and asset restructuring before privatization. Co-ordination with ministries and other government agencies is crucial and the agency should have enough political clout. Most importantly, the government should have the political will to get decisions made in other agencies. In Turkey, the Supreme Planning Council, as the decision-making body of the privatization agency, was powerful enough to do the job. In reality it was Prime Minister Ozal who was the driving force behind the programme. Whenever his attention was diverted to other issues, the process slowed down. For large programmes as in Turkey, the person in charge of the programme should have sufficient political authority and technical competence. To provide political authority, this person should be appointed at the ministerial level; otherwise the process is too detailed and full of bureaucratic traps and consequently will be slowed down at every level. It is also important for this person to possess vision and managerial skills. It is easier to learn the essentials of privatization than acquiring vision and managerial skills. IMPLEMENTATION OF THE PROGRAMME In 1986, the Supreme Planning Council turned over two SEEs, eight subsidiaries, and thirty-five joint ventures to HDPPA. Only a handful of these firms were included in the master plan. Two SEEs, one a giant textile conglomerate with over 45,000 employees, and the other a petrochemical complex with a problematic subsidiary with an incomplete tyre plant, were among these. By May 1991 this list included three SEEs, two of the original ones still on the list, and twenty subsidiaries, of which five were banks, and sixty-three ‘participations’. Teletas, a digital switchboard producer, was chosen to be the first public offering. HDPPA owned 39 per cent of Teletas, and the rest was owned by foreign and Turkish groups. The choice was heavily influenced by the success of British Telecom. The Turkish Postal, Telegraph and Telephone (PTT) company was the sole buyer of the products of Teletas, and PTT owned the shares of Teletas before they were turned over to HDPPA. The agency had to restructure the balance sheet of Teletas to get it ready for privatization.14 In February 1988 Teletas was offered to the public with huge success. The staff of the agency executed the initial public offering competently. The documentation and prospectus were meant to set examples in Turkish capital markets. The issue was oversubscribed, and 42,000 investors became shareholders for the first time with a successful distribution system. The Ozal government came to power in November 1983. The Privatization Law was enacted in 1986, and the master plan was completed in 1987, while the implementation of the first offer took a year. There followed a long pause in activity. Delays were inevitable in the first issue. It was an education for everyone involved.

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45

The Teletas offering, however, consumed all the staff time. This illustrated the necessity of improving internal operations by delegating enough responsibility to financial advisers. Otherwise, the staff can only deal with one issue at a time. Efficient management of the agency is crucial for the speed of the process. It is very crucial to plan ahead to fill the pipeline so that privatization continues without long delays.15 The fundamental importance of installing basic systems for the rapid execution of sales and restructuring and planning the agency’s internal affairs is often severely underestimated. A resident advisory group could improve the efficiency substantially. While the offering of Teletas was executed successfully, the timing was not good. The government’s fight with inflation, which reached around 80 per cent in annual terms, sent interest rates to record heights and stock prices on the Istanbul Stock Exchange to record lows. The HDPPA had to support the Teletas price on occasions. The vagaries of the economy are always a problem for privatization programmes and Turkey is not an exception. Privatization in most developing countries is done in less than ideal conditions. Privatization is often part of the movement of an economy toward a more market-oriented structure. Governments often have conflicting objectives, all of which are legitimate, yet which cannot be achieved all at once. Co-ordination of the privatization activity with the rest of the economic policies is necessary. Otherwise, conflicting or poorlysynchronized policies further complicate the privatization programme. The response of the agency to the problem of depressed capital markets and a volatile economy was to work on the SEEs that required significant restructuring, or at least reorganization, and until the capital markets had improved, to concentrate on trade or block sales of state companies to other private companies with a stipulation that they offer part of the company to the public within three to five years. Two of the SEEs that were turned over to the HDPPA had serious financial problems. Both firms were heavily debtladen, and one of them had interest expenses exceeding its revenues. It was not possible to privatize these SEEs without major financial and asset restructuring. Efforts were concentrated towards smaller firms. Two companies were sold to foreign companies at the end of 198816. The first was a catering company—a majority interest of 70 per cent was bought by a Swedish company. The second was a group of five cement factories which were sold to a French cement concern. Both companies needed additional investments, and they did not have proper management in place to go public (see Table 3.3). These two firms were sold to foreign firms. Two new developments in Turkey have had significant effect on the privatization programme since 1989. The first was the unusually good performance of the Istanbul Stock Exchange. Capital inflow into the country, the drop in interest rates, and the forming of the Turkish Investment Fund listed at the New York Stock Exchange started a bull market. Istanbul Stock Exchange was the best performing market in the world in 1989 (see Table 3.4). The rapid rise of stock prices both posed an opportunity and a problem for the HDPPA. Opportunity in that public offerings were possible with renewed interest in the equity market, and a problem in that the HDPPA had a large portfolio of shares of participations that were listed on the Istanbul Stock Exchange, and was thus the largest potential supplier of new securities. The agency sold shares of listed corporations through brokers on Istanbul Stock Exchange partly to stabilize the stock price movements and partly because they were not prepared for public offerings. The HDPPA sold over US $260 million worth of stocks from its portfolio in 1989.17 The continued rally of the Istanbul Stock Exchange allowed the HDPPA to undertake a series of public offerings of those shares already listed and new shares. Over US $300 million worth of shares were offered in 1990, an amount that was unthinkable just a year earlier. The second development was the change in the political climate in the country. In Turkey there were two referendums, one general election, several interim elections for the parliament, and a nation-wide election

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for the local governments between the last quarter of 1986 and the first quarter of 1989. Consequently, the economic policy of the government did not follow a consistent path. The privatization programme was one of the first programmes of Table 3.3 Public offerings State share (%) Offered public(%) Date of offering Proceeds US$ (1, Sales from portfolio 000) of HDPPA at Istanbul Stock Exchange A. PUBLIC OFFERINGS Teletas 40.00 22.00 2 Feb. 1988 13,090 Erdemir 51.53 2.95 9 Apr. 1990 53,105 Kepez Elektrik 43.68 8.16 16 Apr. 1990 9,390 Cukurove Elektrik 25.44 5.46 16 Apr. 1990 38,829 Arcelik 15.00 5.83 30 Apr. 1990 19,890 Bolu Cimento 35.53 10.38 30 Apr. 1990 8,268 Celik Halat 29.28 13.18 30 Apr. 1990 7,750 Petkim 99.97 7.54 18 Jun. 1990 150,633 Konya Cimento 39.87 31.20 25 Oct. 1990 17,664 Unye Cimento 49.21 2.86 1 Nov. 1990 927 Mardin Cimento 46.23 25.46 22 Nov. 1990 9,161 THY 100.00 1.5 29 Nov. 1990 13,925 Adana Cimento 23.86 17.16 18 Feb. 1991 27,958 Migros 42.22 36.40 25 Feb. 1991 5,609 Afyon Cimento 99.59 39.79 25 Mar. 1991 8,422 Ditas 14.77 2.51 6 May 1991 219 Nigde Cimento 99.83 12.51 13 May 1991 2,604 Total 387,444 B: TRADE SALES Usas 100.00 70.00 2 Feb. 1989 14,450(*) Afyon Cimento 99.59 51.00 5 May 1989 13,000(**) Ankara Cimento 99.30 99.30 5 May 1989 33,000(**) Balikesir Cimento 98.30 98.30 5 May 1989 23,000(**) Pinarhisar Cimento 99.90 99.90 5 May 1989 25,000(**) Soke Cimento 99.60 99.60 5 May 1989 11,000(**) Tofas-Oto 39.00 16.00 22 Feb. 1991 13,070 Ansam 88.33 88.33 28 Oct. 1988 13,588 14 small firms 13–100 all 1986–91 3,433 Total proceeds 126,546 Notes: * Sale price includes an earn out of 21 per cent of the net income for the next ten years ** Buyer has to offer at least 40 per cent of the shares to the public in five years

2,124 97,915 3,115 54,387 49,987 7,551 10,075 9,424 9,516 4,229 10,361 17,119

275,803

PRIVATIZATION IN TURKEY

47

Table 3.4 Trading volume and performance of Istanbul Stock Exchange Year

Index at year end (1/1986=100)

Annual volume US$(1,000)

1986 1987 1988 1989 1990

170.9 673.0 373.9 2,217.7 3,255.7

13,000 123,000 105,000 818,000 5,190,000

the government to suffer, not because of the ups and downs of the economy and the financial markets, but because of political uncertainty. The results of the March 1989 local elections affected the programme most adversely. The ruling party candidates were able to get only 23 per cent of the votes nation-wide, down from 36 per cent in the previous general election. A major shuffle within the government brought additional turmoil, and there was a new minister in charge of the privatization programme in the reformed Cabinet. While public offerings continued successfully and the development of capital markets was a remarkable success, the privatization programme has not yet reached the most important objective of improving the efficiency of the SEEs. Most of the offerings were divestitures of minority shares of private corporations held by the state. The success of public offerings opened the way for privatization of the state enterprises, but there is very little done to privatize the state sector itself. When Mr Ozal became the seventh President of the Republic of Turkey in November 1989, his successor as Prime Minister was not able to fill the vacuum left behind him. The most unfortunate effect of the turmoil in the ruling party was the politicization of the SEEs once again to the levels of late 1970s. It is ironic that the very same party which came to power on the platform to reform these enterprises and fought vigorously to professionalize their management ended up with the same situation of the past governments using the state economic enterprises for short-term political goals. CONCLUSIONS Privatization in Turkey has been part of a process of restructuring the economy and developing the financial markets. The programme has been extremely successful in developing and deepening the capital markets by initially divesting shares of privately-controlled companies from the state’s portfolio. The success led many family-held corporations in the private sector to raise substantial amounts of equity capital. Few stateowned enterprises were privatized. There exists great potential now for the Turkish privatization programme to achieve its objectives by taking advantage of the positive developments in the capital markets and the attitudes of the public toward the programme. NOTES 1. Development of equity markets would make risk capital available for the thinly-capitalized private firms in the country. 2. Technically, enterprises owned by the state are classified into six groups:

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1 State Economic Enterprises (SEEs) (Iktisadi Devlet Tesebbusu): owned wholly by the state and managed under commercial principals. 2 Public Economic Institutions (PEIs) (Kamu Iktisadi Kurulusu): monopolies owned wholly by the state. 3 Division (Muessese): divisions wholly owned by SEEs or PEIs. 4 Subsidiaries (Bagli Ortaklik): joint-stock companies with over 50 per cent shares owned by SEEs or PEIs. 5 Participation (Istirak): joint-stock companies with equity participation of SEEs or PEIs within 15– 50 per cent. 6 Operating facilities (Isletme): operating and manufacturing facilities owned by the divisions and or subsidiaries. For the purpose of this study, SEEs and PEIs are classified as SEEs for the remainder of the paper. 3 Allocation of SEEs to ministries does not always follow the industry lines and there are many arbitrarily assigned enterprises under a ministry. 4 The organizational structure of SEEs creates a serious problem for corporate governance. Separation of business and investment decisions of an SEE, which is vested with a ministry and an SEE, and the financing decisions, which is the responsibility of the Treasury as the owner, results in ambiguity in financial accountability which is called the soft budget constraint. As one can imagine, lack of financial accountability at the firm level often led to overambitious investment decisions for SEEs. 5 There is another group of joint ventures that came to the state sector from failed banks that were taken over by the state or through bail-outs of failed private enterprises. Ownership in these enterprises varied anywhere from a small stake to the entirety of a company. 6 SEEs in the banking sector are also the largest in the financial industry. TC Ziraat Bankasi, the Agricultural Bank for instance, has over half of the deposits in the banking sector. 7 Import substitution policies of the era before 1980 made these joint ventures attractive opportunities for foreign and Turkish investors. Joint ventures with the state as partner offered a form of protection for investors from competition by prohibiting the importation of any domestically-produced or assembled goods. Partnership with the state in exchange for several seats on the boards for the bureaucrats was a valuable device. The purpose of privatization of the participations is to create competition. Usually, an SEE is a single buyer from its participation and there is very little incentive for the managers of an SEE for cost controls because they sit on the board of these joint ventures. 8 The HDPPA, a brainchild of Turgut Ozal, had two other important functions beside carrying out the privatization programme of the government. It provided subsidized mortgage credit to home buyers primarily for new construction, and loans for municipalities for infrastructure projects for housing. The fund’s revenue came from the import duties on foreign cigarettes and alcoholic beverages as well as the head tax levied on citizens travelling abroad. The second function of the agency was to finance major infrastructure projects in transportation and energy. The agency had the authority to borrow with state guarantees in domestic and international markets. It could issue securities, such as profit-sharing bonds, against revenues from toll roads, and electricity generated from the dams financed the Fund. The agency could also sell equity interest in these projects to public or private investors. The charge for the agency in this function was not only to finance those projects, but also to educate people on capital markets. This function of the Fund proved to be very valuable to educate the public to invest in financial instruments instead of the traditionally-popular tools such as bank deposits, gold, real estate and, more recently, in foreign currencies. The HDPPA was established in 1984, and in April of 1990 it was separated into two new agencies, Housing Development Administration and Public Participation Administration.

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9 The Council consisted of eight ministers and five senior civil servants, the Under-Secretaries of State Planning Office, Treasury, Ministry of Finance, Governor of the Central Bank, and chairman of the HDPPA. The HDPPA began reporting to the Minister of State in charge of the economy after 1988. 10 The team first made a survey of senior-level civil servants by asking them about the objectives of the privatization programme. 11 As most plans, changes are inevitable as more and reliable information becomes available and market conditions change. If the plan is too detailed, any deviation can be used by the opponents of the programme as evidence that the programme is failing. Planned ambiguity is actually useful if changes are needed in future. 12 He was also appointed as adviser to the Prime Minister to enhance his standing in the bureaucracy. 13 It is interesting to note that there is still no document outlining the government’s policy on privatization in Turkey. 14 PTT was in the midst of an overambitious investment programme of providing telephone services even in the most remote parts of the country and was badly behind in its payments. PTT paid its receivables by issuing debt indexed to foreign currency. PTT was behind payments after privatization of Teletas, requiring the extensive attention of the management of HDPPA. 15 There is another reason to continue at a brisk pace at the beginning. It gives a chance to the public to recognize that there are various options and ways of privatizing enterprises and reduces unnecessary speculations. 16 The procedures for the trade sales were simple. The financial advisers prepared an information memorandum for companies to be sold, and the agency advertised in domestic and international media about the sale; but the most effective way to search for prospective buyers has been through the financial advisers. Once potential buyers were identified, the agency negotiated the price and terms of the sale. It was not possible to have an auction, because each buyer had special requests or made offers that were not exactly comparable. But after one or two sessions of negotiations, it was possible to establish the terms of the sale such that the final stage of the negotiations was like an auction where the best price won the deal. Usually, the agency did not entertain enquiries from groups who did not seem serious enough or competent enough to run a company that would go public in a few years. A bid bond of 2–5 per cent of the offer price with a minimum was an effective screening tool. 17 Selling through brokers on the exchange instead of a public offering on the primary market undermines public relations. Considering the size of the Teletas offering of US $10 million, the HDPPA could have staged an impressive comeback for the programme. There is further a danger with discreet selling of stocks by the agency. It amounts to state manipulation of the stock market. The stock market is not like money and exchange markets where central banks may interfere to alter prices for macro policies; it is outright wrong and counter-productive for state agencies to interfere with the stock market.

4 Privatization in the USSR* Ekaterina A.Kouprianova

De-etatization of property, is now a very acute issue in the USSR. The policy of perestroika, with its record of about six years, has demonstrated vividly that the command administrative (or administration-by-fiat) system is bankrupt and that the market is the only system capable of leading the nation out of the crisis. Since 1987, attempts have been made to create some intermediate mechanisms of economic management, with the commanding heights remaining in the hands of the state and the field of application of economic methods of management expanding. As public ownership retained its primacy, an economic reform was effected in 1988–9. One of its salient features was the Law on Public Enterprises. It stipulated a greater degree of freedom in economic relations and enterprises’ independence from superior bodies. However, instead of improving the nation’s economic situation, this reform in fact precipitated a grave economic crisis. The old system of management was destroyed, while a new one failed to take shape. Ties between producers were severed, and a great amount of ‘untied’ money came into being. As a result, living standards fell, while the budget deficit increased dramatically. There is therefore no alternative to the introduction of a market economy. The experiment with switching the economy to the market track while preserving all-embracing public ownership has failed. An all-Union market will create a single economic space for widespread and effective economic activity. A programme for the de-etatization of property should result from a consciously-planned strategy which takes the existing economic and political alternatives into account and creates a conducive legislative and economic environment. In an economy with mixed forms of ownership, the transfer of public enterprises to other types of owner ship depends on the development level of the non-public sector, the willingness of the population, the availability of potential investors’ money, and the opportunities for attracting foreign capital. De-etatization of property is essential for encouraging enterprise, abandoning the monopoly of the state in economic activity, and promoting competition among producers. ‘PRIVATIZATION’ AND ‘DE-ETATIZATION’ AS TERMS Applied to the Soviet Union, ‘privatization’ is not a particularly apt term. Roughly, privatization means the transfer of state-controlled enterprises to private ownership. In the USSR the transition to private ownership is not so much an economic as a political issue. Millions of people have been brought up to reject private property. Recently, steps have been taken to restore the good name of private property, albeit with certain reservations (such as ‘earned private property’, the way it was referred to in documents adopted at the 28th

* This paper was written before the disintegration of the USSR.

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Congress of the Communist Party). Towards the end of 1989 official literature began to feature the term ‘deetatization’ which, in the USSR, appears better-chosen with regard to both content and form. The term ‘privatization’ appeared in official literature as late as September 1990, when programmes for transition to a market economy were being discussed. In the Guidelines for Stabilising the Economy and Switching to a Market Economy, the term ‘private property’ is used only in the context of small enterprises. Different authors interpret the words ‘privatization’ and ‘de-etatization’ differently, and this arises from the variety of processes these categories denote. One can single out two of these. First, the process of separating the state from economic functions, that is, from direct economic management. This is how many authors, including the architects of the 500 Days programme, interpret deetatization of the economy. This means, above all, the adherence of enterprises to self-financing and the precept that enterprises bear no responsibility for the debts incurred by the state, and vice versa. Second, the process of changing the owner. The new owner does not necessarily have to be private. The concept of private ownership is interpreted differently in the USSR and abroad. According to western thinking, for example, up to 40 per cent of co-operatives are private capitalist enterprises employing hired labour. The same is true of joint-stock enterprises. In the Soviet Union though, joint-stock enterprises are regarded as representing a collective form of ownership. THE PUBLIC ENTERPRISE SITUATION Most enterprises in the USSR are public. The state intervenes in the affairs of an enterprise, defining its objectives, production costs, output volume and demand for its product, fixing its wages and salaries, and pursuing a state policy of pricing its raw materials and the end products. Public enterprises in the USSR have become economic monopolists. They shaped economic policy (and they still do). The then system of management did not encourage significant commercial activity on the part of public enterprises and made them incapable of responding to technical and technological innovations. Prior to 1987, a public enterprise was issued a state plan which included quotas on all types of products, listed its suppliers and determined how much could be spent and on what. After the Law on Public Enterprises was enacted, the system was somewhat modified. Today, an enterprise is issued a state contract (which, in the absence of a market and with resources distributed directly, is in fact a state order), and most of the enterprises are now selffinancing. The greater degree of freedom enterprises have been granted cannot work effectively under the remaining command-administrative system. In 1990, the balance-sheet value of the USSR’s capital assets (less the value of land, mineral resources, forests and personal property) was 3 trillion roubles. Almost 90 per cent of this amount is owned by the state. The current assets of enterprises and organizations have reached the 800 billion rouble mark, including more than 500 billion roubles’ worth of stockpiled goods and material values. The classification of capital assets by form of ownership is clear from Table 4.1. In industry, capital assets total almost 950 billion roubles. In state-controlled trade (including the catering industry), capital assets make up 40 billion roubles; this sector comprises 250,000 state-run retail stores and nearly 100,000 stalls and kiosks. On the whole, small enterprises are a particularly favourable object of privatization and de-etatization. The small enterprise situation in the USSR is quite distinctive. There are a great many of them in the Soviet Union, most of them publicly owned. But there are only a handful of small enterprises manufacturing technologically-advanced products. The objective of de-etatization is precisely to transform small businesses into a leading sector of the economy and into its motive force, by creating an environment favouring their effective development and by ensuring a change of owner. These public

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Table 4.1 The classification of capital assets by form of ownership Capital assets (billion roubles)

Balance-sheet Value

Percentage

Value minus wear

Public property Co-op property Collective farm property Personal property Total capital assets Public property Co-op property Collective farm property Personal property Total capital assets in production

2,612 55 203 101 2,971 1,771 28 165 22 1,986

87.9 1.9 6.8 3.4 100.0 89.2 1.4 8.3 1.1 100.0

1,690 44 156 69 1,959 1,035 21 123 19 1,198

enterprises will become leased, joint-stock, co-operative, family or private businesses. The Council of Ministers’ Resolution on the Development of Small Enterprises stipulates a number of privileges for these businesses as far as their productive sphere is concerned. However, it is essential to promptly enact a Law on Small Enterprises with a view to establishing a set of favourable conditions for their operation. There are more than 20,000 small enterprises, each employing 200 people or less, and they control assets worth 23 billion roubles. In future, after extensive economic reforms are effected and a market takes shape, the role of public enterprises is sure to diminish. But they will also be operating under completely different circumstances: there will be unhampered circulation of money and stocks with which everything you need can be bought. There will be a developed market of commodities. The state contract will change from a state order into a really voluntary obligation; enterprises will have a stake in it. Public enterprises will form independent voluntary associations and sever the umbilical cord of dependence on central management bodies. A comprehensive Law on Enterprises will come into force putting public property on an equal footing with its other forms. Public enterprises will exist at different levels. At the top, all-union level, there will remain enterprises in the defence and aerospace industries, in energy and nuclear power production, in major railroads and pipelines, in telecommunications, and so on. Enterprises will be created, owned jointly by the constituent republics and by the union; some will be owned by municipal authorities or republics. However, public enterprises will no longer be dominant, as they are now. The bulk of enterprises will consist of businesses representing other types of ownership. THE MAIN AVENUES OF DE-ETATIZATION De-etatization is proceeding in the following main directions in the USSR: first, the establishment of jointstock and limited liability companies; second, the leasing of public enterprises; third, the establishment of co-operatives; fourth, the transfer of enterprises into the hands of private citizens; and fifth, the setting up of joint ventures.

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Joint-stock and limited liability companies The bylaws (Provisional Rules) that have been adopted on the establishment of such companies are a step forward in economic policy. No transition to a market economy is possible without the creation of jointstock and limited liability companies. Joint-stock companies are best geared to the national economy’s need for breaking up giant production entities into smaller units. However, no law on the creation of joint-stock companies has been enacted in the USSR. A relevant bill has been drawn up and is awaiting adoption. Bylaws have indeed begun to shape an environment favouring this form of organization, but bylaws are not enough. The resolution that has been adopted should be improved, and a comprehensive law should be enacted, dealing with many problems which remain outstanding. These refer, first, to the numerous unclear technicalities involved in the issuance, sale and resale of shares. The undeveloped state of our securities market, our stock exchange and our financial and credit mechanism as a whole, as well as the absence of any procedures for assessing the value of property, and the circulation of stocks, presents many problems. Second, while the employees of an enterprise generally have a greater stake in purchasing its shares, one cannot allow all the stock to belong to the employees. This may encourage a steep rise of ‘group egoism’ and produce a monopoly. Third, the concept of the managerial body and its functions should be defined clearly. Fourth, bonds replace shares, and most shares are inscribed. Joint-stock companies are extremely important. They not only raise money but also make investor participation in company management possible. This is one of the best forms of organization relevant to privatization. There can be widespread involvement of private capital, even though the controlling interest may be held by the state, as in Italy. Future prospects include the enactment of a Law on Joint-Stock Companies, the creation of a stock exchange, and proper use of shares. Leasing of public enterprises (including subsequent buy-out) A few years ago, emphasis was placed on the leasing of public enterprises. This was seen as the principal way of increasing the workers’ stake in the results of their labour. When public enterprises are leased, labour productivity rises, almost as a rule, either dramatically increasing the output volume for a given work-force, or reducing the number of workers for a given output target. Currently, particular attention is paid to long-term forms of leasing and to leasing with the prospect of a subsequent buyout. The leasing of land is especially important in the USSR. A leased enterprise shapes its relations with the superior managerial agency on a contractual basis. The leaseholder may buy out the enterprise fully, partly, at one go or on an instalment plan, and subsequently turn it into a collective, co-operative, joint-stock or any other collectively-owned enterprise. By the end of 1989, more than 2,000 industrial and construction enterprises, some 5,000 farms and over 2, 000 enterprises in trade and catering had switched to leasing. Their number has been growing steadily. The practice of various producing branches of enterprises turning into leaseholders is now widespread. However, leasing can hardly play a decisive role in the process of de-etatization. Co-operative enterprises Since the enactment of the Law on Co-operatives, some 200,000 of them have been set up across the nation. They employ a total of 5 million people, and in 1990 their output was worth about 100 billion roubles.

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From the outset, co-operatives were not put on an equal footing with public enterprises. At first, their activities were not taxed; then taxes were introduced, but their size proved to be out of proportion to economic practice. Co-operatives sell their products at unregulated prices and are barred from engaging in many types of activity. Compared to public enterprises, co-operatives are in an unequal Table 4.2 Number of people engaged in individual labour in 1989 Handicrafts Service sector Sociocultural work Folk crafts Other types of work Total

60.4% 28.4% 5.8% 1.1% 4.3% 672,600

position as concerns the terms on which they purchase raw materials, equipment and materials and on which they distribute their products. They encounter difficulties with licensing their products and with exports. All these problems stem from the undeveloped state of our market. The co-operative movement is being resisted powerfully by the conservative part of the population—as a result of frequent cases of co-operatives’ dishonest practices and the high prices of their products. In future, barriers to co-operative activities are expected to be removed. In a favourable market environment, the co-operative movement will develop without the currently prevalent imbalances. Individual labour and private activities The first law concerning individual labour got off to a bad start. It was enacted in the wake of a law on combating unearned income, and this directly affected the development of individual labour. Currently, many forms of individual labour are being legalized (see Table 4.2). The setting up of joint ventures The first joint ventures appeared in 1988. The regulations of the period (the Soviet side controlling 51 per cent of the assets; Soviet labour legislation to be observed by such enterprises) held back their emergence. Within two years, only 200 joint ventures were set up. Conditions improved drastically on 1 January 1989, and up to 100 new joint ventures have since been created monthly. They now total more than 2,000. Most joint ventures are active in the non-productive sphere. Their operation involves certain difficulties, notably, the absence of a market, dependence on the state and the non-convertibility of the rouble. Relevant legal provisions are unclear, and there is no guar antee that joint ventures’ assets are safe. They also encounter problems connected with differences in the technical and technological development levels, the underdeveloped state of the financial market, and the often hostile attitude of the public to their activities. As a result, joint ventures seek to secure quick returns or to ‘skim the milk’. A Presidential Decree on Foreign Investment has been adopted; this is to encourage foreign partners to develop the Soviet Union’s promising market. Foreign investors may take part in the purchase of shares and of land.

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ACTIONS IN DE-ETATIZATION The legislative aspect Successful de-etatization is impossible without a legally-favourable environment. Legislation has recently begun to take shape which will assist in the de-etatization of property. A Law on Enterprises and a Law on Leasing have been enacted. The USSR Council of Ministers has adopted a resolution on approving regulations concerning joint-stock and limited liability companies and regulations concerning securities, as well as a resolution on steps to establish and develop small enterprises. An extremely important Law on Banking has been passed, stipulating the creation of a Reserve System at the top level and of some 400 commercial and co-operative banks at the local level. Recommendations to local soviets have been drawn up on the de-etatization of property, offering practical and technical assistance in de-etatization at the local level. The adoption of laws on joint-stock companies, on private ownership and on small enterprises, as well as of antitrust legislation is essential. Programmes drawn up Two de-etatization programmes were drawn up—the programme of the USSR Government and the 500 Days Programme. After discussing them, the USSR Supreme Soviet approved the Principal Guidelines for Stabilizing the National Economy and on Switching to a Market Economy, drafted on the basis of elements contained in these two programmes. The government programme combines three approaches to the tackling of de-etatization issues: transfer, free of charge, of the property of public enterprises and organizations to their employees; partition and transfer, free of charge, of most of the public property to all members of society or to citizens who are of age; sales of public property to juridical persons at full market price or at some discount. The property owner is to decide which approach will be used. De-etatization is aimed at leaving only 20 per cent to 25 per cent of the value of capital assets in the hands of enterprises at the all-Union level. The policy of de-etatization is to be initially pursued in industries where the functioning of non-public forms is particularly advisable, that is, in retail trade, catering, the service sector and the construction industry. State-run trade and the service sector comprise mostly small enterprises which can be sold to their employees or leased. Some of the big and medium enterprises in this field will be transformed into collectively-owned businesses or joint-stock companies. In 1990–91, de-etatization is to cover some twothirds of these fields. The same three approaches to de-etatization will also be used in industry. Small enterprises (each employing up to 200 people) may be leased or bought out by a collective; on their basis, co-operatives and shareholding companies can be established. Many medium and big enterprises are to be transformed into joint-stock companies. In 1990, 300 to 400 enterprises were transformed in this way. In the USSR, de-etatization of agriculture is very important. It is suggested in the government programme that, at the first stage of de-etatization, state-run farms operating at a loss and ineffectively should be disbanded and their land handed over fully or in part to leaseholders, independent farmers, co-operatives and industrial enterprises and other organizations wishing to grow their own food. In 1990, thirty independent farms were launched in the USSR. Their number will increase steadily. Nothing is said in the government programme about the development and spread of private property.

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PRIVATIZATION IN THE USSR

The 500 Days Programme proceeds from the premise that the state cannot and must not distribute its property free of charge, except that part of public property which people have already earned. This property is to cost either nothing at all or a token price—long-occupied apartments with a minimum of floor space per person, small garden plots and so on. In the section of the programme dealing with de-etatization, the main emphasis is on support for entrepreneurial activities and on equality of conditions with regard to the operation of different types of property. Considerable attention is paid to promoting the private type of ownership. De-etatization should have an integrated and comprehensive character. A broad antitrust policy is being drawn up. Direct de-etatization is aimed first and foremost at the construction industry, building materials, road transport, the service sector, catering, trade, light and food industries, and organizations specializing in procurement and marketing. De-etatization of these spheres should be completed as soon as possible, mostly by selling the enterprises in question on an instalment plan through auctions to individuals or groups of persons; subsequently, these companies are to be transformed into private enterprises or companies of various types. They can also be leased and subsequently bought out either by private persons or by worker collectives. Potentially, de-etatization and privatization are to affect up to 46,000 industrial enterprises and some 760, 000 retail outlets. Potential monetary demand for property on the part of the public is estimated at 100 to 150 billion roubles. This money can be invested within two to three years. One can also expect people to invest 50 to 60 billion roubles (their new savings) in 1991–2 (see Table 4.3). Under the programme it is suggested that small enterprises in food retail trade be sold to private owners. It is advisable to sell 68 per cent of all food stores; 30 per cent of commodity distribution; and 500,000 employees in this sphere will no longer be within the public sector. The rest of the publicly-owned stores should be transformed into joint-stock, co-operative or collective enterprises. Some 77,000 stores with 700,000 employees selling 30 per cent of all consumer goods will become privately owned. De-etatization will also affect wholesale enterprises which maintain warehouses. In catering, about 50,000 small cafes with 60 per cent of all the seats in the industry and accounting for up to 60 per cent of its turnover should be the first to be sold to private owners. Within 500 days, the bulk of small enterprises can be privatized, and by the end of 1991 up to 80 per cent of this group’s businesses can be moved out of the public sector. The authors of the programme note that swift transformation of most big industrial enterprises into jointstock companies will be impossible. It will take experts a long time to draw up legal and technical documents on such transformation and to train personnel for this work. The need is stressed for investment funds (to be established by Republican committees on the management of public property; a USSR Public Property Fund is being created) as a means of Table 4.3 Assessment of possible de-etatization scale (as of early 1989) Balance-sheet value of Percentage of property to Volume of property to property (billion roubles) be be privatized privatized (billion roubles) 1. 1.1

Capital assets, including 2,699 cattle Capital assets in 1,808 production

55.9

1,509 1,011

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Balance-sheet value of Percentage of property to Volume of property to property (billion roubles) be be privatized privatized (billion roubles) 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5

1.2 1.2.1 1.2.2 1.2.3 2.

Industry Agriculture Construction Transport and communications Trade, catering, procurement, farm machinery, etc Non-productive capital assets Housing construction Public utilities, service sector Others Unfinished construction projects Stockpiles Land sales

3. 4. Total *Assessed on 1 July, 1990

883 354 94 378

56.0 65.0 75.0 15.0

574 230 70 57

99

80.0

80

891

55.9

498

499 123

80.0 80.0

400 98

269 190–200*

– 30.0

– 60

540–50* –

50.0 –

270 – 1,839

privatizing and transforming enterprises into joint-stock companies. They are to be set up on the basis of specific groups of enterprises by industry, region or some other category. The funds are to act as holders of controlling interests without intervening in economic activities. Subsequently, they are to transfer or sell these controlling interests. Privatization in agriculture implies that sovereign republics will determine the deadlines and methods involved in the transformation of land ownership relations (including issues of land sales and of private ownership of land). Most of the work to implement the reform is to be done by local authorities. A programme for supporting independent farms is to be launched. It is estimated that 150,000 to 180,000 independent farms can be set up within the next few years, calling for an investment of 13 to 30 billion roubles (150,000 to 200,000 per farm). The sources of financing will include government allocations, credits and private savings. Various forms of co-operatives and companies are to be established in agriculture. Effective privatization is expected to take 15 to 20 years. Principal guidelines for stabilizing the national economy and switching to a market economy In this paper, the equality of all types of ownership is underscored, as is the need to reform ownership relations. De-etatization programmes come into force as relevant decisions are made at the Union and Republican level in the form of Presidential Decrees and decrees adopted by the top legislative bodies of Union Republics. In these instruments, the purposes, principles and main avenues of de-etatization are indicated. The

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guidelines proclaim the freedom of economic and entrepreneurial activity and provide for the establishment of enterprises with registration upon application and no interference of government bodies in their operation irrespective of the form of ownership or management. Enterprises, organizations and private citizens should be free to use the property they own, lease or manage, to independently determine a production programme, to choose their suppliers and consumers, to price their products, to manage their after-tax- profits, and to decide on other matters connected with economic activities and the development of production. Specific de-etatization work is to be performed by the Public Property Funds of the USSR and of the Republics. De-etatization is to be conducted first and foremost in fields where the creation of non-public structures is particularly expedient—in trade, catering, the service sector, maintenance and construction agencies, and small enterprises in various spheres. Under the principal guidelines, a land reform is to be effected, enabling different forms of property and economic management to function effectively, replacing monopolistic land tenure, and shaping an economy comprising different forms of ownership in the agrarian sector. In early 1991, vigorous practical work is to begin in the Republics, concerning the right to own property and the equality of all its forms. Hopefully, these laws will be enacted in 1991. Besides, privatization (as an essential component of the policy of de-etatization) is impossible if potential buyers do not have enough ready money. Often, banks will have to step in and help by offering credits, to promote efficient forms of management geared to a market economy—agro-industrial centres, agrarian firms, co-operatives, joint-stock and leased enterprises, as well as independent farms. In the Republics, programmes are to be launched to support commodity-producing farms and other agrarian management farms and to put them on an equal economic and legal footing with other agroindustrial entities. Families starting their own farms are exempted from taxes and from payment for their land for two to three years after they start operating. The importance of setting up small enterprises to process farm produce is recognized. There are plans to establish an Anti-Monopoly Committee. There is no indication of either the pace or deadlines of deetatization in the Principal Guidelines. This is due to the fact that in different parts of the country, different conditions exist for launching this process. The guidelines are precisely guidelines: they merely map out the strategic directions in which our economic relations are to be transformed. Problems facing de-etatization The problems involved in de-etatization can be divided into three groups: political, economic and legal, and technical. Political problems The rate and the success of de-etatization depend directly on the quality of political decision-making. The shaping of public opinion vis-à-vis de-etatization is a major problem. It is hard to make the man in the street see the advantages of private ownership if, for more than seventy years, a great deal was done to convince him that the reverse was true. Planned, long-term and open work to reshape the public’s attitude to ownership is in order. The often negative attitude to the influx of foreign capital and the establishment of joint ventures can also be described as a political problem.

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The development of the co-operative movement generates fears that the introduction of private property and market relationships will hand public property over to black marketeers. People are also alarmed that the nomenklatura may conduct privatization in its own interests, frequently deflating or inflating the value of the property to be sold. Economic and legal problems The underdeveloped state of the USSR’s financial, credit and banking system creates considerable problems for de-etatization. As the market economy mechanism takes shape, essential conditions will be created for a successful policy of de-etatization. A legal basis for de-etatization should also be ensured, formalizing the joint-stock form of de-etatization, and the sale of an enterprise’s shares to its employees at a discount. The choice of enterprises to be subjected to de-etatization is another difficult point. The belief is widespread that de-etatization should apply to enterprises operating at a loss. However, there are other viewpoints too. Experts dealing with privatization in Eastern Europe believe that thriving enterprises should be privatized first because this produces tangible economic results. Naturally, this approach applies to big and medium enterprises in industry. As to small enterprises, particularly in agriculture, trade and the service sector, their de-etatization also appears to be effective. There is need for trained personnel to conduct de-etatization. Research into the experience of the countries that have embarked on this road can help substantially in carrying out the policy of de-etatization and privatization. Technical problems The main problem concerns the assessment of the value of the property offered for sale. According to recommendations on de-etatization, local government bodies are to set up de-etatization commissions. These are to form independent inventory commissions which will take stock of, and assess the value of, the property to be de-etatized. Ordinary information concerning an enterprise is not enough for assessing the value of property with a view to transforming the form of ownership. The operation of the enterprise and its prospects should be studied in depth. With regard to the sale of public enterprises to foreign investors, the question of this property valuation is very acute. It is essential to name a realistic price at which a foreign company can accept the offer. The record of East European countries indicates that an inflated sale price does little to improve the economic situation. CONCLUSIONS Market relationships which are coming to replace the command administrative system are expected, drastically, to improve the efficiency of the Soviet economy. Without de-etatizing property, it is impossible to switch to the market track. De-etatization creates essential conditions for developing entrepreneurial activity and competition and for overcoming monopolistic practices. De-etatization of property should be thought through in each specific case. The transfer of property should be duly prepared and de-etatization blueprints should be worked out. Without a well-designed policy and professional implementation, de-etatization is doomed to failure.

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REFERENCES ‘Leasing: Archimedes’ lever’, Pravda, 1988. Bogomolov, O. (1990) ‘Privatization’, Izvestiya 264. Bunich, P. (1985) ‘Divide everything or earn everything?’, Vestnik of the USSR Academy of Sciences 12. Public Enterprise in Developed Capitalist Countries, Moscow, Union of the USSR Academy of Sciences, 1986, parts 1 and 2. Grigoryev, L. (1990) ‘On the eve of a joint-stock era’, Moscow News 27. National Economy of the USSR in 1989, A Statistical Yearbook, Moscow, Finances and Statistics Publishers, 1990:269, 275. Nekipelov, A. (1990) ‘Privatization puzzles’, Pravda 279. Nikiforov, L. and Rutgeiser, V. (1981) ‘Leasing relations in the socialist economic system’, Voprosy Ekonomiki 3. ‘On steps to create and develop small enterprises. Resolution 790 of 8 August 1990 of the USSR Council of Ministers’ in a supplement to Ekonomika I Zhizn 33, 1990. ‘On endorsing the regulations concerning joint-stock and limited liability companies and the regulations concerning securities. Resolution 590 of 19 June 1990 of the USSR Council of Ministers’. Principal Guidelines for Stabilizing the National Economy and Switching to a Market Economy, Moscow, 1990. Transition to a Market. Concept and Program (working group formed jointly by Mikhail Gorbachev and Boris Yeltsin), Moscow, 1990. ‘Recommendations to local soviets of people’s deputies on de-etatizing property’, as a supplement to Ekonomika I Zhizn 36, September 1990:1–2. Steve H.Hanke (ed.) (1987) Privatization and Development, International Centre for Economic Growth, ICS Press. Savas, E.S. (1987) Privatization: The Key to Better Government, Chatham, New Jersey, Chatham House Publishers.

NOTE The first thirteen references are in Russian.

5 Privatization in Poland Gregory T.Jedrzejczak

THE PUBLIC ENTERPRISE SITUATION The definition of a public enterprise The public (non-private) enterprise in Poland can be defined by legal ownership and/or by the criteria of administrative and economic control. The state-owned enterprise (SOE) is the dominating organizational form of the national economy. Separate laws regulate the legal and financial conditions of the SOE, guaranteeing its farreaching organizational and financial independence. The state’s interests are represented by the manager as well as the employee self-management and by the so-called founding organ. The enterprise has at its disposal all of its assets, being able to sell them to private parties as well as to invest them in other companies. It cannot, however, without the approval of the founding organ, liquidate itself or restructure itself into a joint-stock company. A part of the state’s assets are found at the disposal of budgetary units and non-profit organizations. One must also include within public ownership the existing service and production co-operatives. These units are legally private: however, their activities are under strict control by the state, and their activities are defined in the state’s economic plans. The most difficult to be clear about are the small private enterprises and private farms. On the one hand, from the point of view of state control, one can include them in the public sector. Measures such as administrative price control, discretionary taxation, limited entry and scale of production and compulsory delivery contracts (in the agriculture) contribute de facto to the overwhelming position of the state in respect of them. On the other hand, the shadow economy— private by definition—has been growing rapidly; it makes up as much as 15–20 per cent of gross national product (GNP). Table 5.1 Participation of public and private ownership in the national economy (percentage share at the end of 1988) Branches of national economy

General

Forms of ownership Public (state-owned +co-operatives)

Private

General economy B 100 C 100 Industry B 100 C 100

A 100 65.5 70.6 A 100 88.3 97.9

81.9 34.5 29.4 93.6 11.7 2.1

18.1

6.4

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PRIVATIZATION IN POLAND

Branches of national economy

General

Forms of ownership Public (state-owned +co-operatives)

Agriculture A 100 29.4 B 100 21.1 78.9 C 100 34.3 65.7 Building industry A 100 79.2 B 100 79.3 20.7 C 100 90.2 9.8 Transport A 100 NA C 100 95.9 4.1 D 100 99.1 0.9 Commerce A 100 NA B 100 93.9 6.1 C 100 96.8 3.2 Symbols: A—GNP 1988 B—Average employment in 1988 C—Net value of fixed assets (current prices) at the end of 1988 NA—Not available

Private 70.6

20.8

NA

NA

The totality of public enterprises in the country The public sector clearly dominates in the Polish economy. Table 5.1 shows aggregated figures characterizing this phenomenon. Polish industry is almost completely in the hands of the state and cooperatives. The private industry is concentrated in labour-intensive, quasi-handicraft branches, and is characterized by a decidedly smaller average employment for each unit of organization (this is shown in Table 5.2). On the other hand, the public sector of industry is much more concentrated, as shown in Table 5.3. This is a typical result of the centrally-planned economy. Agriculture plays an exceptional role in the Polish ownership structure as seen from Table 5.1. As in the case of industry, the Table 5.2 Number of enterprises and average employment in private and public sectors (end 1988)

Private industry Public industry: General State-owned Co-operatives

No. of firms

Average employment

231,295

3

5,823 3,177 2,400

713 1,132 219

organizational and size structure is different as between state and co-operative ownership and private ownership, (see Table 5.4) The existing limit of the private farm is 50 hectares, according to the law of nationalization. The building industry represents the second largest domain in the private economy and its size characteristics are similar to those mentioned above (see Table 5.5).

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63

The traditional area of activity in the private sector relates to services for the households. In 1988 the private sector delivered 34 per cent of these services. Table 5.6 presents the range of services delivered by the two sectors. The sector of the state-owned enterprise (SOEs), which is the subject of the privatization programme, includes about 8,000 enterprises. Within this sector the subsector of industrial state enterprises (other than mining) includes about 3,100 enterprises. The characteristic feature of the state sector is the high concentration of the production. The following illustrative analysis is drawn from a list of the top state-owned industrial enterprises as measured by sales. Figures refer to the first quarter of 1990 and are annualized. The top 100 of these firms represent 1 per cent of the total number of SOEs. However, these firms accounted for 29 per cent of the total sales of the public sector, while the top 10 firms contribute to 12 per cent. The same top 100 and top 10 firms accounted for 39 per cent and 20 per cent respectively, of the total net income of the public sector. SOE’s performance The evaluation of financial performance of SOEs is extremely difficult because of serious distortions in the price system and discontinuity in the fiscal and monetary environment of enterprises introduced by the stabilization programme which started from 1 January 1990. Table 5.3 Distribution of public enterprises in industry according to employment (end 1988) Branch industry

of No. of firms (%) with employment

No. of firms

Average empl. 50 & less 51–100 101–200 201–500 501–1000 1001–2000 2001–5000

In general SOEs Co-ops in it: coal-mining energy metallurgics machinery precise instruments means of transp. electrotech. & electronic chemical building mat. glass paper textile clothing

5,823 3,177 2,400

713 1,132 219

8.2 3.7 8.3

8.7 4.7 14.1

19.9 9.4 34.7

30.2 26.3 36.9

15.4 23.9 5.5

10.2 18.3 0.4

5.5 10.1 0.1

95 90 73 611 155

5,054 1,337 2,907 714 523

1.0 2.2 4.1 11.0 20.7

– – 5.5 6.4 9.0

9.5 6.7 2.7 17.7 17.4

6.3 15.6 19.2 28.5 27.1

1 17.8 10.9 18.0 11.0

4.2 36.7 13.7 11.8 8.4

30.5 19.9 28.9 5.5 5.8

295

1,141

9.2

6.4

13.6

27.8

21.3

10.5

6.1

300

830

12.0

4.7

10.0

31.6

20.7

9.0

9.3

402 309 83 55 379 458

652 463 605 844 884 408

8.0 13.9 6.0 1.8 3.5 9.6

6.7 7.4 1.2 7.3 7.1 6.3

24.1 10.4 30.1 23.6 15.1 20.1

33.1 34.3 24.1 21.8 25.3 43.0

12.2 22.0 20.5 14.6 13.7 13.1

8.0 10.7 14.5 20.0 22.4 5.9

5.2 1.3 2.4 10.9 12.4 1.8

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PRIVATIZATION IN POLAND

Branch industry

of No. of firms (%) with employment

No. of firms

Average empl. 50 & less 51–100 101–200 201–500 501–1000 1001–2000 2001–5000

food proc. printing

841 122

499 377

6.4 8.2

8.2 6.6

22.2 24.6

32.7 37.7

17.7 16.4

10.0 5.7

2.4 0.8

Table 5.4 Characteristics of public and privately-owned agriculture Type of ownership

Number of units

Average area (ha)

State and co-operatives in general State Co-operatives Private: above 0.5 ha below 0.5 ha Note: NA=not available

5,107 2,619 2,488

1,000 1,630 337

2,647,000 1,205,000

6 NA

Table 5.5 Number of constructing firms and average employment Form of ownership

Number of enterprises

Average employment

State-owned and co-operatives in general including: state-owned co-operatives Private

1,856 1,337 519 128,663

461 600 104 2

Table 5.6 Services delivered to households (percentage shares 1988) Type of services

Public sector

Private sector

Industrial Constructing Agricultural (A) Transport (B) Commerce Energy Education Medical care (C) Finance Notes: A—for private agricultural farms B—without local C—refundable

36.8 8.7 96.3 84.7 99.8 100.0 99.7 42.7 100.0

63.2 91.3 3.7 15.3 0.4 0.0 0.3 57.3 0.0

A rough estimation for the group of the top 484 industrial stateowned enterprises is presented in Table 5.7.

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Table 5.7 Large state-owned enterprises (top 484 by sales) (segmentation by net income/sales) Valuation

NI/sales

% of top 484

% of sales of top 484

Good >20.5% 32 44 Average 10.5%–20.5% 40 33 Poor 5.5%–10.5% 20 17 Very poor < 5.5% 8 6 Notes: 1 Data annualized, January-March 1990. 2 Net income=Net profit+obligatory dividend (paid by SOE to the state).

% of sales of top SOE’s 21 15 8 3

Table 5.8 Estimated market value of the state-owned enterprises (From the top 484 firms by sales) ($m) P/E ratio

4

6

8

Top 10 Top 100 Top 300 Top 484

8,200 15,905 22,106 24,559

12,294 23,858 33,158 36,838

16,392 31,810 44,211 49,117

Capitalization of the public sector Lack of the capital market does not allow us to estimate the market value of the public sector capital. Rough numbers for the above-described top 484 enterprises can be estimated under assumptions of different Price/ Earnings ratios, realistic in these cases. The results are presented in Table 5.8. THE THINKING ON PRIVATIZATION The progress The thinking on privatization in Poland has been initiated and directed by two factors: (a) Deterioration of the Polish economy despite the continuous efforts of communist reformers to improve the performance of the economy. (b) Progress in economic thinking about the mechanism and economic laws of the ‘real socialism’ economy. Poland illustrates the difficulties of transforming a closed centrally-directed society with distorted branch structure of economy and inefficient enterprises, into an open, democratic society with an efficient, freemarket economy. The roots of the difficulties can be found in the early 1950s and even the 1940s, but from the point of view of this paper it is enough to show the basic tendencies in the 1980s. After an economic collapse in the 1979–82 period, the Polish economy recovered its potential for economic growth. However, the outstanding results of the first few years of ‘martial-law economy’, due to the automatic reconstruction of the economic system and severe social discipline, disappeared in the last years of this period, with an eventually negative growth rate (−2 per cent) in 1989. Two features of the inflation process were very characteristic in the 1980s:

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(a) For the first time in the post-war years the authorities had to admit that a centrally-planned economy was vulnerable to uncontrollable price changes. In other words, inflation was ‘opened’ after years of ‘hidden inflation’. (b) This ‘opening’ was caused by administrative increases in prices in 1982 and 1988 (rationalized by an attempt to achieve equilibrium of the consumption market); and in both cases the attempts were unsuccessful. As a result, people in Poland have been used to inflation as a constant phenomenon, and at the same time have become sceptical about the government’s ability to fight it. The convertible currency external debt is the most visible heritage of the centrally-planned economy. Poland has the highest convertible currency debt in Eastern Europe, totalling about US $40 billion at the end of 1989, equal to 470 per cent of the total export of goods and services. In the 1980s the debt almost doubled, from about US $26 billion at the end of 1981. This disastrous process was due to many reasons: the current account deficit, the structure of debt maturity, and the depreciation of the US dollar. One has to remember that in a communist country private ownership was banned not only from economic life but from the economic and political thinking as well. In recent years, when the communist system ceased to function in Poland, there have been a number of papers dealing in an open way with ownership structures and property rights. Before that date economics had concentrated with thinking exclusively on ‘parametrical models’ of centrally planned economy with state ownership and some elements of a market mechanism. Privatization in Poland has an important intellectual and organizational dimension: it is a macroeconomic and political problem. Thinking on privatization in Poland is much more holistic and speculative than in western and developing countries where privatization is treated as an important but, on the whole, supplementary factor in economic policy. The connotation of privatization Various economic and political goals serve as a premise of ownership changes in Polish economy. From the political perspective one can notice polarization of thinking. On the one hand, there is a strong temptation towards a new form of social and economic organization to be achieved through transformation of the selfmanagement bodies within the state-owned enterprises into employees’ share ownership plans covering the whole economy. This idea has strong political support of workers of large enterprises and intellectuals engaged in the self-management movement in the past. On the other hand, right-wing and liberal politicians see the creation of a middle class, that is, Polish capitalists, that would stabilize the democratic changes, as an important social condition of privatization. The government’s economic programme in its stabilizing context, directed towards fighting off inflation, treats the privatization of state and pseudo-co-operative enterprises as a stimulus for overall growth in the economy. Changes in the structure of ownership in the Polish economy are aimed at achieving the structure existing in the highly-developed European countries. It has been assumed in this programme that, through achieving its objective of massive privatization, Poland would gain in the following ways: (a) create an environment in which a market economy could thrive; (b) establish and develop capital markets; (c) institute owners within the legal framework of enterprise; (d) provide employees a fair, but not dominant, opportunity to participate in ownership; (e) spread the ownership of enterprises among Polish citizens as broadly as possible;

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(f) encourage foreign capital to invest in Polish economy; (g) reduce the costs of government engagement in direct management of the economy. Thus privatization is treated, not as an ultimate goal, but as the means by which an effective and flexible market economy can be created, with a well-functioning capital market. The creation of an effective capital market as the highest-priority long-term objective of privatization is based on an observation of market-oriented economies where the capital market seems to be the most effective means of allocation of resources. The links between privatization and capital markets can be envisaged as follows. From the beginning different types of securities will exist, as various types of issues will seek funds using a variety of instruments. However, the market, in the first few years, will be dominated by the shares of privatized state-owned companies. The foreseen implications of this fact for the capital market are that: (a) these shares will be seen by investors as securities with a specific quality ‘guarantee’; (b) the supply of shares can fluctuate as a result of consecutive privatizations; and (c) prices on the secondary market can drop (compared to the primary market) because of discounted selling to employees. Capital markets, apart from the apparent advantage of stimulating allocation mechanism, also bring other benefits: (a) creation of necessary conditions for attracting foreign capital investment; (b) releasing and stimulating entrepreneurship and saving-oriented behaviour within the society; (c) economic education of shareholders; and (d) political suppoirt for privatization from those shareholders who financially benefited from purchase of shares. The legal framework The government’s economic programme envisages only a general frame for the course of privatization of state-owned enterprises, which could be stated in the following way: (a) a general availability to the public of shares and/ or assets that can be purchased from privatized enterprises; (b) transparency of the privatization procedures, most of all the procedure involving the sale of shares; (c) preference for small investors and thereby spread of ownership as broadly as possible; (d) full transferability of shares in the secondary market. The necessary assumptions and procedures of privatization have been reflected in the Act on the Privatization of State-Owned Enterprises which was passed by Parliament on 13 July 1990. This law opens two ways for effective privatization of the state-owned enterprises: (a) privatization by way of the sale of shares (so-called capital privatization), and (b) privatization by way of winding-up an SOE and selling its assets (so-called privatization by liquidation).

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Privatization by selling shares The proposed general procedure for privatization of state-owned enterprises by selling its shares is made up of two stages: Stage 1 Enterprise transformation (corporatization)

The transformation of a state-owned enterprise into the form of a joint-stock company can be treated as the bedrock of the whole procedure. This step has two goals: 1 to transform the equity of the firm into a form that can be used for capital investments; or to transform ‘funds’ of an SOE into capital stock; and 2 a clear answer to the question about the legal ownership of a privatized firm. The first issue is technical in character; the second one touches on an important political problem. The government’s privatization programme and the law on privatization, both imply that the capital of a jointstock company, resulting from transformation, totally belongs to the state Treasury. In opposition to that, some people, especially from the employees self-management movement, promote the idea that part of the capital of the state-owned enterprise belongs to the employees. The Minister of Ownership Changes may transform a state-owned enterprise into a joint-stock company on the request of: (a) its Executive Director and the Employee Council after obtaining the opinion of the general assembly of the employees as well as the opinion of the Founding Body; or (b) the Founding Body, submitted with the consent of the Executive Director and the Employee Council after obtaining the opinion of the general assembly of the employees. In a case of disagreement between the above-mentioned authorities the government can order the transformation of a state-owned enterprise into a company. On the other hand, the minister can refuse the transformation due to the financial or economic condition of the enterprise or important national interests. The establishment of new labour-owner relationships is an important element of the transformation stage. By virtue of the law, employees of a transformed enterprise become the employees of a company which is responsible for obligations arising from the terms of employment in the transformed enterprise. As a part of a recompensation scheme, the employees of the company are entitled to elect one-third of the members of the Supervisory Council. Stage 2 Disposing of shares (flotation)

The previous stage should be treated as a preparation for privatization, which consists of selling shares of a privatized joint-stock company by the state Treasury. In relation to selling, two aspects have special meaning: (a) the potential buyers, to whom the offer is addressed; and (b) the means of sale. The potential buyers can be placed in four groups: all Polish citizens; employees of privatized enterprises; local institutional investors; and foreign investors.

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The previously mentioned general rules of the privatization programme imply that the Polish citizen is seen as the main potential buyer of shares, independently of the place of employment or the legal source of income. The employees of privatized enterprises will be a preferred group of buyers. They are entitled to buy up to 20 per cent of the total amount of shares of the company. These shares will be sold at 50 per cent discount compared to the issue price. The value of preferences will be limited to the average of one-year pay in the state enterprise in the 12month period prior to the registration of the new company, with expiration of a year after the issuance. These preferences will be awarded to individuals and not to the employees treated as a group. The employees will not, however, be restricted as regards reselling shares on the secondary market. The basic problems with domestic institutional investors emanate from the lack of private financial institutions (with the exception of two small insurance companies) and the monopolization of the banking system by the state-owned inefficient banks. The social and political assumption of ‘the citizen share ownership’ can cause serious economic consequences, most of all, in the absence of institutional investors, too broad a dispersal of shares in comparison with Western economies. This calls for support for the rising private banks as well as for the privatization of some state banks and savings institutions. The creation of mutual funds investing in privatized enterprises is also needed. Finding foreign investors is one of the key tasks of privatization. Special attention is attached to portfolio investments of institutional investors, as well as those organized into funds such as the country fund. To attract active investors the possibility of management contracts connected with relatively small shareholding can also be considered. The general rule is that these types of investments will have the same fiscal and currency fringe benefits as those of joint-ventures. Also foreseen is the procedure where income from gains of reinvestment of Polish currency can be repatriated from the country. Following the example of other countries, in particular cases of privatization there will be a ceiling placed on foreign investments. It is foreseen that there will be different forms of selling shares, where generally full disclosure, complete review and competitiveness in sale will apply. For these reasons, an unlimited subscription and auction of shares will be preferred. This does not rule out private placements, in justified cases of trade considerations. Each privatization will be preceded by a procedure of full disclosure and preparation of a prospectus. On the one hand this should protect the interests of the investor; and on the other, it should discredit any charges made about giving away the state’s assets, especially to foreign investors. Renowned foreign firms will take part in the preparation of the prospectus, mainly in the first pilot privatizations. Privatization by liquidation The privatization law does not limit the growth of the private sector to capital investments through the purchase of shares of large enterprises. Other activities include the so-called small privatization, or in other words the creation of workshops, as well as support for the growth of the private sector ‘from the bottom’ through the creation of new private firms, as well as the growth of the already existing ones. For this reason a state-owned enterprise can be wound up in order to: (a) sell its assets, or integrated parts of the enterprise assets; (b) use the enterprise’s assets or integrated parts of the assets as a contribution to a new private-owned company; or (c) allow the enterprise’s assets to be leased to a private company, upon payment, for a specified time.

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ACTIONS IN PRIVATIZATION Privatization in Poland, as a measure of economic policy, emerged in about 1989. The privatization schedule is delayed as compared with the assumptions of the stabilization programme and social expectations. The main reason is that the political struggle around the legislative conditions were prolonged beyond anyone’s expectations. However, a number of events leading to de facto spontaneous privatization have taken place before the law was accepted: (a) Decreasing efficiency of a centrally-planned economy forced the former governments to accept some forms of ‘hidden’ privatization. For example, in 1970 a small foreign firm could be licensed under the condition that the owner of it had a Polish origin. In 1988 the more open and flexible formula of jointventure between a Polish state-owned enterprise and a foreign partner was introduced. (b) Decomposition of the ‘real-socialism’ system led to the concept of proprietization of nomenklatura (uwlaszczenie nomenklatury). The idea of ‘soft landing’ or ‘golden parachutes’ for the members of the declining communist party was realized in the form of limited liability companies owned by these people and through the leasing assets of SOEs. After seizing power, ‘Solidarity’ stopped this practice, but a good formula for revindication of the state property has not been found yet. This phenomenon has brought into relief one of the basic problems of privatization, namely, the difficulty of valuation of the firm as well as its assets, in the situation of a non-existing owner, as well as a lack of a capital market for the verification of prices. In effect it led many times to a meaningful lowering in value of the investment made in the company by the state enterprise; it also increased the gains for private capital. In the last two years a few privatizations were carried out, based upon the concept of the so-called employee share ownership, where the employees bought a part of the capital of the enterprise; this was connected with leasing a part of the assets belonging to the SOE. This privatization, meaningless up to now from the economic point of view, represents an inconvenient example of privatization by a road that avoids an offer of the shares to the public and the capital market channels of trading, and thereby does not follow the rules envisaged by the government’s economic programme. The plan for 1990 envisaged selling seven medium-sized enterprises to the general public via public offer and to foreign investors via private placement. These seven companies represent different branches of economy: clothing, glass, electronic, electric, metallurgical industries, constructing, services. They have been prepared for selling by western investment banks with the co-operation of Polish consultancy firms and Polish commercial banks. In addition to this about thirty small companies would be privatized by offer to employees via the liquidation and/or leverage buy-out (LBO). The next year’s privatization plan is much more ambitious and is composed of the following elements: (a) Privatization, by public offer, of ten companies from the list of the top fifty industrial enterprises. (b) Privatization, with utilization of different techniques, of 150 to 200 companies from the list of the top 500 enterprises. (c) Massive privatization of small companies or integrated parts of their assets—at least one-third of the total number of these firms.

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PROBLEMS ENCOUNTERED Identification of enterprises chosen for privatization Within the number of public enterprises, which run into the thousands (7,000 within only industry, agriculture, and the building industry), it is absolutely necessary to make a selection of the best enterprises to be privatized, in order. This task has a critical meaning for the future of privatization, since it creates certain precedents and can form (or destroy) the confidence of the people in this new form of savings investment. This is why the first privatized enterprises must almost guarantee high dividends as well as high capital gains for the buyers. The selection can hardly be based on the previous financial records of the firm, since these were related to a time of different financial, fiscal and monetary regimes. This is why the criterion of ‘potential growth’ has an important meaning, such as: brand name, competitiveness on international markets, managerial staff performance and technical equipment. Valuation Opinions presented on the evaluation of privatized enterprises have fallen into two categories: those that believe that valuation should and could be avoided by letting the market value the enterprises, and those that recognize that individual enterprise valuation is necessary but is likely to cause delays in the implementation of a privatization programme. The government’s privatization programme rejects ‘the market valuation’ thesis, arguing that ‘the markets’ would have insufficient information, and speculative and/or random trading, distorted prices, lack of investors confidence and possibly fraud might result. Unless the enterprise is a candidate for winding-up, valuation must be focused on valuing the enterprise as a going concern, and based on the ability of its assets to generate profits. Simplified methods of valuation are to be used, depending on the size of the enterprise and its role in the economy. A large number of state-owned enterprises are small and have relatively few assets. Furthermore, imprecision in the valuation of such enterprises will not have any major economic consequences. Valuations for such enterprises can be performed quickly, using generally accepted rules of thumb or short cuts. For large and medium-sized companies, more detailed valuations will have to be undertaken. Even then some short cuts are possible. The very detailed ‘British style’ valuation could be superfluous anyway in a non-market economy, given the uncertainties about the future. However, while each individual valuation per se should not cause delays in realizing the privatization programme, delays could result from the lack of the necessary skills in Poland. At present, the number of well-established Polish consultancy firms is between ten and fifteen and is likely to rise somewhat in the near future. In the short term, the solution to the problem is capacity augmentation by engaging a large number of foreign experts. From the long-term point of view, it would be important to launch immediately a training programme for Polish valuation consultants so they can increasingly take on the task after the first year. Experience in other countries shows that political problems with valuation arise primarily from two circumstances: (a) when a value placed by valuation experts is substantially less than the book value of the assets; and (b) when a sale is made at a price which is substantially less than the initial value placed.

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In the Polish case these problems can be multiplied by three factors: (a) artificial prices, imprecise accounting practices and non-market structure of assets; (b) lack of secondary capital markets; and (c) high social expectations in relation to the value of national patrimony. Restructuring In most cases described above commercialization (corporatization) will not mean commercialization in the economic sense, having to assure the ability of competition in the market place. As seen from international experiences in privatization, the enterprise should undergo a long and costly restructuring before it can be sold through public offering. In the Polish situation—characterized by a large number of enterprises to be privatized as well as by strong political pressure to speed up this process—restructuring cannot go as far or last so long. However, financial restructuring is foreseen, based on the following: (a) a straightening of financial statements of the privatized company based on western standards; (b) treating the expenditures dealing with unproductive equipment and durable resources as a subject of a write-off procedure; and (c) in justified cases, granting the firm debt retirement through the state Treasury. It is generally hoped that organizational restructuring will be geared toward breaking up the monopolistic structures wherever possible. Also foreseen is that the privatized form will sell out production and service units which can operate independently. Until recently, in the permanently prevalent economy of shortages, it was common practice to accumulate in the enterprises service shops, kindergartens, vacation houses, and so on. Today, these present themselves as non-profitable elements. To the buyer of shares, the firm should be an attractive, asset-bearing, capital investment. Technical (capital) restructuring is not foreseen, on the other hand, since it is too costly and timeconsuming. It is assumed that such restructuring will take place once the firm is privatized. Demand for shares of privatized companies Limits of demand for shares create one of the most serious and controversial problems of mass privatization. By very rough estimation, the book value of the state-owned enterprises, when compared with the savings of the population, leads to the conclusion that the privatization of the existing assets would last over a hundred years! Hence it is unavoidable to augment the demand by issuing free vouchers as quasi-money. However, the free-voucher system in its logistic dimension creates immense problems. The key advantage of this scheme over the others suggested is that it does not affect the companies themselves prior to privatization. It handles some of the demand-side problems without prejudging the supply side of the market; it treats all citizens alike but does not treat all companies alike. However, the idea is much more complicated when considered as a logistic problem. First of all, and paradoxically, the introduction of a free vouchers scheme, by its very (massive) scale, creates an additional demand which is difficult to satisfy on the supply side. For example, if one assumes the voucher value equals US $50 per head (which is equal to half a month’s average salary) and that the vouchers can ‘buy’ one-third of the offered stock, then we arrive at a total value of US $6 billion of privatization offers which are needed to absorb the vouchers issued.

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Internal organization of privatization administration The privatization programme in Poland started with the establishment of the office of the Government Plenipotentiary for Ownership Changes in November 1989, consisting of a small cadre of people. Much of the effort of the group was spent in fighting a political battle to ensure passage of the privatization law. As it is seen now, at the beginning of the implementation stage, the idea of a massive but controlled privatization has been caught in an organizational and financial trap. On the one hand, the state-run privatization has to have ‘administrative power’ to be executed. On the other hand, privatization is a business-like activity calling for knowledge, that is, as the cutting edge of financial economics. Because of this, the ideal candidate for this job would be the good (but underpaid) civil servant and, at the same time, an expert in corporate finance, capital markets, and so on. There are very few individuals in the world today who are experts in all these different areas, and certainly they are not underpaid civil servants. The Office of the Plenipotentiary was transformed into a fully-fledged Ministry of Ownership Changes in September 1990. Recent Developments in Polish privatization Effective privatization started in the second half of 1990. In the nine months since the passage of the Law on Privatization of State-Owned Enterprises Poland has achieved substantial progress in privatization. Privatization of five enterprises by public offering is the most visible index. As a result of this the Polish capital market increased by the following amount of stock: Exbud Kielce: 450,000 shares bought by around 30,000 investors. Apart from that, two control blocks of shares (15–20 per cent) were sold to the management of the enterprise and to a foreign investor. The Silesian Cable Company: 830,000 shares were bought by over 30,000 people. Some blocks of shares were bought by foreign investment funds and private persons from Poland. Prochnik: 1,200,000 shares were purchased by over 30,000 persons, while some 12 per cent, controlling block of shares, was taken over by a Polish insurance company. Tonsil: 750,000 shares sold to 28,000 persons. The controlling package of shares is owned by a Polish bank. The state Treasury is searching for an investor for 30 per cent of shares. Krosno: 1,100,000 shares were sold to 28,000 persons. Also a Polish bank bought 10 per cent of the shares, and a foreign trade company, a further 10 per cent. As a result, shares of an issuing price of 300 billion zlotys entered the market, spread around 100,000 people. (In May 1991 the next successful public offer took place, which in size was comparable to the previous ones.) During this year (1991) it is expected that, as a result of privatization by public offer, shares of the next 10–15 companies will enter the market. Beyond these spectacular privatizations, other important cases have been completed: two by direct sales to foreign investors: one through an employee/management buy-out; privatization of 143 small and mediumsize enterprises through the liquidation route; forty-eight through sale of assets; and ninety-five through leasing (with deferred purchase). In addition, 80 per cent of retail and wholesale stores, more than 50 per cent of transportation and more than 40 per cent of construction services are now in private hands. A further 140 enterprises have been commercialized, and now are joint-stock companies, operating as commercial entities and supervized by their boards of directors. The Stock Exchange in Warsaw has just been opened and the shares of five companies privatized by public offers are traded there.

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The government has also made considerable progress in the design and preparation of the proposed mass privatization programme. As presently envisaged, this would include the establishment of a number of funds playing the role of intermediaries between Polish citizens and a significant number of companies privatized in this way. As a result: on the one hand, citizens would become co-owners of the funds by investing in them vouchers distributed freely to them or by free distribution of funds shares; and on the other hand, fund managers would use the vouchers to compete for the purchase of shares in the commercialized companies chosen for this scheme and then would play the role of active institutional investors. CONCLUSIONS In Poland the consequences of privatization and introduction of a market-driven distribution of capital will go far beyond the economic sphere. Above all it signified the abandonment of the ideological paradigm of a ‘social-justice’-driven society which has been very deeprooted in people’s consciousness. From this point of view discussion on the privatization law can be treated as an ‘acid test’. Three main lines of thinking have emerged during this debate: (a) A pseudo-privatization solution, based on the state-created and the state-controlled institutions playing the ‘market game’. (b) Workers’ self-management converted into ‘self-ownership’. As a result it would give us a mixture of Yugoslavian self-management, West-German mitbestimmung and American employee stock ownership plans on the sale of the whole economy. (c) Individual ownerships following western patterns but with elements of nineteenth century idealistic liberalism. For the time being, the third way of thinking has prevailed, but it does not mean that privatization and the introduction of capital market institutions will open an easy road to free-market economy. APPENDIX 1 THE MASS PRIVATIZATION PROGRAMME IN POLAND 1 The objectives of the mass privatization programme (MPP) in Poland are as follows: (a) to improve the efficiency and value of several hundred Polish state-owned enterprises, by converting them to companies, transferring them to new investment groups, and making use of management skills and capital from Poland and abroad; (b) to accelerate radically the privatization process in Poland; (c) to give all adult citizens a stake in the privatization process through new investment groups, enabling them to benefit from the increasing value of enterprises in a fair and equal manner. 2 ‘National Wealth Management Funds’ will be formed as close-end funds. Their supervisory and management boards will have Polish chairmen and board members include Polish banks, private businesses, newly-privatized companies, joint ventures, and eminent international businessmen and financial experts. These investment groups will have management contracts which contain performance-related clauses.

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3 All resident Polish citizens who are at least 18 years of age on 31 December 1991 will be entitled to participation in all the investment groups. They have to apply in Spring 1993, by which time the first annual reports of the investment groups will be available, for a participation certificate representing a share in each of the investment groups. Trading in such certificates and shares in each investment group will commence in spring/Summer 1993. 4 About 400 medium-to-large state enterprises will be covered in the MPP scheme. They represent about 25 per cent of total industrial sales and 12 per cent of total industrial employment. 5 Up to 10 per cent of the shares of each company in the MPP will be given free to employees. Certain ‘lead’ investment groups will be allotted sub-stantial minority interests in each of the companies. The shareholding structure of companies in the MPP will be as follows: 33 per cent 27 per cent 10 per cent 30 per cent

lead shareholding transferred to one investment group distributed among many investment groups (maximum) given free to employees retained by the state

Allotment of a part of the state’s shareholding to ZUS (i.e., the social security system) is being considered as part of reforms in the social insurance system. 6 The international management firms have the duty to manage the investment groups with a view to maximizing their value for the benefit of all shareholders. They will be represented on the supervisory boards of the companies in which they have shareholdings. They will encourage or cause the companies to restructure. They will be free to trade their shares to third parties, subject to suitable control by the anti-Monopoly Office and the Ministry of Ownership Changes.

APPENDIX 2 THE STRUCTURE OF THE MINISTRY OF OWNERSHIP CHANGES The Ministry of Ownership Changes was established in 1990. Ever since it has been expanding so as to adapt itself to the growing needs of government attention to matters of privatization, the composition is as follows: Minister Secretary of State: Department of Capital Privatization which deals mainly with privatization of single-holder corporations of the state. Under-Secretary of State: Department of Selection which indicates the most favourable route of privatization; Department of Commercialization which transforms state-owned enterprises into singleholder corporations; Department of Founders Supervision which monitors the single-holder corporations of the state.

Source: The Republic of Poland, Ministry of Ownership Changes, Mass Privatisation: Proposed Programme, Warsaw, June 1991.

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Under-Secretary of State: Legal Department; Department of Reprivatization; Department of Privatization of Property Not Owned by the state, which deals with transformation of municipal and co-operative properties. Under-Secretary of State: Department of Privatization Co-ordination which gathers information concerning government policy of privatization; Administrative and Budgetary Department; Department of Small and Medium Companies which decides on the starting of their privatization process. Under-Secretary of State: Office for Capital Market Development; Office for Analyses for the Ownership Transformation Process. Director General: Foreign Affairs Bureau which deals with international financial institutions and with consulting firms; Information and Negotiation Centre. Department of Mass Privatization. Foundation for Ownership Changes which consists of foreign specialists: This remains outside the Ministry structure. Department of Mass Privatization.

6 Privatization in Hungary Regulatory reform and public enterprise performance Zoltán Román

THE ROLE OF THE STATE-OWNED ENTERPRISES A study prepared by the UNIDO Secretariat categorized the motives for establishing public industrial enterprises into six groups as follows: (i) to compensate private sector inadequacies, (ii) exploit monopoly, generate government revenue and achieve price stabilization, (iii) obtain savings and foreign exchange and utilize aid, (iv) control commanding heights of the economy and achieve national self-reliance, (v) pursue a specific sociopolitical model of development and (vi) generate employment, improve income distribution and stimulate regional development.1 At the beginning of 1948 Hungary was still a market economy although the banks, the mining industry and the four largest corporations of the heavy industry were already nationalized. In March of that year (‘the year of the turn’) all industrial enterprises with more that one hundred employees and, within a short period, with minor exceptions, all enterprises had been nationalized (or some small ones forced to establish themselves as co-operatives). This was in pursuance of ‘a specific socio-political model of development’, the model of the Soviet Union. Like all other components of the economic and political system, nationalization and the pattern of industrial organization were copied from the Soviet Union, as in the other European countries. The severe deficiences of the ‘centrally-planned’ system had already been recognized and criticized in Hungary in the early 1950s; but after the suppressed revolution—and the initiated systemic changes—of 1956, a comprehensive economic reform was introduced in 1968 only. The reform questioned three basic assumptions taken for granted in the textbook models of the centrallyplanned economies, namely, that: (a) central planning and control can foresee, regulate and implement the desired development of the country; this is not only a feasible but also a superior system compared to market economies; (b) the state-owned enterprises, both the management and the collective, identify themselves with the overall national plan and the obligatory targets derived from it for the enterprises; and (c) apart from such ‘moral stimulation’, the monetary and other ‘material’ incentives for fulfilment and over-fulfilment of the plans can prove to be effective.

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The comprehensive economic reform of 1968 in Hungary did aim at a special combination of plan and market, keeping intact, however, such basic characteristics of the system as the dominance of state ownership, centralization and one-party power. As regards the assumptions (ii) and (iii) mentioned above it was always understood, though not stated explicitly, that if they did not work, force would ensure the success of the central instructions. This fundamental pillar of the system had not been touched and questioned by the reform, until twenty years later. The need for more entrepreneurship and private initiative came into the fore only in the early 1980s, and the need for the basic systemic changes including privatization only towards the end of the decade. The hesitant, stop-go implementation of the economic reform of 1968 sheltered the weaknesses of the concept. It was in 1987–8 that even the communist government had to recognize the failure of the experiment and started to transform the economy from ‘centrally-planned with substantial reforms’ into a ‘socialist market economy’, later into a ‘market economy’ (without any special attribute). A number of measures were taken in order to prepare the transition when the free elections in March-April 1990 confirmed the wish of the overwhelming majority of the population to change completely the political and economic system of the country. How to implement this transformation into a democratic market economy within a relatively short period became the major task of the new (non-communist) government, fighting at the same time with a pressing foreign indebtedness (US$ 2,000 per capita), growing inflation (at 30 per cent now) and increasing open unemployment (unknown previously, now 1.2 per cent). If we compare the share of the state-owned sector in originating national income (Net Material Product NMP) in 1960 (the year before the collectivization of agriculture) and in the years after the economic reform of 1968, the changes are not negligible but rather small (see Table 6.1). Table 6.1 The share of the ‘social sectors’ in originating NMP (%)

State-owned enterprises Co-operatives Auxiliary activities of the population Private sector Total

1960

1970

1980

1986

67.4 17.0 6.6 9.0 100.0

70.7 23.6 3.1 2.6 100.0

69.8 23.0 3.7 3.5 100.0

63.4 23.0 7.6 7.0 100.0

These are the figures of the Central Statistical Office. Official statistics usually register only the data of the ‘formal’ economy. They do not take into account activities in the ‘shadow’ economy: and only partially cover those of the (legal) ‘second’economy, very significant in Hungary. The shares of 1986 did not change remarkably in the subsequent years. Owing to the lack of precise figures for the same categories for 1989, the shares of the auxiliary activities and of the private sector in originating gross domestic product (GDP) in the material sphere of the economy may be cited: these were 7. 0 and 6.3 per cent respectively. From the total number of active earners in the material sphere of the economy at the beginning of 1989 (see Table 6.2), 9.2 per cent were engaged in the private sector and 5.1 per cent as entrepreneurs/selfemployed, 2.1 per cent as family members, and 2.0 per cent as employees. From the gross value of the productive fixed assets approximately 3 per cent belonged to the private sector, 12 per cent to the cooperatives, and 85 per cent to the state-owned enterprises.

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THE PATTERN OF THE STATE-OWNED ENTERPRISES Centrally-planned economies prefer large organizations due both to economic and political considerations. They overestimate the significance of the economies of scale, in particular the size of the enterprises, neglecting both the emerging diseconomies and the potential of small business. Treating market and hierarchies as ‘alternative modes of co-ordination’, they always give priority to hierarchies’, hence the dominance of large multi-plant organization. Refusing the need for market competition (its role in regulation and performance stimulation), monopolistic and oligopolistic situations are not questioned. On the contrary, these are usually declared and treated as optimal solutions. The political power based on a monolithic one-party system prefers Table 6.2 Number and distribution of active earners (1 January 1989) In the material sphere of the economy Total Number of active earners (1, Per cent 000s)

Number of active earners (1, Per cent 000s)

1. from this: in private enterprises 2. Family members of the above 3.

Employees 74.0

2,898.1 2.0

77.6 85.6

3,940.5 2.0

81.7

Members of co-operatives 51.3

515.8 1.4

13.8 51.3

531.5 1.1

11.0

5.1

218.4

4.5

2.1

81.0

1.7

3,735.4

100.0

4,822.7

Entrepreneurs employed Family members of the 79.4 above Total

self- 190.8

100.0

to handle a limited number of large economic units. In the centralized set-up (with excessive stateownership) the planning and control of the state-owned enterprises—and of the co-operatives, too—is much easier as they are less in number. Small-scale private business is only tolerated and usually constrained to produce and trade in simple consumer goods, repair and other services. The centrally-planned East European economies followed these guidelines for four decades. Neither the ‘reforms’, nor the ‘improvements’ of the economic system brought about much change until recently. One difference nevertheless should be noted. While the ‘improvements’ led as a rule to further concentration, the ‘reforms’ increased the freedom of private entrepreneurship and the share of small business. According to the figures of the Organization for Economic Co-operation and Development (OECD) Economic Outlook2 the contribution of private business to NMP (Net Material Product) in 1988 amounted in Czechoslovakia, the German Democratic Republic, Romania and the USSR to 2.5–3.5 per cent, in Bulgaria to 9 per cent, and in Hungary and Poland to 15 per cent. In spite of the reform declaration that a more balanced size-pyramid of enterprises was needed, until 1980 the concentration of both the state-owned enterprises and the co-operatives under strong formal and informal state control had increased. Between 1970 and 1979 the number of state-owned enterprises in industry decreased from 821 to 702, that of industrial co-operatives from 821 to 673, the number of state farms from 194 to 131, the number of agricultural co-operatives from 2,241 to 1,350 and the number of domestic trade

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organizations from 946 to 603. In 1980 the government stopped this process of centralization and decided to reverse it with moderate success since. In the Hungarian state-owned sector the share of employees in small business is marginal, that in mediumsized enterprises might be around 10 per cent, and large organizations dominate. In the co-operative sector a more equal distribution of size-classes can be found but also with the relative dominance of medium-sized and large units. In the market economies on an average more than two-thirds of the active earners are engaged in small and medium-sized enterprises (according to the European Community’s (EC) categories: up to 500 persons).3 This share might be about one-third in Hungary (and similar in Poland, and around 20 per cent in the other East European countries). THE MAJOR SECTORS OF THE ECONOMY Looking at the role and share of the state-owned enterprises by sectors: in agriculture in 1987 the 130 state farms owned 11.0 per cent of the land, employed 133,000 persons and originated about 15 per cent of the agricultural production. The 1,392 co-operatives had 566,000 members, 62 per cent of the land and contributed 50 per cent of the total agricultural output. The rest was produced by 1.4 million ‘small producers’, mostly by second economy’s activity (by members of the co-operatives, and employees of the state farms, but in a great number of industrial and other enterprises, pensioners and so on). Seven and a half per cent of the employees of the state farms and 55 per cent of the members of the co-operatives were engaged in organizations not exceeding the 500 persons limit. In industry, in 1987, state-owned enterprises dominated with a 80.3 per cent share in total industrial output (see Table 6.3). Two items of this table require further explanation. When at the beginning of the 1980s the government started to facilitate start-ups and some moderate growth of small business, a special form of ‘entrepreneurship’ was introduced. Voluntary groups (working communities and groups) could and were established in the state-owned enterprises and co-operatives, aiming at work beyond the ‘normal’ working hours with the assets of the enterprise/co-operative, not necessarily but mostly for Table 6.3 Industrial activities in Hungary by type of organization (1987) Type of organization

Number of enterprises or Employment (1000s) Percentage share in the value other units of total industrial output

State-owned enterprises 1,043 Industrial co-operatives 1,392 Working communities and 12,484 groups* Private industry 47,691 Non-industrial organizations 2,492 Total – Note:* =Second jobs

1,258 196 193

80.3 6.1 0.6

81 218 –

1.8 11.2 100.0

the same organization—not for wages but on a free contractual basis. Hundreds of thousands of employees enjoyed the additional income of this (and other forms of) legalized ‘second economy’, though not without drawbacks on the ‘first economy’s’ performance. Now in the period of the transition into a true market economy these special forms of ‘entrepreneurial groups’ are vanishing but they played an important role as advocates and incubators of entrepreneurship.

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The other item to be explained is ‘non-industrial organizations’. The Hungarian statistics are based, not on data of establishments, but on those of enterprises classified by their major profile. When the administrative barriers of diversification have been eliminated from the early 1970s the number and the share of the industrial sub-units of the agricultural co-operatives and of all other non-industrial organizations increased remarkably. In 1987 2,492 non-industrial organizations had 13,667 sub-units, performing industrial activities. These units are mostly very small ones (up to 20–50 persons). Although they are only semi-autonomous, under the special Hungarian circumstances they accomplish functions of (private) small business (see Table 6.4). Of the 1,26 million employees of the state-owned enterprises only 1 per cent was working in 1987 in enterprises with not more than 100; and less than 10 per cent in enterprises with not more than 500 workers. Table 6.4 shows the size distribution of the 1,043 state-owned enterprises and their 4,869 establishments. Although establishment sizes are larger than usual, the high degree of concentration is due Table 6.4 Size distribution of the state-owned enterprises and their establishments in Hungarian industry (1987) (%) Size-classes by number of workers Establishments Number of establishments Number of workers Enterprises Number of enterprises Number of workers

–100

101–500

501–1000

1001–2000

2001–5,000

61.3 9.4

28.5 31.1

6.2 23.3

2.7 20.2

0.8 16.0

23.9 1.0

28.8 8.1

19.9 15.6

16.2 24.2

9.1 28.8

5,001+

2.4 22.3

primarily to the dominance of multi-plant firms. The overwhelming majority of the 4,869 plants are merged into large enterprises, as a result of the long process of extreme centralization mentioned above. In construction (building industry), in 1987, 164 large state-owned enterprises were working with 191, 000 employees. Fifteen per cent of the income of these enterprises originated from industrial production; and their contribution to the total construction output was the largest from the five categories of organization, but less than 40 per cent: State-owned enterprises Co-operatives Enterprises of other sectors 30,000 small private organizations Populations’ contribution (family houses)

36.4 per cent 9.8 per cent 27.2 per cent 18.4 per cent 8.2 per cent

As regards the state-owned construction enterprises, the contribution of those with less that 100 employees is marginal. In foreign trade large specialized state-owned enterprises represented a state monopoly; but decentralization began in this area, too. Now with minor exceptions all enterprises are authorized to undertake export and import transactions. Nevertheless, in 1990 the forty-one state-owned foreign trade enterprises established by the former Ministry of Foreign Trade produced more that 70 per cent of the total turnover. Of these enterprises seventeen are already transformed into joint-stock companies, seventeen are governed by Enterprise Councils, and seven directly by the ministry (now called Ministry of Foreign Economic Relations). The guidelines on how to privatize these companies are being formulated.

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In domestic trade and catering, in 1987, mostly large state-owned enterprises and co-operatives dominated, but the private sector is growing fast. Out of the total turnover of retail trade and catering in 1987, 57 per cent was accounted for by some 500 state-owned enterprises, operating 26,000 units. The mainly large co-operatives had 29,000 units, with 33 per cent of the total turnover; out of this 10 per cent came from the 32,000 units of the private sector. Telecommunication and transport were and are concentrated in large state-owned monopolies, except for road transport and taxis where small private undertakings are gaining an increasing share. MARKETIZATION AND PRIVATIZATION Two connotations of the term ‘privatization’can be found in the recent literature. On the one hand privatization denotes the change of ownership from public (state-owned) to private; on the other hand it means—for example, in the formulation of Professor V.V.Ramanadham, Co-ordinator of the UNDP Interregional Network on Privatization—a shift in the organization of economic activity in such a way that the proportion of activity under ‘the influence of the market’ expands and the relative extent of government or ‘administered’ influence declines. In this latter, broad, interpretation privatization is a means for ‘marketization’ of the economy which can be provided by operational (managerial criteria) changes, organizational (structural) changes and ownership changes (divestiture). In this sense the Hungarian reform can be considered as an experiment of marketization without ownership changes, through operational (managerial criteria) changes (focusing on profits) and organizational changes (through very much prolonged decentralization). Based on experience from the meagre results of the two decades of economic reform, there is not much confidence now in Hungary in the non-divestiture ways of privatization. At the same time doubts about the effectiveness of the first two ways of ‘marketization’ mentioned above, the operational and organizational changes without changes in ownership in a non-market environment, do not question the use of, and the need for, such changes—all the more because such measures can be treated as preparatory steps for divestiture. In the 1970s and 1980s, when we have spoken about structural adjustment (and we did it recurrently), as a rule we emphasized the urgent need to change the pattern of production by branches and products. Now in the framework of the ongoing systemic changes two other kinds of structural adjustment have come to the fore in Hungary and in the other East European economies: the radical modification of the ownership and size patterns of enterprises. These two tasks are closely interrelated. They can and should be implemented on two tracks—equally important: (i) by divestiture privatization and decentralization of large enterprises, and (ii) by promotion of start-ups and growth of private business. Changes in the legislative framework have paved the way for the systemic changes, too; but the recognition and acceptance of them required a couple of further years. In 1984–5 the hierarchical dependence of the state-owned enterprises on the sectoral supervising ministries was for about two-thirds of the enterprises and they got a new statute. They are governed by Enterprises Councils of whom 50 per cent are elected by the employees and 50 per cent are nominated by the general manager, who is himself elected (and eventually dismissed) by this Council.4 The new statute eliminated dependence on the supervisory ministries but not on the ‘functional’ authorities (as the Ministry of Finance, the National Price Board, and so on). It increased participation; however, it weakened— in a non-market environment—the position of the general manager, strategic orientation and entrepreneurial behaviour. In the centrally-planned economies private business in industry has been restricted to artisanry. This can be demonstrated also in the Hungarian case, where even after the economic reform of 1968 private firms

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were only tolerated. Their role was redefined in 1977, again in terms of the satisfaction of the demands of the population, mainly for repair and services (Law-Decree nos 14 and 15). Special individual licences were needed for start-ups; an upper limit of the number of employees was fixed (six persons including family members, plus three apprentices in 1977); they experienced discrimination in material supply, in contracting with state-owned enterprises, and in export; and success in business was usually accompanied by an increased number of inspections, often vexatious. It was in 1981 that the issuing of licences was lifted; the employee limit was gradually raised (to illustrate: 1981–9 persons, 1983–12, 1988–30, 1989–500, 1990—no limit at all). The prohibition turned first to benevolent tolerance and then to support—at least by declaration. Instead of administrative measures, now the financial conditions and the lack of infrastructure keep back the growth of small business. From 1981 to 1989 impressive development in private small business was registered in retail trade and catering (three-fold increase) and in transportation (six-fold increase). Construction stagnated, services increased by 75 per cent, and industrial activities by 50 per cent. Until the free elections in March/ April 1990 and the victory of the former oppostion parties also, the lack of confidence conditioned start-ups and expansion. FURTHER CHANGES IN THE LEGISLATIVE FRAMEWORK The Company Act of 1977 gave a uniform statute for all state-owned enterprises—formally with a guarantee of great autonomy and accepting that (for historical reasons and foreign relations) some of them can operate as joint-stock companies. There was another statute for the co-operatives; they were considered as autonomous economic groupings, but the use of the property rights of the members was very much restricted and a strong informal state/party control has always been present. In the early 1980s some new forms of partnerships for private business were introduced. Then, already moving towards a kind of market economy, in 1988 Parliament approved Law VI, which widened the choice of the legal forms of the stateowned enterprises as follows: Unlimited partnership Deposit (or limited) partnership Union Joint enterprise Limited liability company Company limited by shares (joint-stock company) The law opened the gates for enterprises with mixed (state, foreign, private) ownership (and raised the limit of the number of employees at private enterprises up to 500). Law XXIV/1988 on Foreign Investments facilitated, and made attractive, foreign investments in Hungary by simplifying start-ups and guaranteeing free repatriation of profits and substantial tax exemptions. Stimulated by these favourable conditions and later also by changes in the political system, the number of joint ventures increased in 1989 from 300 to 900 and in 1990 to more than 4,000. The major partners came from Austria, Germany (Federal Republic of Germany), USA and Switzerland. The growth in the number of joint ventures was accompanied, however, by a decline in the amount of capital invested per case. At the end of 1989 in two-thirds of the joint ventures

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foreign capital did not exceed 1 million Hungarian forint (Ft.) US $16,000. Law XCVIII/1990 modified some of the conditions laid down in 1988 stimulating the establishment of joint ventures of larger size and of companies with a 100 per cent foreign share. Another important Act, Law XIII, approved by Parliament in the spring of 1989, regulated (with the intention to facilitate and to promote) the transformation of the enterprises from one statute to another.5 At the beginning of 1990 Law V on Individual Entrepreneurship liberalized start-ups and operations of private entrepreneurs/ enterprises. Since, first of all on the basis of Law VI/1988, and then in some cases based on Law XIII a kind of ‘spontaneous privatization’ has been started, another act, Law VI/1990 established a State Property Agency (SPA). Its task was formulated as: to maintain the separation of the executive power and ownership rights of the state, to decrease significantly the enterprising property of the state, and to establish the adequate methods and organizational background, as the execution of the Law XIII 1989 (TL) on the transformation of economic organizations and economic associations. and ‘in order to increase protection of state property and interests of the society as well as to promote publicity and competition’. At the same time Parliament also passed Law VIII/1990 on Protection of State Property Entrusted to Enterprises. With the Decree XX/1990 Parliament stipulated the ‘Asset Policy Guidelines in 1990’ defining the dual task of the SPA until September 1990 as follows: On the one hand it has to enforce—in the legal framework—the principles of publicity, competition and real asset valuation in the course of spontaneous privatization started by the enterprises, and in the case of non-public transactions it has assured the protection against the unjustified devaluation and undersellng of the state-owned property. On the other hand the SPA had to start selling the state-owned property with the help of the best privatization methods possible (shaping selling techniques, the qualification of the potential managing staff, search for future buyers, defining favoured groups of buyers). It should start and, if it is possible, finish the transformation and sale of some profitable state-owned enterprises which can be introduced to the stock exchange in a short while and which can operate as openly established joint stock companies. In this decree the goals of privatization are formulated in broader terms, too: The goal of selling the state property is to gradually extend private ownership and to strengthen real self-governing and public ownership. The property of the nation should be operated by owners with real interest in increasing the proceeds and assets; the motivations of ownership should be intensified in the economy. Selling of state property to enterprises and economic associations operating under state control or with majority state ownership is to be avoided if possible. The sale should encourage competition; and by simultaneous decentralization it should reduce the number of companies with economic superiority. It should promote to establish new, efficient employment possibilities. It should facilitate the influx of foreign working capital that provides modern technology and management and that means market extension.

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The comprehensive Law on Privatization was to be submitted to Parliament in September 1990. In the government’s ‘Programme of the National Renewal’ (published in September 1990) there is a chapter on privatization. Most probably this will be the base for the draft of the Law on Privatization. The programme sets the target to privatize at about 50 per cent of the state property in three to five years, with different methods including actions of the SPA but allowing initiatives also for the enterprises concerned and for the potential foreign and domestic investors. As new owners, domestic entrepreneurs, foreign capital, municipalities, pension and other funds as well as employees are listed in the programme without mentioning limits, preferable proportions and financial methods. Without waiting for general guidelines, Parliament discussed and approved in September Law LXXIV/ 1990 on Privatization of the Assets of State-owned Enterprises in Retail Trade, Catering and Consumer Services. That means privatization is going on in Hungary at the present time on four lines: (a) actions of the State Property Agency; (b) ‘spontaneous’ initiatives of the enterprises and/or investors (c) implementation of Law LXXIV/1990 in retail trade, catering and consumer service: and (d) promotion and growth of private small business. THE SPA PROGRAMME-PACKAGES In September 1990 the SPA announced its ‘First Privatization Programme’ for twenty state-owned enterprises of different sizes and active in different sectors, in industry, trade and services. The total book value of the assets of these enterprises amounts to 73 billion Hungarian Ft. Distributed as follows: Value of assets: 1.1–5 billion 5.1–10 billion 10.1+ billion

Below 1 billion 10 enterprises 3 enterprises 2 enterprises

5 enterprises

The two largest enterprises are the Richter Gedeon Rt Pharmaceutical Company and Hungarohotels; looking at the turnover figures the Centrum Department Stores is the leading one. As guidelines for selection from about 2,000 state-owned enterprises, the following criteria were listed by SPA: satisfactory performance of the enterprise; supporting behaviour of management and employees; investors’ demand for the enterprise; possibility of using several methods of privatization; previous preparations for privatization. The SPA called for tenders from consulting and other firms engaged in such businesses; in a few weeks about 200 firms (among them 50 foreign ones) asked for detailed—general and enterprise-specific— terms of reference. SPA declared preference for three approaches or their combinations: (a) transformation of the state-owned enterprise into a joint-stock company and public sale of the stocks; (b) tender, public or with invitations; and

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(c) employee ownership, in different forms. The applicants should get acquainted with and assess the market, financial, ownership and management situation of the enterprise concerned; then they have to give proposals for its future business strategy, modernization, and capital requirements, as well as the methods and schedule of the privatization process. The application should include a presentation of the applicant-firm, of its staff, of its past experience and the fee requested with a detailed budget. The SPA promulgated that in the evaluation of, and final decisions on, the tender, 3:1 weights would be given to the professional content of the proposal vs the price requested by the applicant. According to the programme-booklet of the government issued in September 1990, three to four privatization packages with 20–25 enterprises each are to be announced annually. HANDLING THE INITIATIVES OF THE ENTERPRISES The total book value of the state-owned enterprises is estimated around 2,000 billion Ft. Privatizations up till now concern about 5–8 per cent of this value. The ‘spontaneous privatizations’ by the initiative of the enterprises (the managements of the enterprises) themselves have been sharply criticized. Also the annotation to the Law LXXIV/ 1990 referred to the frequent misuse of the legal possibilities in such transactions, causing significant losses for the state and the society, first of all through extreme undervaluation of the assets sold or transferred. Nevertheless, in order to avoid the protracted implementation of this fundamental condition of the systemic change, and also taking into account the limited capacity of the SPA, this way of privatization has not been excluded or restricted but put under the control of the SPA. The major rules of this control have been laid down by the Law VIII/1990 as follows: Article 1 of the Law defines the cases when these rules are to be applied for example (b) property transfer of the property value right or property participation in economic association of the enterprise provided the value of the contract exceeds 30 million forints. According to Article 2, ‘The enterprise is obliged to have the value of the property being subject of the contracts listed under para (1) subparas (a) (b) (c) and (d) defined by a registered auditor (auditing organization, independent auditor, organization or person entitled to auditing).’ Further on by Article 3: the enterprise is obliged to report its intention for entering into a contract under the power of the Law to the State Property Agency. The report has to contain the title of the contract, the value involved, the value defined by the auditor, other important conditions of the contract (duration, date and way of completion etc.) and the ratio between the value and the total assets of the enterprise by the balance sheet. The enterprise is not obliged to report (Article 6): (a) if it announces a public tender for the conclusion of the contract listed under Article 1 para (1) subpara (b) (c) (d) and (e) and the contract is concluded as its result;

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(b) if it publicizes the conditions of the contract at least in two national daily papers, undertaking the obligation that if any third party made a more favourable offer within thirty days after the announcement, the contract would be entered into with the third party. Based on the report according to Article 3 the SPA may take the following measures (Article 5): (a) if there is good reason to doubt the results of the property appraisal, it requires to repeat the property appraisal which is to be completed by an auditor assigned by it within thirty days after the assignment at the expense of the State Property Agency. The enterprise should not transfer the property or should not invest it in kind into an association under the value defined in this way; (b) if the importance of the contract or other circumstances, especially ensuring freedom of competition, require concluding the contract on the basis of a tender; (c) if the contract is in obvious prejudice of the interests of society or causes damage to the national economy, it prohibits the conclusion of the contract. The enterprise can conclude the contract in thirty days from submisson, with the conditions included in the report, unless the State Property Agency takes one of the measures listed under Article 5 before the deadline (Article 4). In the period March-September 1990 the SPA handled 160 cases of privatization. The agency approved sixty transactions to the value of 25 billion Ft. at 148 per cent of the original book value of the assets. Twenty-eight of the reported cases were rejected; and the rest are under examination. PRIVATIZATION IN THE RETAIL TRADE, CATERING AND CONSUMER SERVICE SECTOR In 1989 the state-owned enterprises operated 25,375 shops and catering units, 27 per cent of the total number, employing 51 per cent of all active earners of the sector, with 57 per cent of the total turnover of the sector. The share of the private enterprises is rapidly increasing in this segment of the economy. They operate 43 per cent of the units (as a rule very small ones) with 20 per cent of employment producing 13 per cent of the total turnover. As the figures indicate, the third form of ownership, co-operatives, has a significant share, too. All types of privatization will be used in this sector. By spontaneous privatization about 4,000 units have been transformed already, mostly into small limited liability companies. The SPA package announced, as mentioned before, includes trade companies and hotels, too. Beyond the decision that these spontanous initiatives must be supervised by the SPA, Law LXXIV/1990 created a special scheme and schedule for an accelerated though not complete, so-called pre-privatization. According to preliminary estimates the law might touch about 8,000 units of 150–160 enterprises (plus 2,000–3,000 units of state-owned enterprises engaged in consumer services). The procedure laid down in this law is to be applied to all units which, on 31 December 1988, or after this date: (a) were operated according to the wide-spread6 special accounting, incentive and contracting-out schemes; or (b) did not employ more than ten persons in retail trade, or more than fifteen in catering (and consumer service).

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The law suspends the right of the state-owned enterprises to sell, contract out or transfer in any form such units without the approval of the SPA. All state-owned enterprises having such units must submit detailed information to the SPA within thirty days on: 1 each unit in this category with data about the value of the assets, form of operation and ownership of the premises; 2 previous transactions, intentions and future implications of privatization. Then with the help of a large network of experts the SPA will determine the value and the minimum price of each unit, announcing public tenders for sale. Actually the premises of the units will not be sold, only the licence for operation will be—with option for the premises in case they go on sale. This solution had to be accepted first of all for technical reasons (after long discussions). In order to strengthen the position of the quasi-owners, the licencees, they are offered a ten-year guarantee of tenancy of the premises, and the licences for operation can be sold without restrictions. The law defines an order of preferential treatment in case of equal offers as follows: the manager of the unit, employees of the unit, partnership of the employees, employees of the mother company or their partnership, and finally, applicants paying in cash. Two years are foreseen for the complete implementation of this privatization programme. THE GROWTH OF PRIVATE SMALL BUSINESS Several objective trends and necessities point to the indisputable requirement to reverse the present 1:2 proportion of the SME and large enterprises in the Hungarian economy. Some of them will be listed below without claiming a ranking of their importance: 1 Technical progress diminishes the minimum efficient scale of production in most branches. 2 With higher incomes the demand for special products and services of small business is increasing. 3 There is a growing need for autonomous work and entrepreneurship in Hungary and small business offers more possibility for them. 4 Many large, unprofitable or even loss-making state-owned enterprises can be reorganized/restructured only by breaking down or disintegrating them into smaller units. 5 Unemployment is increasing (for several reasons); this can be met first of all, at least partially, by startups and growth of small business. 6 In most branches flexible production and marketing systems are based on a balanced proportion of, and on the co-operation of, small, medium-sized and large enterprises; and this is so in the Hungarian economy too. 7 According to historical trends the share of those sectors is increasing where plant sizes are smaller. 8 Hungary is striving for a democratic society based on a normally-functioning market economy; and in democratic societies a strong middle-class is necessary. For market competition more actors are required. This presupposes a significant SME sector! The relatively fast progress in divestiture privatization of the stateowned enterprises is a prerequisite of the proper systemic changes desired in Hungary, as in the other East European countries. On the other hand, however, this encounters many difficulties: unclarified political implications (for example, privatization vs

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reprivatization), technical hindrances (such as the lack of reliable balance sheets, auditing, and valuation of the assets), scarcity of domestic capital, moderate inflows of foreign capital, and so on. Therefore, the promotion of start-ups and growth of private small business so as to increase the share of private ownership has a special significance under these circumstances. This conclusion is clearly recognized, repeatedly declared, often emphasized; nevertheless, the progress achieved is rather modest. Four factors will be listed here to explain this experience. 1 The legislative framework ensuring free entry into the market and the elimination of the previous discriminatory measures are important, necessary, but not sufficient, conditions for the desired fast growth of private small business. 2 SME’s have advantages over large enterprises (first of all, greater flexibility), but they have disadvantages too. These must be counterbalanced with the help of special infrastructures for banking, training, consultancy, information, incubators; preferential treatment in some cases; activities, networking of the trade associations, and so on. Such systems of promotion were not in existence previously; their development has started only recently. 3 As a legacy of the past decades, there is a serious lack of entrepreneurship, entrepreneurial spirit, managerial skills and accumulated private capital. In all these respects special measures and actions are needed. Foreign experience and aid can be very useful; actually they are indispensable—without underestimating the national efforts, including a less restrictive and better stimulating economic policy. The entrepreneurial profit tax is 40 per cent, the social insurance contribution of the employers 43 plus 1.5 per cent, credit rates (with an inflation rate of about 30 per cent per annum) around 40 per cent— these conditions cannot enhance sufficient entrepreneurship on a large scale. Becoming aware of these constraints, from 1 January 1991 tax reliefs for start-ups, preferential credit schemes, and guarantees for loans have been introduced. In March a so-called Existence Fund was created to support privatization actions of individual entrepreneurs. 4 To promote start-ups and growth of small business in economies in a transitional stage with the burden of stagnation, inflation, foreign indebtedness, and budgetary deficit, requires special skills and methods of economic policy. These have not been found in Hungary yet. A number of tasks are to be performed simultaneously: (a) to implement changes in the political and economic systems; (b) to increase competitiveness, by ‘doing things better’ and ‘doing better things’ which means higher productivity, improved quality, and accelerated structural adjustment; (c) to manage foreign indebtedness and the deficit of the state budget; (d) to handle inflation, unemployment and poverty.

These tasks are closely interrelated. The timing of the steps taken, forecasting the possible negative sideeffects, looking for synergic impacts, are of utmost importance. The government in Hungary is late in the elaboration and launching of a complex economic programme including actions in both privatization and strengthening the SME sector.

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SOME CONCLUSIONS In spite of the two decades’ experience of economic reform, the progress made in building a new legislative and institutional frame-work, and the relatively higher share of the private sector (compared to other East European countries), the way to a ‘normal’ market economy seems to be far longer and difficult than is expected by most politicians. In 1990 the favourable positive balance of foreign trade and the increase of start-ups of small business and joint ventures could not counterbalance the many crisis-phenomena of the ‘systemic vacuum’, in particular in the still-dominant state-owned sector, the growth of unemployment, poverty and inflation and in the shrinking of GDP. Privatization in the East European economies is a unique task without historical experience. According to the State Property Agency’s report in 1990, nearly 200 enterprises have been privatized in Hungary—about 10 per cent of the state-owned enterprises. These are very impressive figures compared to other (developed and developing, market) economies; but in Hungary most experts are not satisfied with the process as it goes on, quantitatively and qualititively. From the critiques I cite only the three issues quoted most: 1 The goals, methods and priorities of privatization and the comprehensive guidelines have not been clearly formulated, submitted to, discussed and approved by Parliament. Of course, these guidelines are to be in harmony with the economic programme of the government—which is also waiting for discussion and approval in Parliament. A number of fundamental questions and laws are handled and decided in an ad hoc manner. Present property rights, the distribution of the incomes from privatization, the ways and means of compensation of former owners or reprivatization, the employees’ voice and shares, the impacts on, and the future of co-operatives, are not clarified sufficiently. Answers to these questions are motivated mostly by momentary political considerations— instead of adequate inquiries, studies and unprejudiced discussions. 2 Privatization should improve the efficiency of operation of the enterprises. To this primary objective not much attention is paid. The need for restructuring before or after privatization has been overlooked. Arrangements for the management and governance of the majority of the state-owned enterprises to be privatized some years later are absolutely unclear. Too much weight is given to political and immediate financial impacts, and less than necessary weight is given to efficiency and strategic requirements. Privatization should be fitted in a comprehensive vision of how to improve competitiveness, productivity and flexibility of the total business sector, including small, medium-sized and large enterprises, private, co-operative and (temporarily or in the long run) state-owned enterprises. 3 As far as the institutional set-up is concerned, the statute, the role, and the capability of the State Property Agency are hotly debated. This single centralized institution fulfils a number of tasks. These include monitoring, implementing and controlling all privatization transactions and handling state property. In most experts’ opinion, decentralization in the operational activities, a division of labour and power, and checks and balances are needed, and most probably will be realized in the not too distant future. NOTES 1. The Changing Role of the public industrial sector in development United Nations Industrial Development Organization (UNIDO) IS 386 (1983), 39. 2. See the Financial Times, 24 September 1990, vi.

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3. According to the 33/90/EN issue of the Euro-Info in the European Community (excluding the primary sector), in 1986 micro-firms with a staff of up to nine persons provided 27 per cent, SME’s between 10 and 499 persons 45 per cent, and large firms 28 per cent of the 91.5 million jobs altogether. 4. In the field of industry, after the implementation of the enactment 22/ 1984, out of the 1,009 state-owned enterprises, 236 remained under state supervision, 131 under trusts, 332 under The Enterprise Council, 257 under The Employees’ Assembly (another variant of the former statute), 24 were foreign-owned and 29 of other subordination. 5. The annotation to the ‘Transformation Law’ pointed out that ‘it is evidently not equal with the ownership reform, cannot substitute it, its scope is much narrower’. And just for this reason this Act has been attacked by many economists, lawyers and (at that time) opposition parties both before its tabling and after its approval by Parliament. A modification of this law is in progress. 6. In 1989, out of a total of 53,502 units of the state-owned enterprises and co-operatives in this sector, 39,502 (66 per cent) belonged to this category.

REFERENCES Guidelines on Privatization, UNDP Interregional Network on Privatization, UNDP, New York, 1991. The Changing Role of the Public Industrial Sector in Development, United Nations Industrial Development Organization (UNIDO) IS. 386, (1983). Heath, J. (ed.) (1990) Public Enterprise at the Crossroads, Essays in Honour of V.V.Ramanadham, London, Routledge. Mizsei, Kálmán and Patakai, István (eds) (1990) A privatizációs kihivás Közép-Kelet-Európában, MTA Világgazdasági Kutató Intézet, The Challenge of Privatization in Central-Eastern Europe, Research Institute of World Economics of the Hungarian Academy of Sciences. Móra, Mária (1990) As állami vállalatok (ál-)privatizáciôja, Gazdaságkutatô Intézet, The (Pseudo-) Privatization of the State-owned Enterprises Economic Research Institute. Ramanadham, V.V. (ed.) (1989) Privatization in Developing Countries,, London, Routledge. Roman, Zoltán (1986) ‘Competition and industrial organization in the centrally planned economies’ New Developments in the Analysis of Market Structure, in Joseph E.Stiglitz and G.Frank Mathews (eds.),The MIT Press. Roman, Zoltán (1990) ‘The size of the small firm sector in Hungary’, in Zoltán J.Acs and David B.Audretsch (eds.) The Economics of Small Firms, A European Challenge, Kluwer Academic Publishers. Roman, Zoltán (1991) A kis-és középvállalatok helyzete az iparban, Ipargazdasági Intézet (The small and medium-sized enterprises in the Hungarian industry , Institute of Industrial Economics). Seminar on Privatization, Warsaw, 22–23 October, 1990, Ministry of Ownership Changes, UNDP. Tájékoztatö az állami vállalatok privatizációjáról, 1990, Allami Vagyonugy-nökség (Information on the Privatization of the State-owned Enterprises 1990, State Property Agency.) Vuylsteke, Charles (1990) ‘Privatization in emerging market economies. Constraints and practical responses, Background note for World Bank Group Conference, Washington DC. 13–14 June, 1990.

7 Privatization in Czechoslovakia Michal Mejstrik

THE PUBLIC ENTERPRISE SITUATION Before considering the transition of Cechoslovakia to a market economy, we should assess the initial situation to get a serious point of departure. The pressure of inertial tendencies is sometimes very strong and cannot be easily reversed. An initial endowment also should not be underrated. An inadequate assessment can lead to improper therapy. Gradually since 1945 and finally in 1948 under Russian influence, communists took over power in Czechoslovakia, Poland, Hungary and East Germany and started to build ‘socialism’. On behalf of workers and for a redistribution of income, they dismantled the market system and implemented a command economy. As a basic prerequisite for the introduction of a specific centrally-planned economy (CPE), they saw rapid redistribution of property rights through nationalization and collectivization (for example, Czechoslovak agrarian reform that created around 10,000 agricultural co-operatives and state farms as the exclusive form of farm organization). Industrial (and all financial) enterprises with employment exceeding 500 persons were nationalized already in 1945, smaller enterprises with over 50 employees in 1948 (see Table 7.1). Private crafts and service establishments were either liquidated or nationalized and integrated into larger state-owned enterprises (SOEs), where some of them gradually lost their craft character. As can be seen in Table 7.1, even by 1960, 93.4 per cent of net material product (NMP) produced was under state domination. The non-farming private sector had dropped its share of NMP from 33.4 per cent by 1960. As the mid-1980s approached, Czechoslovakia found itself with 96.7 per cent of its NMP dominated by the state sector and only 0.7 per cent of NMP was contributed by the non-farming private sector. It was nearly the same as in East Germany, but much less than in Table 7.1 The per cent share of the net material product produced by individual sectors (1948–83) (current prices used) 1948

1960

1970

1980

1983

Total Net Material prod. 100.0 100.0 100.0 Individual farms 1.1 5.0 3.5 Private sector 33.4 1.6 0.9 Socialistic sector 65.5 93.4 95.6 state-owned enterprises 62.9 81.8 85.1 co-operatives 2.6 11.6 10.5 Source: Historial Statistical Yearbook of CSSR, FSU, SNTL, Prague, 1985

100.0 2.1 0.5 97.4 87.5 9.9

100.0 2.6 0.7 96.7 86.4 10.3

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Poland or Hungary, which paradoxically had much shorter traditions of private industry and market economy. These systematic institutional changes were supported by a specific economic policy of structural reconstruction aiming at ‘industrialization and concentration’ based on ‘law of increasing returns’ without any limit or any optimal size. There was a steady increase in plant size, which led the small and functionally-closed Czechoslovak economy to the artificial formation of an indivisible single plant with natural or technical monopoly (sometimes oligopoly was the case). The hierarchical structure of the centrally-planned economy generated institutional reasons also for the formation of an administrative monopoly. As an attempt to manage the hierarchical CPE more easily and co-ordinate industries and firms better, economic authorities decreased the number of enterprises while increasing the size of the firms; for example, in Czechoslovakia between 1958 and 1980 (with interruption 1964–6) the share of employment of state-owned industrial firms with less than 500 employees fell from 13 per cent to 1.4 per cent. In 1988 the average size of over 1,600 state-owned industrial firms that employed over 3 million employees (nearly half the labour force) was 3,100 workers (see Table 7.2.). Unfortunately now, Czechoslovak manufacturing is experiencing serious difficulties in international competitiveness. What is feared is an irreversible sharp decline in export manufacturing, that is, gradually decreasing productivity and relative quality and consequently a loss of markets. The financial position of state-owned enterprises is indicated in Tables 7.3–7.5. They reflect the subsidies offered by the government, as well as the tax revenues collected. The ‘mature’ Czechoslovak economy over the last decade has approached the lowest average figures of total factor productivity Table 7.2 Enterprise size distribution of Czechoslovakian manufacturing firms between 1965 and 1988 (a) Share of total number of enterprises—NOENSH Year

Employment size categories

in absolute terms <500

500–2500

in relative terms >2500

<500

500–2500

>2500

1956 763 721 73 49.0 46.3 1960 137 523 181 16.3 62.2 1970 109 560 204 12.5 64.1 1980 80 562 218 9.3 65.3 1988 91 586 213 10.2 66.8 Source: Historical Statistical Yearbook CSSR, SNTL, Prague, 1985; Statistical Yearly, 1989

4.7 21.5 23.4 25.4 25.0

(b) Share of total manufacturing employment—EMPLSH Year

Employment size categories

in abs. terms (000s of workers)

in relative terms (%)

<500

500–2500

>2500

<500

500–2500

>2500

1956 1960 1970 1980

193.2 154.4 37.0 26.0

826.2 745.4 729.4 751.0

466.6 857.9 995.0 1052.0

13.0 8.8 2.1 1.4

55.6 42.2 41.4 41.1

31.4 48.8 56.5 57.5

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(b) Share of total manufacturing employment—EMPLSH Year

Employment size categories

in abs. terms (000s of workers) <500

in relative terms (%)

500–2500

>2500

<500

1988 26.0 787.0 1024.0 Source: Statistical Yearly, FSU, SNTL, Prague, respective years

500–2500

>2500

1.4

42.8

55.8

(TFP) growth rates among the European CMEA countries (see Table 7.6). The deceleration of the growth of factor inputs was not compensated by adequate growth in TFP. The drop in TFP growth led to the gradual deceleration of average annual rates of growth of the net material product (Mejstrik 1990 a, b, & c). The decline in the competitiveness and performance of Czechoslovak manufacturing can be seen more clearly through the fall in its export capabilities. THE THINKING ON PRIVATIZATION In order to face the negative tendencies in the economy, radical measures had to be taken to restructure industry and meet world standards. These were enabled by revolutionary developments in Czechoslovakia in November 1989. Economic reformers faced a market dominated by large state monopolies, which were created and maintained by administrative Table 7.3 Czechoslovakia: financial position of enterprises (in billions of current koruny)1

1 2

3 4 5 6 7 8 9

Output of which: Price subs Costs of which: mat. costs of which: depreciation of which: Tax Nonmat. costs Wage costs Wage tax Int payments Other 1−2=Gross profit Price diff. on foreign trade Extraordinary receipts 3+4+5=Total gross profit Subs other than price subsidies Prof. taxes 6+7−8=Net profit after taxation

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1165 15 1058 747 57 8 24 186 30 25 46 107 1 23 131 81 112 100

1220 22 1115 796 62 10 25 193 31 26 44 105 – 19 124 61 92 93

1295 17 1187 857 65 11 26 198 32 26 48 108 – 21 129 55 101 83

1332 18 1211 872 68 14 28 203 37 27 44 121 1 22 144 55 110 89

1450 22 1321 963 72 15 29 208 38 27 56 129 13 23 165 55 127 93

1497 21 1363 995 77 14 31 212 39 28 57 134 20 23 177 54 145 86

1552 20 1414 1018 80 22 33 218 40 28 77 138 19 21 178 57 135 100

1595 20 1452 1039 84 22 34 223 44 28 84 143 21 20 184 62 147 99

1627 22 1477 1049 89 22 37 228 49 28 86 150 21 20 191 69 147 113

1621 33 1513 1036 90 10 37 225 108 31 76 108 23 3 134 75 39 170

MICHAL MEJSTRIK

1980

1981

1982

1983

1984

1985

1986

10 11 12

Other resources 17 −4 41 19 6 3 24 9+10=Profit for distribution 117 89 124 108 99 89 124 Distributed profit 44 39 39 32 28 33 28 of which: wage fund 8 6 6 7 8 8 7 Fund for cultural and social needs 4 4 4 4 4 5 6 13 11−12= Retained earning 73 50 85 76 71 56 96 14 Depreciation after taxation 49 52 54 54 57 63 58 15 Borrowing from banks 33 14 18 14 22 12 13 16 13+14+15=Total financial resources 155 116 157 144 150 131 167 17 Use of financial resources 155 116 157 144 150 131 167 18 Investment 107 112 100 106 116 132 131 19 Stocks 36 6 31 18 21 – 17 20 Financial assets 12 −2 26 20 13 −1 19 Source: CSFR authorities Notes: 1 Including the monetary sector for 1980–88; excluding the monetary sector for 1989

1987

1988

1989

23 122 26 8 6 96 62 16 174 174 130 17 27

2 115 34 10 6 81 67 15 163 163 139 2 22

−16 154 38 15 6 116 80 −10 186 136 136 18 −18

Table 7.4 Czechoslovakia: subsidies and taxes for enterprises in the material sector1 (in billions of current koruny)

Subsidie s2 Price subsidie s State budget to profit after tax Branch ministrie s to profit after tax Intervent ions Investm ent Earmark ed subsidie s Other Total Taxes

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

15

22

17

18

22

21

20

20

22

30

5

7

6

6

7

8

10

11

11

16

8

5

5

6

5

5

7

7

10

12

14

15

10

10

8

4

2

2

2

2

33

19

20

20

19

21

19

19

20

21

4

3

2

2

2

2

2

2

4

8

4 83

3 74

3 63

3 65

5 68

5 66

8 68

10 71

11 80

11 100

95

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PRIVATIZATION IN CZECHOSLOVAKIA

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

Taxes 29 30 31 36 37 38 39 43 48 106 on wages Deprecia 6 8 9 12 13 11 19 19 19 10 tion tax Profits 94 76 83 92 107 125 115 126 125 86 tax Total 129 114 123 140 157 174 173 188 192 202 Source: CSFR authorities Notes 1 Includes all organizations of transport and communication. Excludes budgetary subsidies and common organizations, personal economy, private sector, hobby and housing co-operatives 2 Does not include subsidies in operation of foreign trade organizations Table 7.5 Czechoslovakia: subsidies and taxes for enterprises in the non-material sector1 (in billions of current koruny) 1980

1981

1982

1983

1984

1985

Subsidies Price subsidies – – – – – – State budget to profit after tax 4 5 5 5 6 6 Branch ministries to profit after tax 1 – – – – – Interventions Investment 6 4 4 3 2 3 Earmarked subsidies 2 – – – – – Other – – – – – – Total 13 9 9 8 8 9 Taxes Taxes on wages 1 1 1 1 1 1 Depreciation tax 2 2 2 2 2 2 Profits tax 3 1 2 1 1 2 Total 6 4 5 4 4 5 Source: CSFR authorities Notes: 1 Includes housing enterprises and co-operatives; excludes monetary sector

1986

1987

1988

1989

– 6 –

– 1 –

– 7 –

3 2 –

3 – – 9

4 – – 11

4 – – 11

2 – 1 8

1 3 2 6

1 3 2 6

1 3 3 7

2 3 3 8

Table 7.6 Growth of total factor productivity in Central and East European countries (material sphere, average annual percentage change) Country

1961–5

1966–70

1971–5

1976–80

1981–8

Czechoslovakia German Dem. Rep. Hungary Soviet Union Poland Bulgaria

0.4 0.7

2.0 1.5

1.5 1.3

0.7 0.8

0.1 1.1

1.2 0.9 0.9 1.7

1.6 2.1 1.1 2.2

1.6 0.7 2.2 2.0

0.5 0.5 -0.6 1.4

0.3 0.5 0.2 0.8

MICHAL MEJSTRIK

Country

1961–5

1966–70

1971–5

1976–80

97

1981–8

Romania 1.2 1.0 3.1 1.5 0.7 Source: Based on Economic Survey of Europe, 1984–5 and 1989–90 (United Nations 1985 and 1990); Statisticka rocenka CSSR; Hajek, Janackova, Nachtigal (1990) in Mejstrik (1990)

action rather than by economic considerations, and one that almost completely lacked a private sector, even when compared to Hungary or Poland. The coalition structure, made possible by artificial monopolies and oligopolies, derived its own system of barter exchange, an informal distribution network of resources, where formal monetary cost played a secondary role. The trump card in an exchange was the ability to deliver a deficit product, also known as ‘natural revenue’, such as industrial materials in short supply, or a ‘natural’ bonus system of vacations. The collusive oligopoly decided on a distribution of resources and benefits primarily for the internal rewards of the ‘mafia’. The behavioural problems of this coalition structure cannot be easily changed by the simple, formal transfer of the economy to a market-based one. The country faces, in turn, a very hostile environment for the introduction of a market structure. Barriers to entry include not only those common in developed market economies, but also a complete lack of guaranteed supply of market and resources information. The principal points of departure for reform are the full or partial privatization of state firms as well as the development of a new private sector of small and medium-sized firms. The former process should be preceded by the breakup of the monopolies and/or the internal decentralization of management decisionmaking. However, even the formal breakup of these enterprises does not dissolve the coalition structure. In fact, in such a small, closed economy as Czechoslovakia, the individual units of former state firms would become monopolies in their own right. Thus, Czechoslovakia is faced with a monumental task of creating basic competition— alternative suppliers, in turn, alternative selection of prices and qualities of goods. The Czechoslovak adjustment process is closely supervised by IMF and World Bank experts, who provide valuable independent expertise also in privatization, and facilitate the conditions of re-entry of Czechoslovakia (as a founding member) to both organizations. Because it is in Central Europe the country mainly follows European Community patterns of economic and legal organization in order to be prepared for its affiliation to the European Communities. The main controversy in Czechoslovakia has been between gradualists and radicals over the speed, depth and tools of the transition process. Some external factors (cut of oil supplies and oil price increase, Council for Mutual Economic Assistance (CMEA) mutual foreign trade denominated in convertible currency) accelerated public discussion in the direction of the radical reform package, adopted by the federal government already in May. The reappraisal of the long-standing traditions of the state sector and its transformation is, however, a still-undecided point of controversy. The reformers rooted in the 1960s postpone it to the future and see it as very gradual, whereas the radicals suggest speeding it up and minimizing the privatization period for some SOEs at the very least. The main argument here is that one cannot renew the functioning of a market economy without renewing private ownership. The main purpose of privatization is to create inviolable fields for sovereign rule by the owner and exclusion of interference by others, especially the government, except for generally recognized elements like taxation. The frontiers have not been well defined until now; the owners have not been well defined; and this ambiguity has been generating an economic and ecological irresponsibility and non-transparent financial relations.

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ACTIONS IN PRIVATIZATION The ultimate target of the privatization process is a substantial decrease of the state sector (state-owned assets) and a widening of private ownership among the citizens. The property rights should be transferred from the government to a broad constituency of individual shareholders. In Czechoslovakia this broad constituency includes potential detractors of privatization—managers and employees of SOEs and the users of their output. Hence, these future shareholders are becoming personally interested and involved in privatization and are becoming the basis of a powerful political constituency supporting privatization and opposing renationalization. The interim National Assembly had passed several dozens of new interim laws or amendments during the spring of 1990. Since June, the newly-elected National Assembly (a different group from the interim) has been able to elaborate and pass the accomplished blueprint of transition, that should introduce a number of simultaneous major measures as of 1 January 1991. Nationalist tensions coming from some Slovaks oriented to separatism have been slowing down the necessary adjustments, but do not pose a serious threat to reform. Now there are the newly-created Ministries for Privatization and Property Management on a Republic level (Czech and Slovak) and a co-ordinating Bureau for Privatization and Property Management at the Federal Ministry of Finance, which represents a direct transfer. According to the Federal Ministry of Finance, perhaps 70 per cent of state-owned enterprises are now seen as the subject of privatization and this should be performed mainly at the level of Czech and Slovak Republics. Two of the laws are very important from the point of view of privatization. The Restitution Law passed in October aims to return the small assets (real estates, barber shops, restaurants, etc.)— expropriated without compensation in the last wave of nationalization in 1959—to their previous owners or their heirs. The original property owners should produce evidence of their claims between 1 November 1990 and 1 April 1991. This applies not only to domestic citizens, but also those who left Czechoslovakia after the 1948 communist takeover. The evidence is still available in files saved by municipal agencies. Under that law state agencies should return the property upon adequate claim, immediately without reference to any law court. The estimated number of property claims is close to a hundred thousand. The Law on small-scale privatization passed in November 1990 seeks to privatize the remaining small assets (for example, new ones) through public auctions. Two rounds of public auction are likely— first for Czechoslovak citizens only (present or previous ones since 1948) and the second one open also to foreigners. This could speed up the privatization process and lower the role of public sector from its internationally extremely high level. The law on large-scale privatization was submitted to the National Assembly in December 1990. There have been no workers’ councils any more since the April renationalization (which makes a great difference in comparison with Poland and Hungary). The necessary flexibility of exporters increased, when the monopoly of 50 state-owned trading companies was broken and 1,000 firms have been already authorized to conduct foreign trade activities. Several dozens of other related interim acts have also been passed by the National Assembly in the spring and autumn of 1990, including an amended Business Code, and a joint venture law. An important role in the transition process in Czechoslovakia could be played by foreign investors. A stable Czechoslovak economy lying in Central Europe allows them to start here and ‘go East’ (the large Eastern European market and especially the Russian market well understood by Czech and Slovak businessmen who usually speak Russian) or ‘go West’ (an opportunity considered mainly by the Japanese, taking into account the relatively skilled labour, low transport costs, and so on). The relevant legislation is being adopted step by step. Risk aversion by certain sections of the Czechoslovak population is an obstacle; but domestic demand for additional convertible investment is high.

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Even more important than reliable supplies of high technology or innovative products is up-to-date organization and management, allowing for domestic firms to restructure so as to be able to meet unknown standards of western markets and marketing techniques. An important step in the right direction was the legislation regarding Foreign Direct Investment (FDI) (amendment to joint venture law) and bilateral agreements on FDI protection and profit repatriation. The most simple case is that of the company owned 100 per cent by foreign investors. As for each joint venture, one must wait upon approval of the office of the Ministry of Finance. Besides the assessment of the financial soundness of a proposed investment project from the domestic and foreign point of view, the field of interest is also assessed, as some strategic sectors are protected (e.g. banking services, where an approval of the State Bank is needed, as well). By the end of 1990, the uniform foreign exchange retention quota required selling 30 per cent of convertible currency revenues to the banks. Importers producing for the domestic market without sufficient exports could obtain convertible currency at the foreign exchange auctions. ‘Limited convertibility’ introduced from 1 January 1991 should help in this. Under bilateral investment production agreements (BITs), profit transfers abroad equivalent to 20 per cent of the foreign capital investment are guaranteed by the government. Local currency financing is available for joint ventures. A minimum of 5 per cent of gross profits must be contributed to a single reserve fund, which must be maintained at a minimum of 10 per cent of the joint venture ‘basic capital’. Separate social security funds of the firms—same as for a domestic firm—amount to 50 per cent of the payroll. There are tax concessions for joint ventures; they pay profit tax at 40 per cent (compared with a tax rate of 55 per cent for state enterprises) and dividends are taxed usually at 25 per cent. The basic problem for joint ventures consists of the unresolved issue of privatization. Acquiring an asset of an SOE or other state property by a joint venture signifies in fact its partial or full privatization in favour of foreign investors. Cases involving large-sized enterprises should be approved by the government. Capital asset evaluation is a problem in itself. The claims of former property owners, whose holdings were expropriated in the past, should be respected in the form of preferences at least. The final solution of FDI questions relating to privatization is the subject of the National Assembly, but joint venture establishment in the suggested restricted form will be started soon. Until the end of 1990 there were 1,236 approved joint ventures; out of them one-fifth (271) are 100 per cent owned by foreign investors (total capital invested 134m koruna). They are mainly very small, only 39 joint ventures have equity more than 10m koruna. In order to separate the new establishments with foreign direct investment from privatization of SOEs, the government is considering allowing them to register directly without any approval. The classification of the national property according to the blue-print of the Federal Ministry of Finance, as submitted to the National Assembly, is as follows. Category A consists of public utilities and other regulated SOEs, that are not supposed to be privatized in the near future. The production of public goods and services on federal, republic and local levels will amount to around three-tenths of SOEs. The redefining of public goods on federal level (e.g. defence, foreign service), on republic level (e.g. some public utilities) and on the municipal level (e.g. collection goods of local importance—culture, etc.) should predetermine the nature of federal, republic and local budgets and their revenues (taxes, tariffs, etc.). Phase 1—Commercialization (corporatization) and small-scale privatization The SOEs not producing public goods would be cut from the budget and commercialized. Simultaneously the property claims of the original owners should be considered step by step.

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Category C should cover newly-defined municipal property. This amounts to municipalization of national property—subject to commercialization and small-size privatization by newly-established district privatization committees, and by autonomous local governments, i.e. municipal councils elected in local elections in November 1990. Examples are restaurants local services, rental flats, which can be returned to the original property owners (if they existed) or sold. The banking sector will contribute by loans without any preferences, which were originally asked by some employees. (The National Assembly rejected any preferential treatment for employees.) Category B includes state-owned ‘heavy industry’ (B1) and ‘light industry’ (B2) firms, that are due to be privatized. As a necessary precondition (and to allow for divisibility of SOE assets) both subcategories of firms should be commercialized first, i.e., the SOEs ought to be converted into the form of the state-owned corporations (joint stock companies) with the Board of Directors appointed by the government (there are now already some 50 corporatized SOEs). These corporations will be asked to self-finance, even if one should admit that informal channels to the government will enable them to acquire tax exemptions or subsidies. That is why the commercialization of the first should be inevitably interconnected with commercialization of the economic environment. The latter has to be more hospitable to private ownership; this involves liberalization of prices, imports and exports and the unification of the tax system. The related costs and revenues of commercialization and privatization will be settled by means of the Funds of National Property (established on federal and state levels), which will also help to settle the liabilities of privatized firms. Phase 2—Large-scale privatization In the short run the category Bl state-owned corporations will not be privatized, but their assets can be temporarily rented (perhaps to employee stock ownership plans (ESOPs) as well); or they can enter into joint ventures with foreign participation (through FDI). The municipal property of category C will not be inevitably converted into joint stock companies, but might be offered directly to the original owners or to single proprietors as soon as possible (after the November local elections). The state-owned corporations of category B2 should be the subject of mass privatization. The techniques, how the equity shares of these corporations will be offered, and to what transferees—to private domestic and foreign investors and citizens—are under debate. PROBLEMS ENCOUNTERED The standard sell-off model requires in centrally-planned economies the evaluation of the firm’s market value; further, it faces the problem of a relatively low level of domestic private savings. Billions 330 of liquid koruna savings, representing about one half of GNP (or around 10 per cent of book value of state assets), are quite insufficient for the purchase of national property, but fairly sufficient to destabilize a domestic market in case of the loss of policy creditibility. Further, more than one-third of the personal savings are estimated to be in the hands of 5 per cent of citizens, mainly the previous establishment and participants in the shadow market. The public is unwilling to support the government in returning economic and political power to the present holders of savings. The current effort to sell off to the first coming foreign company (that is, ‘FIFO’, not an auction) is often seen as a politically unacceptable form of spontaneous privatization, that can provide existing managers, often communist party functionaries (nomenclatura),

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‘golden parachutes’ at low prices. The experience of Hungary shows that any effort to reverse the agreements with foreign investors could mean the loss of the government’s credibility abroad. The reason for a low price of firms follows from the fact that evaluations of existing firms are based exclusively on book value (with an extremely low price of land, etc.). The author performed several capital asset evaluations which showed that the book value of a structure located near the Czech-West German border is nominally the same for a Czech structure in koruna terms (about 3,800 koruna per cubic metre of Czech structure) as for a West German structure in Deutschen marks (about 3,000 DM per cubic metre of West German structure). The market value of the firm might, of course, be equal to zero for a poor asset (with low expected cash flows, etc.) or be many times greater than the book value for a good asset (especially for internationally competitive firms). Anyway, to assess the market value of the firm from expected cash flows on the base of distorted produce and input prices (based on domestic costs and mark-up combined with nontransparent subsidies) is somewhat naïve. Hence modifications of common procedures are required case by case to indicate the potential (international) competitiveness and worth of the firm. Nevertheless, under existing conditions of trade expressed in book values the employees are often afraid of a foreign buy-out, as the structures acquired by foreigners might not be used any more for productive purpose but after removal of worn-out equipment might be redone into cheap warehouses with minimum needed labour. The cross-ownership model of privatization (based on closely-linked networks of suppliers and creditors) was widely used in West Germany and Japan after the Second World War, but has shown many efficiency problems in Hungary and Yugoslavia and is not recommended. For the rapid privatization of the B2 category of SOEs the Federal Ministry of Finance has recommended an unconventional ‘voucher-model’. Out of the state-owned corporations’ marketable shares, 20– 100 per cent of equity could be available for voucher sale. Each citizen would get the vouchers—investment money with limited maturity—for a registration fee (1/2 monthly wage) and in the same number of points. These would entitle citizens to bid for ownership of offered shares of SOEs. Voucher owners ought to ‘buy’ some shares at the Dutch auctions (or otherwise) of the B2 corporations’ offered stocks. These auctions will be held for a limited period. Then the vouchers will expire. With respect to the lack of citizens’ information on offered shares, the system is proposed to be refined by investment organizations (holding companies or ‘voucher-market’ mutual funds—see Svejnar (1989)—operated with foreign advisers). They concentrate information and generate diversified portfolios of shares for citizens. Besides the rapid redistribution of property rights, a capital market could be created (simulated) instantly. Neither the state treasury nor the companies, receive any financial funds from the investors. As a result of voucher privatization, there will be a group of private owners supervising the firms’ management and development. The model of vouchers exchanged for shares of privatized enterprises represents radical transfer of the ownership rights to individuals. That will further limit the budget revenues, but should widen personal incomes by dividends. Regulations delaying dividend payments by two years, proposed by some, would seriously harm the entrepreneurial interests of new shareholders. Also unreasonable could be similar administrative regulations which allow trading with marketable shares only with some delay. It would postpone the secondary market and block the endeavour for corporate governance on the basis of shareholders’ package. It is believed that the market mechanism will force citizens to generate additional pension and social security funds, and that they will behave as responsible investors and will not convert their capital (shares or derived options) into liquid money to be spent on consumption. The original voucher blueprint of the Federal Ministry of Finance has suggested selling residual, available shares to domestic and foreign investors in turn. To compensate for differentiation of shares given away from shares paid for by investors, one might divide the common shares into various classes offering

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different voting rights. The open question is how many shares will be available for the public. Then, under the existing conditions of insufficient private domestic savings the author would prefer a combination of some form of leveraged buy-out or leasing (e.g. in the form of manager and employee stock ownership plans (ESOP), consumer stock ownership (CSOP), general stock ownership corporation (GSOC) etc.) with foreign private capital (through joint ventures with FDI). The supply of new capital, technology, organization and management through FDI is quite necessary for encouraging competition and economic growth. Foreign investors should be entitled to buy simultaneously at least part of the existing or newlyissued shares in an agreed ratio. Some 10 per cent of stocks could be privatized by ESOPs (or related ownership plans) with the government as a lender and a bank as a trust. The repayments for the employee stocks through dividends can provide: (i) the stable revenue flows for the government, that can be used in future, e.g. for repayments to original property owners; and (ii) anti-inflationary motivation of employees to weaken the wage growth and limit strikes and other forms of industrial conflict. The author agrees with Svejnar (1989), that those factors would be important components of a successful transition programme and would support the antiinflationary policy from the microeconomic level. To enforce that, the employees could buy exclusively or partially the preferred stocks ensuring priority dividends but without voting rights or with conditional voting rights. The macroeconomic consequences were elaborated by L.Klein in 1977. The point is that if the households have regular income expectations from normal growth of wages and then augment this by expected future earnings from equity holdings (with full earning pay-out), they will probably raise their savings to agree with the higher discounted stream of future (expected) receipts. Even if they are moderate in wage claims, they will not have to consume less if the scheme stimulates investment and shifts the growth path. CONCLUSION The debate on privatization models can evidently come to one conclusion—let all flowers grow. On the importance of new private establishments, reference is made to the author’s paper in 1990. REFERENCES Conte, Michael and Svejnar, Jan (1990) ‘The performance effect of employee ownership plans’ in A.Blinder (ed.) Paying for Productivity, Washington DC: The Brookings Institution. Dornbusch, Rudiger and Edwards, Sebastian (1990) The Economics Populism Paradigm, National Bureau of Economic Research Working Paper, May. Gati, Charles (1990) After Communism, What? The Political Agenda in Central and Eastern Europe in the 1990s, Washington DC: Third US— Czechoslovak Roundtable on Economic Relations. Grosfeld, Irena (1990) ‘Privatization of State Enterprises’ in Eastern Europe: The Search for Environment, Delta, Doc. no. 90–17, Paris. Hanke, Steve H. (ed.) (1987) Privatization and Development, San Francisco, California: International Center for Economic Growth,ICS Press, Institute for Contemporary Studies. Hinds, Manuel (1990) Issues in the Introduction of Market Forces in Eastern European Socialist Economies, Washington DC: The World Bank, Report no. IDP/0057. Kornai, Janos (1990) The Road to a Free Economy, Shifting from a Socialist System, New York: Norton & Company. McDermott, Gerald and Mejstrik, Michal (1990) Czechoslovak Competitiveness and the Role of Small Firms, Berlin: paper for the conference at the WZB.

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Mejstrik, Michal (1990a) ‘Where are we headed: the case of Czechoslovakia’, in Duncan, Colleen (ed.) German Reunification: Privatization of Czechoslovakia, Hungary and Poland: Implications for Western Business, New York University Press. Mejstrik, Michal (1990b) ‘Innovation and Technology Transfer’, (Proceedings of Conference), Prague: Institute of Economics. Mejstrik, Michal (1990c) The Transformation of Czechoslovakia to a Market Economy. The Possibilities and Problems’ Warsaw: Seminar on Privatization, UNDP. Milanovc, Branko (1989) Liberalization and Entrepreneur ship Dynamics of Reform in Socialism and Capitalism, New York: Armonk, M.E.Sharpe. Mizsei, Kalman (1990) Experiences with Privatization in Hungary, Washington DC: World Bank Conference. Mlcoch, Lubos (1989) Behaviour of Czechoslovak Enterprises, Research Paper no. 348, Prague: Institute of Economics. Nellis, John (1990) ‘Privatisation in Reforming Socialist Economices’, Conference on Privatisation in Eastern Europe, Ljubljana: ICPE/EDI, World Bank/UNDP. Ramanadham, V.V. (ed.) (1990) Privatization in Developing Countries, New York: Routledge, Chapman and Hall. Sachs, Jeffrey and Lipton, David (1990) Creating a Market Economy in Eastern Europe: The Case of Poland, BPEA, no. 1. Shliefer, Andre and Summers, Lawrence (1988) ‘Breach of trust in hostile takeovers’, in Corporate Takeover: Causes and Consequences, Chicago: University of Chicago Press. Svejnar, Jan (1989) A Framework for the Economic Transformation of Czechoslovakia, New York: Plan. Econ. Report, V(52). Vuylsteke, Charles (1989) Techniques of Privatization of StateIOwned Enterprises, vol.I, Methods and Implementation, Washington DC: World Bank Technical Paper no. 88, The World Bank. Young, S.David (1990) Business Valuation and the Privatization Process in Eastern Europe: Challenges, Issues and Solutions, Fontainebleau: INSEAD. Zamrazilova, Eva (1990) ‘International comparisons of economic development levels between East and West European countries’, Jahrbuch des Ost-Europa Wirtsschaft, November.

8 Privatization in East Germany Regulatory reform and public enterprise performance Volkhart Vincentz

INTRODUCTION The privatization of state-owned enterprises in the former German Democratic Republic (GDR) is presumably the most crucial and difficult part of the transformation of the East German economy. In Germany the necessity and importance of a private enterprise system was hardly called in question during the turbulent months between the fall of the Berlin Wall and the reunification. The rather unanimous affirmation of private ownership in the GDR differs from the lengthy and controversial debates in several East European economies. The decision for a sweeping privatization in East Germany resumed the spirit of the Federal Republic of Germany’s (FRG’s) economic policies after the Second World War which continuously had assigned high importance to private ownership. In contrast to other European countries there were no nationalizations of sectors or enterprises in the post-war FRG. This paper describes how the principles of economic liberalism are applied to privatization in East Germany. The first section outlines the creation and organization of the Treuhandanstalt, which is in charge of privatization in East Germany. Then, the basic philosophy of a market-guided privatization is explained. In order that this concept can be applied successfully several preconditions related to the functioning of markets must be fulfilled. These prerequisites will be analysed one by one in the following sections. Taking into account the experience available so far, we shall assess to what extent the preconditions are fulfilled in practice. Further, the fierce discussion about the Treuhandanstalt will be structured according to the economic arguments that are put forward to justify a departure from a purely market-guided privatization. In the concluding section, the results of the privatization are summarized. HISTORY AND ORGANIZATION OF TREUHAND The task of privatization of the former state-owned property was assigned to a state trustee agency, the Treuhandanstalt (Treuhand). It is responsible for more than 8,000 enterprises, 10,000 small shops, restaurants, and service firms, 2.3m ha of arable land, 1.9m ha of forest, and the assets of former GDR parties, mass organizations, the army, and the GDR security service. Treuhand was founded already by 1 March 1990 under the communist government of Hans Modrow. At that time the purpose of the new institution was rather to rescue parts of the old economic system than to transform the economy. When the new freely-elected GDR government under Lothar de Maizière took power, the statute of Treuhand was rewritten. A new law defining the tasks and duties of Treuhand came into force on 17 June 1990. This law, still valid today, clearly laid emphasis on privatization. But some ambiguity with respect to Treuhand’s task remained.

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After the unification of Germany the Treuhand was subordinated to the FRG Ministry of Finance. There is discussion on shifting the responsibilities to the Ministry of Economic Affairs. As Treuhand had to build the administration from scratch, several months passed before the new institution could start its work around October 1990. The number of employees of Treuhand increased from about 600 in its early days to more than 2,500 by summer 1991. It took several months to supply Treuhand with a sufficient number of telephone lines.1 Nevertheless, the complaints of customers trying to contact Treuhand in vain still abound. One of the first measures taken by the freely-elected GDR government was to remove old party functionaries appointed by the former SED government from their management posts in Treuhand. At least the top positions were staffed with experienced managers and politicians from West Germany. After some initial infighting, Detlev Rohwedder became president of the Treuhand in August 1990. Rohwedder was a state secretary in FRG’s Ministry of Economic Affairs in the 1970s. Afterwards, as chairman of the managerial board of Hoesch, he successfully restructured the steel company. After Rohwedder was murdered in April 1991 by ultra-leftist (West) German terrorists, Birgit Breuel, former Minister of Economic Affairs and Finance in the state (Land) Lower Saxony, took over the presidency of Treuhand. After several reorganizations Treuhand has now a matrix organization divided into nine executive boards. Six of these boards have functional responsibilities, for example, administration or financing, as well as operating responsibilities for certain branches of the economy. The headquarters of Treuhand in Berlin is responsible for the enterprises with more than 1,500 employees and for firms in the sectors of transport, energy, banking and credit. The rest of the 8,000 companies initially owned by Treuhand are dealt with by fifteen regional subsidiaries. The ‘small privatization’, that is, the sale of retail and wholesale shops, restaurants, hotels, and services, is done by the company for privatization of commerce (Gesellschaft zur Privatisierung des Handels (GPH)), a 100 per cent daughter of Treuhand. Treuhand has also to deal with the financial aspects of its enterprises. In the first months after the monetary union of 1 July, 1990 liquidity credits were provided to the firms to keep them afloat. Yet, some of the money was also used for investments. Slowly, Treuhand has been retreating from this task, forcing the firms to use the capital markets to finance their needs. But till the end of 1991 the interest on the 100 billion DM of the companies’ debts will be paid by Treuhand. THE BASIC GUIDELINES OF PRIVATIZATION The law on privatization gives a whole list of objectives that Treuhand should pursue. The leading principle is to transfer the state-owned wealth into private ownership. But other objectives are also mentioned: achieving competitiveness in respect of as many companies as possible, supporting a structural change in the economy, and providing capital to companies which can be restructured successfully. There is some vagueness in this description and, depending on interpretation, the mentioned objectives might even conflict with one another. A consistent set of principles which should guide the privatization was developed and clearly stated in the reports of the Council of Economic Advisers to the Government and the Advisory Board of the Ministry of Economic Affairs.2 In general, the government endorsed it, although it hinted at some modifications.3 Let us first look at the concept of privatization in its purest form. The task of Treuhand is to sell the enterprises to private investors. If a company cannot be sold, there is a strong indication that it is not viable and should be liquidated.

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The majority of companies have to be restructured, that is, reorganized and retooled, before they can possibly generate profits. How ever, it is not the task of Treuhand to engage itself in restructuring. If it is worthwhile from a purely business point of view some private entrepreneur will buy the firm. In general, a private person can restructure a firm more efficiently than Treuhand. The investor who offers the highest price has probably the best concept of restructuring it and, therefore, the firm should be sold to him. It is erroneous to assume that the firm has first to be restructured before it can be sold. If expected future profits exceed the costs of restructuring there will be an investor who is willing to pay Treuhand a positive price. If, however, the restructuring costs eat up any future profits, Treuhand would make a loss if it restructures the company itself. This loss can be avoided if the firm is liquidated. An important function of the process of privatization is to identify those firms that are not viable in a market economy. This distinguishes privatization in East Germany and East Europe from that in the UK or France in which the survival of the firms was not in question. In East Germany the market, or the absence of demand on the part of private investors, determines those companies that have to shut down. In this matter Treuhand should stick to a pure businesslike point of view. If, for political reasons, additional issues such as unemployment, regional and industrial policies have to be tackled, that task has to be assigned to institutions designed to handle such problems. Treuhand’s task should be confined to profit-oriented privatization only. In order that these principles of privatization can be used as sound guidelines and valid arguments several prerequisites have to be fulfilled in reality. In general, the market in which the companies are traded must not be unduly distorted or hampered in other ways.4 Only then can one have confidence in the usefulness of the market decisions which determine the exit of a firm or its survival. In actual terms such a market exists only in a rudimentary form; at least it is not prepared to handle such large volumes as are implied in the privatization of the GDR economy.5 Therefore, it is the task of Treuhand and other institutions to develop such a market. The following section will discuss possible failures of the market for companies, which might justify a deviation from the basic guidelines of privatization. The experience of almost a year of Treuhand’s work allows us to assess to what extent potential deficiencies of the market for companies are relevant and what measures were taken to remedy them. Also we shall group the numerous criticisms voiced against Treuhand according to the economic arguments underlying them. UNEMPLOYMENT AND RESTRUCTURING The most urgent problem in East Germany is the extremely high unemployment. In June 1991 out of the total labour force of 8.8 million people 837,000 were unemployed and about 2 million were working shorttime, which is only a disguised form of unemployment. The prospect for the labour market is bleak. At the end of 1991 an unemployment ratio of 40 per cent or higher is expected. The Treuhand, although only executing the orders of the government, is considered by a large part of the population as a job killer responsible for the demolition of hundreds of thousands of jobs.6 No wonder emotions, accusations, and even threats against Treuhand are wide-spread and rising. Many people feel that Treuhand should protect employment to a much larger extent than it does. However, the economic arguments to buttress this claim are few. It is claimed that at least some of the firms closed by Treuhand could have been restored to a healthy and sound state. The critics of Treuhand’s policy demand more monetary support for the firms to buy time for adjustment.

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Let us examine this argument for its economic logic. Treuhand, as a state agency, should take into account costs of unemployment. Considering unemployment explicitly as a cost drives a wedge between private and social returns. Given the situation in East Germany, it is very likely that most people losing their jobs today will stay unemployed for some time. The average length of unemployment depends, of course, on the economic recovery whose beginning is highly uncertain. Unfortunately, one has to assume that a significant volume of unemployment will persist for the next couple of years. Costs of unemployment not only consist of unemployment compensation but include social and mental hardships, experienced in times of mass unemployment. Apart from the direct costs, the repercussions on other economic agents, resulting from the liquidation of a firm, have to be considered. Demand will decrease and expectations turn pessimistic if a large number of firms in an area are closed. These effects are not negligible because Treuhand is not a marginal agent in the economic process.7 Its policy, for example, to shut down the whole chemical industry, would have far-reaching effects for the whole economy and all branches. But even if Treuhand includes such costs in its internal decision process, as it is likely to do, they have to be weighed against the costs of keeping the firm alive. These do not include only the subsidies paid to the firm, but also the diminished incentives for the receiver of the money to reorganize and restructure. Further, resources, especially land, are occupied and thus not available for alternative, more effective, usage. Usually, the costs to keep the firm running will exceed the costs of unemployment. Keeping alive firms which cannot attain a positive sales price in the market is not the cheapest way to curtail unemployment. There may be exceptions. In areas suffering already from extremely high unemployment the associated costs of additional unemployment might be high enough to justify subsidies to ease the adjustment process.8 The case in favour of temporary subsidies for a firm can be strengthened if one takes into account additional costs which occur from closing the firm now and reopening it later. Some firms may actually become profitable in a booming economy. However, these future profits in the period of recovery of the East German economy are more than offset by the losses experienced during the present crisis. If the market determines the destiny of these firms they would be closed now and reopened later. This might, however, not be the optimal strategy if re-entry into the market is not costless. Before we consider how such stop-and-go costs can alter Treuhand’s decision about closing or subsidizing, the nature of these costs may be briefly discussed. Costs of re-entry are costs or foregone benefits caused by interrupting the life of the firm, that is, by closing and (possibly) reopening. These may be set-up costs of various types connected with any opening of a firm or certain technically-determined costs. An example of the latter are blast-furnaces in the steel industry which have to be completely rebuilt once their fire is extinguished; continuity of operation is important in this case. In addition, foregone benefits are associated with the interruption of business. Mainly these are connections and knowledge of the firm which disappear or quickly depreciate when the business activity ceases. There exists also a particular learning-by-doing effect for firms in transforming economies. The management and employees learn to put the specific advantages of their firm—if there are any—to use in the new market environment. Part of this learning and training on the job, for example, the marketing of the products, is linked to the specifics of the firm and cannot be acquired outside. The existence of significant stop-and-go costs might change Treuhand’s conclusions about the value of subsidies. Firms which are financed by Treuhand until they are bought by a private investor obviously do not incur re-entry costs. But, once the firm is closed it will be costly to reopen it. These costs will reduce the expected profits and thus postpone or even prevent the reopening of the firm. This in turn, increases the length of unemployment of the dismissed employees who cannot find work elsewhere. As a result, the re-entry

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costs lead to increased costs of unemployment which enter Treuhand’s decision-making process. Thus the existence of substantial re-entry costs can justify a temporary support of ailing firms. To clarify the argument a highly simplified numerical example is provided in the Appendix (Table 8A.2). It shows how, comparing the alternatives, Treuhand would prefer to close the firm if stop-and-go costs are absent. However, if costs of re-entry exist, it would be rational to subsidize the firm for one period and sell it afterwards. The example can also be used to demonstrate another argument which supports intervention. It was assumed that the time horizon of the potential investor was pretty short. This may reflect the high uncertainty and risk which is characteristic of a phase of transformation and turmoil. From the standpoint of Treuhand, that is, the state, the relevant period to be taken into account should be longer; and the state should act in a risk-neutral way. Thus, if, for example, the relevant time horizon were seven periods instead of four the firm could be sold immediately. The degree of risk aversion of private business might be too low from the point of view of the country’s economy. Costs of unemployment together with significant stop-and-go costs and differences in the risk aversion between private investor and the state can justify intervention. This does not mean, however, that most of the firms should remain in Treuhand’s ownership as a public enterprise. This would swallow up huge amounts of money. According to a study by the German Finance Ministry, 400 billion DM would be needed till the year 2000 if restructuring should be given priority over liquidation of firms. The argument put forward above does not suggest a change of the paradigm but a change in the degree of free-market rigour. It alludes to irreversibilities of a firm’s exit and therefore it cautions against hasty closures. If the argument in favour of temporary support is valid several policy options follow. The first and best solution would still be to find a private owner. This can be done either by subsidizing the interests on credits or by accepting a negative selling price.9 Only a second-best solution would be to subsidize the firm till it could be sold for a positive price. Considering the policy of Treuhand over time, one can detect a change in its readiness to close down quickly ailing industries. Privatization has still top priority, but some closures of the past are considered less favourably today.10 In spring 1991 the guidelines of Treuhand’s policy were increasingly affected by concerns about the whole economy. The Ministry of Finance doubted that Treuhand should take any longer a purely business point of view about its activities. The rising unemployment and the danger of de-industrialization of whole areas led to modifications in Treuhand’s mandate.11 It was accepted that in some cases firms might be restructured at Treuhand’s expense.12 Also Treuhand’s decision criteria changed. The objective to get the highest price was supplemented or even substituted by the amount of investments pledged and the number of jobs secured by the new owner. Another indication of change in Treuhand’s policy comes from the agreement signed between Treuhand and the trade union in April 1991. It laid down the principles for Treuhand’s participation in social policy. It stressed the responsibilities of Treuhand as the owner of the former GDR firms. According to German law, in the case of a partial or complete closure of a firm, the trade union and the employer have to sign a ‘social plan’. Depending on the estate of the bankrupt, it determines a compensation to be paid to the dismissed employees. After a long row Treuhand accepted the treaty with the trade union to finance such social plans even if the firm concerned could not pay the compensation from its assets.

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THE TRANSPARENCY OF THE PRIVATIZATION PROCESS To let the market decide on the existence or non-existence of an enterprise requires a high degree of transparency in the privatization process. In case essential information is missing or distorted, the forces of demand and supply cannot distinguish the viable enterprise from the doomed one. Market failure in the privatization process might result in closing the wrong firms, which can be as costly as keeping alive noncompetitive companies. A closer look at the informational requirements of market-guided privatization reveals that there are still considerable problems. Not all methods of privatization provide the same transparency of the process. An open formal bidding procedure would not only reach the most potential investors but provide also the best way to maximize the proceeds from privatization and to guard against suspicion of a closed-shop policy. Hitherto, however, the prevailing procedure used by Treuhand was based on extensive bargaining with a few or only one customer. This procedure is chosen because Treuhand does not deal with well-defined standardized products. The object of the purchase can, to a large extent, only be defined during negotiations with the customer. If possible an open bidding procedure is used. The ‘small privatization’ of whole and retail sale candidates—restaurants, hotels, and other service firms—was done by publicly inviting tenders. There was a special twist in the first round of the sales of small shops. The period to turn in an offer was kept extremely short. Having the opportunity to look at the candidate at short notice, the East Germans should be preferred by this procedure. The medium-sized and large shops and enterprises in the restaurant business were advertised nationally and internationally. A third method of privatization would be to issue and sell shares of the companies. As yet this procedure has not been applied in East Germany. For legal reasons none of the East German joint-stock companies would qualify for trading at the German Stock Exchange. Most people are sceptical of the idea of developing a special market for shares of East German firms. Privatization via shares, which worked pretty well in developed industrial market economies, is less suited to the selling of rather shaky trusts with a strong need for restructuring. Actually, the shares could only be sold together with a concept of restructuring. This would make it difficult to raise enough capital. Usually investments for reorganization, modernization, and so on, are financed only if the investor gets all of the profits of his restructuring efforts. If he were to share it with a lot of small shareholders the willingness to provide the necessary capital inflow is likely to be low.13 Information about many candidates for privatization is still insufficient. Only in March 1991 a compendium became available to the public, which includes some basic, but few financial, data about Treuhand’s companies. But essential information about many firms is still missing. All companies were required to provide a Deutschmark balance sheet which should give a first indication of the true value of the assets and liabilities of the firm. The deadline for this opening balance sheet had already been extended to April 1991 but even by June these data were not available for a large number of firms. Obviously, without such data it is difficult to find an investor. The asymmetry of information between Treuhand and the firm’s management causes a major incentive problem. Providing ‘internal’ data to Treuhand will mean, for a noncompetitive company, that it possibly hands over the arguments for its liquidation. The managements of firms would be interested to conceal or at least delay the revelation of such information. Assuming superior knowledge on the part of the insider about the efficiency of a company, one would expect that the managements of viable companies would use the advantage and take over the firm. Yet, only 5 per cent of all sales were management buy-outs (MBOs). Only recently more favourable conditions and support for Management buy-outs (MBOs) and Employee buy-outs (EBOs) were established. Similarly,

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only 5 per cent of the firms were sold to foreign investors. These data point to a considerable inadequacy of information outside of West Germany. In the past privatization proceeded on the basis of limited information, which impeded the sale of the companies. Improving the transparency of the market would definitely help to improve the legitimation and public acceptance of Treuhand’s activities. THE FIRM TO BE PRIVATIZED A major problem in privatization is to determine the exact identity of the enterprise. Neither the scope of a company nor the assets and liabilities which should be attributed to the firm are sufficiently precisely defined. The first step in the privatization process was to transform the state-owned companies into corporations. The people-owned trusts were converted into joint-stock and limited liability companies. This conversion, which was finished in autumn 1990, was only formal in the sense that the existing economic units, which were tailored to the needs of a planned economy, were given a different legal form. This is reflected in the size distribution of Treuhand’s firms. More than 70 per cent of the labour force belongs to firms with more than 500 employees. This structure, which is completely different from the West German size distribution, is not very well suited to attract investors.14 Small and medium-sized western firms would be reluctant to restructure such large companies. However, a lengthy process of deconcentration before the beginning of the privatization would have unduly postponed the transformation of the economy. Because of legal difficulties which were somewhat smoothed by a recent ‘law on splitting assets administered by the Treuhand’s, the deconcentration began in spring 1991. The task of Treuhand is to create such bundles out of the existing firms which allow it to privatize as many firms as possible. Treuhand has to fight the tendency of potential buyers to accept only the best parts of a firm because the remaining parts would, in most cases, be unsaleable and stay with Treuhand. Besides the already mentioned difficulties in getting sufficient information about the viability of the company, sales are further impeded by the debts which the companies accumulated in the past. Unlike in a market economy, in a socialist economy subsidies and credits were given to firms rather arbitrarily. Distorted prices and costs made profits or losses almost meaningless. Therefore, the debt of a firm does not convey much economic information. Similarly, the assets a company accumulated are not necessarily an indicator of efficient performance. Many firms can only be sold if the debts remain with Treuhand. Even this might be better than closing the firm down because the selling-price would cover at least some of the debt. The optimal strategy is to privatize without considering the debts.15 Obviously, a firm should not be closed only because its debt exceeds the expected profits. The debt as well as environmental damages, to be mentioned below, will remain whether the firm goes bankrupt or not. Similar to the problem of debts, the liability for environmental damages caused by the company strongly influences the price and impedes privatization. The privatization of the chemical industry is severely hampered by this problem. In many cases an investor can only be attracted if either Treuhand or the state assumes responsibility for the removal of environmental damages. Finally, the subject matter of privatization is not clearly defined because there is a considerable amount of uncertainty about the property rights. The principle of restitution was stipulated in the unity treaty. All former owners expropriated after 1949 are entitled to get back their property. This led to a flood of claims, mostly for land, which often concerns companies under Treuhand. Until all the conflicting claims are

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settled, privatization cannot be speeded up. The principle of restitution is probably the single problem that did most to delay privatization. When its effect became obvious new bills were passed which should give priority to the investor irrespective of his being the former owner or not. The principle of restitution still holds but in several cases the former owner will only be compensated. But uncertainty still remains, because of several pending appeals against these laws. QUESTIONS OF POWER AND CONTROL Although privatization should be conducted according to market principles, the process itself is highly centralized. The Treuhand as the only supplier of property rights is a monopolist with a huge bureaucracy. Naturally, it is suspected that this industrial giant misuses its discretion and power. An effective control of its decisions is almost impossible. Owners of small and medium-sized firms especially are reluctant to enter into lengthy negotiations with the powerful state agency. Often the detailed sales contract demands that the buyer guarantees the number of jobs and future investments. In addition, the price may increase afterwards because of a revaluation of the sold premises two years after the contract was signed. Investors without countervailing power are rather repelled by these conditions. Complaints about red tape and organizational slack abound: the unduly long delay of responses to inquiries, insufficient information for customers, and lack of competence. The activities of the ‘brotherhoods’ of former party functionaries get wide publicity. Although the top management comes from West Germany, several functionaries of the former ruling class still remain in influential positions using their old connections, they try to participate on their own in the privatization processes. Another strand of complaints, predominantly from East Germany, asserts that Treuhand is too soft to the industrialists from West Germany. The assets are sold off much too cheaply and the interests of the employees are not protected vigorously. This criticism emphasizes the considerable market power of the demand side, the strength of the West German corporations and conglomerates. It is argued that western big business is mostly concerned with getting rid of potential competitors in East Germany. Enjoying sufficient market power, a West German firm does not have to fear other prospective buyers of a given East German enterprise. Thus, being the only customer, it may refuse to buy and thereby trigger the liquidation of the East German enterprise.16 A slightly different version of this argument maintains that the West German firm buys the eastern competitor but only to close it down shortly afterwards.17 If privatization is used to exert and expand its market power, even the survival of viable East German firms is at stake. The empirical relevance of such strategic behaviour is, however, difficult to assess. But it was initially pointed out by the government that privatization, which in the majority of cases meant sale to a West Germany company, should not create or strengthen monopolies. At the beginning of Treuhand’s activity Rhowedder wanted to use privatization as a chance to create a more competitive industry in Germany. He tried to annul or oppose sales to the West German market leader in various branches—for example, insurance, energy, commerce and civil aviation. However, this policy was not very successful. In the case of the East German airline Interflug, the long search for a second customer beside the West German airline Lufthansa finally resulted in the liquidation of Interflug. But most of all, such a policy of stimulating the forces of competition delayed the final privatization. Therefore, the concern about market power has become less important.18

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THE PERFORMANCE OF TREUHAND: AN ASSESSMENT In assessing the extent to which privatization was hampered by all the problems mentioned in the earlier sections of this paper, one should consider the record of Treuhand’s activities to date. Until June 1991 more than 2,000 firms were sold for 9.5 billion DM. In spring 1991 privatization picked up speed: about 300 companies were sold per month. This is an impressive record if compared to prior privatizations in the FRG or other western countries. But compared to the task before Treuhand the results are barely satisfying. The number of companies sold does not tell much about the economic success of the privatization programme. Because of the ongoing deconcentration, the more than 9,000 enterprises under Treuhand today exceed the number of firms owned by Treuhand in autumn 1990 by 1,000. It is more relevant to look at the investments pledged by the new owners. Altogether 50 billion DM—in energy alone 30 billion DM—will be invested in the next couple of years. In 1991 private investment is expected to reach 20 billion DM; this is substantial but less than is needed to stimulate quick recovery. Excluding the sales of commerce, the companies which were sold up to the end of April 1991 secured 342,000 jobs. On an average each firm employs 214 people while the comparable figure up to January 1991 was 429 employees per sold enterprise. This indicates that it is getting more and more difficult to sell labour-intensive production sites. Some 380 companies with 87,000 employees were closed. Finally, these results were achieved only at considerable cost. In the second half of 1990 the expenditures of Treuhand exceeded its income by 4.3 billion DM. It is estimated that this year the deficit will be 23 billion DM. It is probable also that in the future the proceeds from sales can hardly balance the expenditures. Earlier estimates that Treuhand has inherited a wealth of 600 billion DM were far from the mark. Altogether the record of privatization does not fulfil the expectations held only some months ago. But this can only partly be attributed to the work of Treuhand. The results are mainly due to the factor of general economic development. For example, in the second half of 1990 the increase of wages in Eastern Germany by more than 40 per cent led to a rapid devaluation of the existing stock of machinery which was suited to labour intensive production. Along with other policy measures, wage policy influences sales prices and privatization prospects. A large portion of the population blames Treuhand for the miserable state of the East German economy, especially for the rising unemployment. In the public eye Treuhand is criticised for acting too fast as well as acting too slow. Some say it spends too much time searching for the highest possible price, others say it sells off the country’s wealth far below its value. These conflicting criticisms originate from the different points of interest in East and West Germany. While in East Germany Treuhand is accused of premature liquidations and yielding to the western trusts, in West Germany the opposite view dominates. This negative impression of Treuhand is nurtured by the fact that this huge bureaucracy actually has considerable discretionary freedom to decide. This is, however, necessary because strict rules of behaviour cannot be laid down. The pure model of economic liberalism cannot provide exact guidelines because there are several deficiencies of the market which often render simple rules unrealistic. Of course, the first and best solution would be to eliminate all types of market failures. But this would take much time, which is not available in the current situation. Given the pressure of time, the best that Treuhand can do is to decide on a case-by-case basis, which makes it, however, vulnerable to suspicion and accusations of various kinds. Treuhand introduced, in its pure business point of view, concerns about employment and regional issues. This does not necessarily mean that it sacrificed the principles of economic liberalism under political pressures. Treuhand might just have better adopted its behaviour to the deficiencies of the market of which it is a part. What in some cases seems to be an artificial delay of a necessary liquidation, disguised as an endless search for an investor, might be the necessary attempt to overcome the still-existing barriers of information.

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In addition, growing social problems increased Treuhand’s awareness about the danger of decisions which may be difficult to reverse. Therefore, it uses today a high dose of caution in deciding about liquidations. NOTES 1 Only in July 1990 did the Treuhand have its first two telephone lines connected to the West German net. The telephone numbers of the East German net are extremely hard to access from West Germany because of the few connections between the two networks. 2 See Council of Economic Advisers, Auf dem Wege zur wirtschaftlichen Einheit Deutschlands (On the way to the economic unity of Germany), Annual Report 1990/91, November 1990:229–36; Advisory Board of the Ministry of Economic Affairs, Probleme der Privatisierung in den neuen Bundesländern (Problems of privatization in the new states), 16 February 1991; Council of Economic Advisers, Marktwirtschaftlichen Kurs halten (Stay on market economic course), Special Report, 13 April 1990. 3 Cf. Jahreswirtschaftsbericht 1991 der Bundesregierung (Government’s annual report on the economy 1991), in Presse- und Informationsamt der Bundesregierung, Bulletin no. 24:167. 4 Most of the preconditions necessary for the market to function properly were pointed out and discussed in the Annual Report 1990/91 of the Council of Economic Advisers. 5 The argument here is not about a breakdown of the market because of an endogenous decline in prices due to overwhelming supply. Most observers assume that, in the case of Germany, financing is not a limiting factor because the world-wide capital market is open to potential investors. 6 According to an opinion poll in June 1991, 85 per cent of East Germans think that Treuhand does not comply with its task. 7 Arguments concerning industrial or technological policy are usually derived from partial equilibrium models. In this case, however, one has, theoretically speaking, to use a general equilibrium model to derive all effects stemming from the policy. 8 These subsidies need not be used to preserve existing firms. In East Germany so-called employment companies were founded, which should absorb dismissed employees. These employment firms are heavily subsidized and should work on urgent problems, as pollution, but they must not compete with the private industry. 9 Already in 1990 it was decided to subsidize substantially all investments in East Germany. 10 ‘Officials say that if the wartburg decision could be taken again the closure would be more gradual and there now seems universal agreement that the four industries with especially high regional concentration…cannot be left to collapse’, Financial Times, 9 April 1991. 11 Die Zeit, no. 15, 5 April, 1991, and Wirtschaftswoche, no. 16, 17 April 1991:17. 12 Basically this amounts to accepting a negative sales price. For example, this was the case with the famous Zeiss Werke in Jena. 13 Cf. Ch. Watrin (1991) Treuhandanstalt: Transformator im Prozeß der Systemänderung (Treuhandanstalt: Transformer in the process of changing the system), Wirtschaftsdienst 4:168. 14 In West Germany only 22 per cent of the labour force is employed by firms with more than 500 people. 15 Cf. Annual Report 1990/91 of the Council of Economic Advisors, 233. 16 C. the interview with W.Thierse, deputy party leader of the German Social Democrats: ‘Why is it a law of nature, that an industrial enterprise in the former GDR has to perish, only because it is a potential competitor to a West Germany company?’, Spiegel 9:29, 1991. 17 This argument was especially applied to the take-overs of East German newspapers. 18 Talking about the experiences with Interflug, Rohwedder said: ‘one cannot give way to dreams of the economic order (ordnungspolitik) for too long, dreams which cost a lot of money every month’, Spiegel, 5:59, 1991.

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APPENDIX A NUMERICAL EXAMPLE ON TREUHAND’S DECISION-MAKING To clarify the argument on the closure of a firm, a highly-simplified numerical example is provided below. Imagine that Treuhand includes in its cost-benefit analysis the costs of unemployment resulting from the closure of a firm. These costs are assumed to be −3 per period. We assume that the average length of unemployment is longer than the period between the closing and the reopening of the firm. For the sake of simplicity we overlook discounting and suppose that any potential buyer of the firm has a time horizon of four periods. If the firm is bought, the selling price is equal to the expected profit over four years. If stop-and-go costs exist they are assumed to be −4. The expected profits of the firm excluding re-entry costs are given in Table 8A.1. Table 8A.1 Expected profits Period 1 2 3 4 5 6 7 Profits −4 −3 0 2 2 2 2 Note: The subsidy Treuhand must pay to keep the firm running equals the value of expected losses in the period

The sum of expected profits taken into account by the potential buyer varies with the point of time at which the purchase happens. In this example the relevant sums are −5 at the beginning of period 1, +1 at period 2, and +6 if the firm is bought at the beginning of period 3. There will be no buyer at the beginning of period 1, but the firm can be sold in period 2 at a price of 1 if no re-entry costs exist. Given the stop-and-go costs of −4, the firm can be sold only at the beginning of period 3 at the price of 2 (sum of profits minus cost of re-entry). Table 8A.2, following, gives the relevant data to determine what action Treuhand may take. Table 8A.2 Hypothetical costs of alternative actions Action

Costs

Subsidize

Subsidies for period 1 Proceeds from sale Net Cost of unemployemt for period 1 Proceeds from sale Net Cost of unemployment for periods 1 and 2 Proceeds from sale Net

Close/reopen without re-entry costs

with re-entry costs

−4 1 −3 −3 1 −2 −6 2 −4

Comparing the alternatives in this example, Treuhand would prefer to close the firm if stop-and-go costs are absent. However, if costs of re-entry exist, it would be rational to subsidize the firm for one period and sell it afterwards.

9 Privatization in Bulgaria Christo Dalkalachev

INTRODUCTION Privatization in Bulgaria is supposed to be a prerequisite for the transition from a totally-centralized economy (called also centrally-planned economy) towards a mixed economy (called also market economy). It is assumed to be the only way to create one of the most important of national markets, the financial or capital market. The privatization process in Bulgaria will start by mid-1991 or earlier. There is an understanding in the country that the transition will not be a revolution but should, rather, be a quick evolution, for example, in a reasonably short time (the term used from Lyonel Stoleru 1990). At the same time, it is not very clear how privatization will manifest itself and the Bulgarian society is not prepared yet for privatization. There does not exist a model on how a private sector could be created in a national economy, where all the markets (commodities, labour force, capital and other factors of production) were substituted by state regulators for the last half a century and where only state ownership was the eligible order. Even the term ‘private ownership’ was replaced by the term ‘personal ownership’, which signified one’s property which could not (or was forbidden to) be used for an economic turnover. In this paper an attempt is made to show that in Bulgaria privatization should start with the existing financial underdeveloped infrastructure; privatization should be conducted with non-standard procedures; privatization in its turn will create the necessary conditions for the development of the future financial infrastructure; the role of the central government in the privatization process will be very active; and the population will have to take an active part in privatization, with appropriate attitudinal responses. Table 9.1 Fixed assets at original cost (in Lv.m and %) 1986 Fixed assets Productive sector Industry Construction Agriculture Transportation Communications Trade and logistics Other branches of the productive sector

111,029.60 74,751.00

1990 100.00 67.33

100.00 57.17 4.18 12.44 19.64 2.12 4.03 0.43

126,185.01 86,179.02

100.00 68.30

100.00 59.33 4.34 11.32 17.84 2.22 4.48 0.47

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1986 Non-productive sector Communal services and housing Science and science institutions Education Arts and culture Health, social care, sports and tourism Other branches of the non-productive sector Note: Figures adjusted for inflation

36,278.60

1990 32.67

100.00 75.61 2.44 7.95 2.16 5.79 6.06

40,005.99

31.70 74.51 2.57 7.43 2.39 7.11 6.00

PUBLIC ENTERPRISES IN BULGARIA The structure of the Bulgarian national economy As per the Bulgarian National Statistical Office and economic regulations, the Bulgarian national economy is divided into two sectors—the Productive Sector (PS) considered as producing the GNP, and the nonproductive sector (NPR) supposed to be consuming the GNP. Sector branches under each head are defined in methodology different from that in western countries. That makes direct comparisions of the statistical data difficult. The aggregate sector branches are shown, for example, in Table 9.1. Enterprise types in the Bulgarian national economy When analysing the Bulgarian enterprises one should divide them into two different periods: before 13 January 1989, when the State Council issued Decree 56 on Economic Activity, and after that date. During the first period there were only two possible enterprise types: state enterprises and co-operative enterprises. The state enterprises were regulated by the sector branch ministries through different types of intermediate regulators (between the ministries and the enterprises). The co-operative enterprises were under the regulation of the Ministry of Agiculture (or the National Agro-Industrial Association), or of the so-called Central Co-operative Union—in reality a ministry with a different name. These two types of enterprises were the only eligible producers. Households were permitted to lease restricted pieces of land and use them for agricultural purposes. Initially they could not sell their products (they were intended only for internal household consumption), but later on they were allowed to sell them in the so-called co-operative markets. During the second period (for example after 13 January 1989), the economic situation changed. Decree 56 on economic activity stated four very important things: 1 economic activity would be carried out by companies; 2 state and municipal property would be transferred for management by the companies; 3 individual citizens or groups of citizens could register companies for carrying out economic activity; and 4 foreign legal and natural persons were allowed to carry out an economic activity through the companies.

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There has been a quick process of registration of companies. According to several amendments to Decree 56 there exist fifteen different types of companies (as can be seen from Table 9.2). One-man companies and collective companies increased enormously after March 1991. The citizens’ companies, numbered 6 to 11 in Table 9.2, are supposed to be the base for the future small-scale private sector in the country. Despite their large number (more than 90 per cent of the total number), most of them have not operated in a proper way. And they do not have the necessary fixed assets or capital for doing business. Table 9.2 Distribution of the Bulgarian companies by type 1 March 1991 No.

(%)

No.

(%)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

State companies Municipal companies Companies of public organizations Shareholding partnership companies Limited liability partnership companies Unlimited liability partnership companies Mixed shareholding companies Mixed limited liability companies One-man companies Collective companies Partnerships Foreign subsidiaries Co-operative organizations Collective farms One-man farms Total

1,002 786 190 131 448 11 15 153 53,768 20,653 1,107 109 259 927 10 79,569

1.26 0.99 0.24 0.16 0.56 0.01 0.02 0.19 67.57 25.96 1.39 0.14 0.33 1.17 0.01

25 March 1991

1,381 833 236 152 567 20 28 224 83,465 35,603 1,275 137 296 1,075 12 125,304

1.10 0.66 0.19 0.12 0.45 0.02 0.02 0.18 66.61 28.41 1.02 0.11 0.24 0.86 0.01

Types of ownership in the Bulgarian national economy The types of ownership in Bulgaria are of utmost importance in the process of transition toward a market economy in general and of privatization itself. Land ownership presents the biggest problem. Land was never nationalized, which means that it is private property (du jure). But during 1949–52 it was expropriated from the private owners and used by the state as a state property (de facto). The situation concerning land in Bulgaria is totally different from that in the other East European ex-socialist countries (in which private ownership of land was never changed) and even from the Soviet Union (where land was nationalized in the early 1920s). Now, with the new Law for Land Ownership and Land Usage (State Gazette 17/1 March 1991), the land will be returned to the former owners or their heirs. But this law concerns only the land for agricultural usage. Even so, there are many practical difficulties, both political and administrative. The next expropriation was done during 1948–49. This concerned the so-called ‘large city property’. Under this, hotels, restaurants, storages, big private housings, and so on, in the towns and cities were expropriated. Now, with the proclamation of the right to private property in Bulgaria, these expropriated

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properties should be given back to their former owners or to their heirs. One could imagine how difficult the problem would be, assuming that the original property has physically changed meantime. Finally, during 1948 there was a nationalization (without any compensation for the owners), of the factories, plants, machinery, equipment and all the other means of production. This type of state-used property is again subject to return to the former owners or their heirs. As of now, it is possible to define at least eight different types of ownership in Bulgaria: 1 state ownership of land; 2 private ownership of land; 3 state ownership of land (site)/state ownership of means of production; 4 private ownership of land (site)/state ownership of means of production; 5 private ownership of land (site)/private ownership of means of production; 6 private ownership of land (site)/private property (hotels, restaurants, and so on) in cities; 7 private ownership of land (site)/state property in cities; 8 state ownership of land (site)/state property in cities. In fact, in the past all municipal property was expropriated and used as state property. This complicates the ownership problem even more. As a result, before any privatization can start, it should be clearly defined what kind of property will be given back to the former owners/heirs, for what kind only a compensation will be paid to the former owners/ heirs, what kind of property will remain state-owned, what kind of an ownership will remain municipal, and at the end, what kind of property will be privatized. Because of these complications Decree 56 (which now plays the role of a business law in the country) mentions seven different types of ownership: state, municipal, co-operative property of public organizations, property of citizens, property of foreign legal and natural persons, and mixed property. Interestingly, the term ‘private property’ is not mentioned at all. The fixed assets in Bulgaria During the last forty-five years Bulgaria has been transformed from a typical agricultural country into an industrial one. This was connected with the creation of an enormous amount of fixed assets. Table 9.3 Composition of the gross national product (current prices) Indicator name

unit

1986

1990

Total

% Lv.m % % % % % % % %

100.00 80,689.94 69.90 8.40 11.10 0.10 4.70 0.60 3.20 2.00

100.00 83,587.41 70.30 8.20 9.61 0.10 5.23 0.60 4.31 1.71

Industry Construction Agriculture Forestry Transportation Communications Trade and logistics Other branches of the production sector

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Table 9.1 shows how the fixed assets are distributed as between the two sectors of the national economy (68.30 per cent in the productive sector and 31.70 per cent in the non-productive sector) and among the different branches in the two sectors. These data have relevance for the creation of the private sector through a privatization process. The first candidates for privatization may be ranked as follows: industry, transportation, communal services and housing, agriculture, trade and logistics. But from the point of view of overall efficiency, for some political reasons and also for reasons for privatization convenience, the rating could be: agriculture, trade and logistics, communal services and housing, construction, industry and transportation. The communications, the science and science institutions, education, health care and the majority of the utilities will remain public for the next ten to fifteen years. At this point it will be interesting to look at the composition of the gross national product itself (Table 9.3) Capital investments in Bulgaria The fixed assets in the country were developed by a very sophisticated, centrally-regulated scheme of capital investments. The sources of investments were the government budget and the capital investments funds of different regulatory bodies at different management levels between the enterprises and the government. Ordinarily an enterprise by itself could not install fixed assets, because its own funds (created from the profit distribution) were slim. In practice most of the necessary capital investments came from the Central Government budget. The five-year plans and the annual plans highlighted the soTable 9.4 Annual capital investments (in Lv.m) 1986 Total Productive sector Industry Construction Agriculture Forestry Transportation Communications Trade and logistics Other branches of the productive sector Non-productive sector Communal Services and housing Science and science institutions Education Arts and Culture Health, social care, sports and tourism Other branches of the non-productive sector

1990

9,361.30 6,634.00

100.00 70.87

2,727.30

29.13

100.00 68.40 5.08 9.21 0.13 9.87 1.88 4.64 0.78 100.00 68.01 3.68 6.31 2.46 7.97 11.57

10,116.33 7,649.76

100.00 75.62

2,466.57

24.38

100.00 65.13 4.96 16.09 0.04 5.12 2.06 4.94 1.66 100.00 70.21 5.98 10.67 1.16 4.31 7.68

called ‘strategic branches’ for investment. For instance, during the period 1986–90 the strategic branches were electronics, mechanical engineering and biotechnologies. Comparing Table 9.4 with Table 9.1, it can

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be seen that the annual branch distribution of the capital investments were identical to the branch distribution of the fixed assets. The Government invested (Table 9.5) in state enterprises, co-operative enterprises and (indirectly) in households. The investments in the households were large, because it was obvious that small household farms with leased land were effective. The investments were mainly in respect of price subsidies for fertilizers and small-scale agricultural machinery. During the last period (1986–90) there was a big rise in capital investment in the small-scale industry and agricultural (co-operative) enterprises. The channels of investment indicated in Table 9.6 are interesting in the context of the Bulgarian economy. The very big amounts towards construction and assembly costs were due to the very inefficient system of operation of the construction enterprises. The very low levels for Table 9.5 Capital investments by types of ownership (in Lv.m)

Total In state enterprises In co-operative enterprises In householdings Others

1986

1990

9,361.30 8,545.20 80.50 735.50 0.10

9,746.66 9,078.41 200.00 467.93 0.32

Table 9.6 Distribution of annual capital investments (in %)

Total for the economy Construction and assembly Current assets Geological researches Research and development Others Productive sector Construction and assembly Current assets Geological researches Research and development Others

1986

1990

100.00 48.34 38.45 2.18 2.80 8.22 100.00 37.22 49.06 3.03 2.32 8.36

100.00 45.56 42.47 1.28 4.74 6.46 100.00 34.02 54.45 1.54 3.78 6.21

Research and Development (R&D) reflect the low level of technologies installed, old machinery and equipment. It will be impossible to modernize the whole economy (or even the industry enterprises) before we start privatization; this is one more reason for starting it soon. The infrastructural handicaps in privatization are aggravated by the fact that the investment process itself was very inefficient. Because of the inefficient way of operation of the different actors (regulators) involved in the process, and because of their conflicting objectives, the time period for the transformation of the capital investments into fixed assets has been very long. Typical figures were five to ten years for installation of new technology in metallurgy, three to six years in mechanical engineering and so on. Due to

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this, an enormous amount of capital (Table 9.7) was tied up in an unfinished investment process, especially in the industry branch. Table 9.7 Capital investment provided but not utilized (cumulative figures in millions of Lv. at end of the year)

Total Productive sector Industry Construction Agriculture Forestry Transportation Communications Trade and logistics Other branches of the productive sector Non-productive sector Communal services and housing Science and science institutions Education Arts and culture Health, social care, sports and tourism Other branches of the non-productive sector

1986

1990

11,490.10 9,182.60 7,501.50 287.50 444.60 2.60 374.90 213.10 294.00 64.40 2,307.50 1,374.80 69.00 147.80 94.20 309.90 311.80

14,094.73 11,132.24 9,095.96 182.70 1164.83 0.78 523.97 37.29 40.35 86.35 2,962.49 1,223.53 428.14 548.41 39.80 222.20 500.41

The industrial enterprises Industry is the most important branch from the point of view of privatization and the problems here will be most difficult to solve. There is heavy concentration of labour force and fixed assets in some sub-branches (Table 9.8): mechanical engineering and metal processing (21.81 per cent and 16.85 per cent), electrotechnical and electronic industry (14.93 per cent and 7.74 per cent), chemical and rubber industry (7. 69 per cent and 12.31 per cent) and textile industry (9.72 per cent and 4.63 per cent). As can be seen from the columns for wages as a percentage of production costs, most of the Bulgarian industry sub-branches are labour intensive. This, again, reflects the low level of the installed technologies, and has great relevance to privatization techniques. In the last five-year period (1986–90), there was a noticeable rise (25 per cent) in the number of the state and co-operative enterprises (Table 9.9 ). This rise was mainly in mechanical engineering and metal processing, the electrotechnical and electronic industry, and the chemical rubber industry. This could be explained by their strategic position in the whole productive sector.

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Table 9.8 Employment, fixed assets and wages in industry by sub-branches Indicators

1986

1990

Employment No.

(%)

No.

(%)

1986

1990

Fixed assets

Wages

(%)

(%)

(%)

Total in the industry 1,223,708 100.00 1,270,425 100.00 100.00 100.00 Electricity and heat production 31,953 2.61 36,671 2.89 16.91 19.57 Coal industry 46,782 3.82 44,998 3.54 5.70 6.23 Metallurgy 36,775 3.01 36,875 2.90 8.90 8.65 Mechanical engineering and metal 254,466 20.79 277,141 21.81 14.60 16.85 processing Electrotechnical and electronic 151,707 12.40 189,702 14.93 5.11 7.74 industry Chemical and rubber industry 99,178 8.10 97,674 7.69 15.45 12.31 Construction materials production 64,730 5.29 54,406 4.28 7.29 5.53 Wood processing 70,551 5.77 65,249 5.14 3.55 3.20 Paper and pulp industry 19,304 1.58 18,286 1.44 2.02 1.84 Glass and china industry 26,159 2.14 24,318 1.91 1.62 1.21 Textile industry 121,789 9.95 123,544 9.72 6.19 4.63 Sewing industry 82,131 6.71 84,167 6.63 0.73 0.88 Fur and shoe industry 34,160 2.79 32,470 2.56 0.63 0.59 Printing and polygraphic industry 10,173 0.83 7,735 0.61 0.55 0.39 Food, drink and tobacco industry 173,850 14.21 177,189 13.95 10.75 10.38 Notes: Employment shown as average number of employees at the end of the year and in percentage; Fixed assets shown in percentage; Wages shown as percentage of the total production costs.

1986

1990

(%) 10.20 6.60 27.20 7.50 13.60

9.50 5.60 24.20 8.10 12.90

10.90

9.40

8.00 15.00 16.80 8.50 20.50 14.20 19.60 16.40 16.80 16.80

7.50 14.30 16.10 8.20 19.70 13.40 19.60 15.30 15.20 15.20

Table 9.9 State and co-operative industry enterprises (numbers at the end of the year) Indicators

1986

1987

1988

1989

1990

Total in the industry A State enterprises Electricity and heat production Coal industry Metallurgy Mechanical engineering and metal processing Electrotechnical and electronic industry Chemical and rubber industry Construction materials production Wood processing Paper and pulp industry Glass and china industry Textile industry

2,003 1,820 18 6 8 470 173 99 134 269 19 20 132

2,088 1,907 19 6 8 493 202 108 135 269 20 21 142

2,161 1,933 19 7 9 503 204 109 135 265 20 20 140

2,247 1,960 19 8 10 513 206 110 135 261 20 19 138

2,477 2,096 20 10 12 552 219 117 142 271 21 19 143

CHRISTO DALKALACHEV

Indicators

1986

1987

1988

1989

1990

Sewing industry Fur and shoe industry Printing and polygraphic industry Food, drink and tobacco industry B Co-operative enterprises

81 41 35 315 183

84 46 36 318 181

86 47 36 333 228

88 48 36 349 287

95 52 38 385 381

123

The second group—textiles, sewing and the food, drink and tobacco industries—grew, though they were never nominated as strategic because they were flexible and could develop in a rather autonomous way. The same is valid for the co-operative enterprises as well. The majority of industrial enterprises (about 80 per cent) have under 500 workers each (Table 9.10). This is normally the size of a small or medium-scale enterprise. An important characteristic of the industry sector is that the labour force and the gross production are relatively concentrated in the small and medium-scale enterprises (Table 9.11)— 32.51 per cent and 33.86 per cent, respectively (in 1990). More than half of the labour force and gross production are concentrated in enterprises with up to 1,000 workers. From Table 9.12 one can notice that the majority of the enterprises are with high and very high amounts of fixed assets (according to Bulgarian standards). Profits from sales for the industry enterprises are shown in Table 9.13. Table 9.10 Size distribution of the state and co-operative industry enterprises (at the end of the year) Size of the enterprise by number of workers

1986

1990

No.

%

No.

%

Total under 500 501–1,000 1,001–3,000 3,001–5,000 5,001–10,000 above 10,000

2,003 1,422 328 227 15 9 2

100.0 71,0 16.4 11.3 0.7 0.4 0.1

2,477 1,969 369 127 6 4 2

100.0 79.5 14.9 5.1 0.2 0.2 0.1

Table 9.11 Size distribution of industrial employment (workers) and gross production (% at the end of the year) Size of the enterprise by number of workers

Total employment

Gross Production

1986

1990

1986

1990

Total under 500 501–1,000 1,001–3,000 3,001–5,000 5,001–10,000 above 10,000

100.00 27.22 21.84 35.86 5.61 6.48 3.00

100.00 32.51 24.88 26.17 10.57 2.78 3.09

100.00 26.70 21.10 32.60 5.50 10.30 3.80

100.00 33.86 25.58 25.92 9.50 2.20 3.23

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Over the period 1986–90 one can observe some favourable trends for several sub-branches. These were due not to efficiency factors, but mainly to the changes in the administrative system of prices. It was typical for the government to change the prices either according to changes in its own view of the relative importance of the sub-branches or according to changes in the interests of the regulatory bodies at management levels below the government. For example, the price rises of this type were announced for the light industry subbranches in the years 1987–9. The decreases in profits from sales (as in the coal industry, the metallurgy and the construction materials industry) were due to increases (sometimes drastic) of the prices of raw materials and energy. Because of the latter reason, the gross profit (Table 9.14) in industry as a whole decreased constantly in the period 1986–90 (the Table 9.12 Size and distribution of state and co-operative enterprises (by initial value of fixed assets) Size of the enterprise by fixed assets (thousands of Lv.)

Enterprises

1986

1990

Number

(%)

Number

(%)

Total under 100 100–199 200–399 400–799 800–1,499 1,500–2,999 3,500–4,999 5,000–19,999 above 20,000

2,003 30 26 67 156 297 379 256 523 269

100.00 1.50 1.30 3.34 7.79 14.83 18.92 12.78 26.11 13.43

2,477 131 40 53 191 199 458 328 564 513

100.00 5.28 1.61 2.14 7.73 8.04 18.49 13.24 22.77 20.71

Table 9.13 Profits from sales in state and co-operative industry enterprisess (as % from the total cost of production) Indicators

1986

1990

Total in the industry A State enterprises Electricity and heat production Coal industry Metallurgy Mechanical engineering and metal processing Electrotechnical and electronic industry Chemical and rubber industry Construction materials production Wood processing Paper and pulp industry Glass and china industry Textile industry Sewing industry

9.1 9.0 17.9 −12.7 −3.0 10.3 16.9 8.0 2.5 11.2 3.8 0.8 9.8 7.9

13.1 12.9 2.2 −11.2 −8.0 10.3 19.0 8.2 −0.7 11.7 52.6 12.6 16.2 21.9

CHRISTO DALKALACHEV

Indicators

1986

1990

Fur and shoe industry Printing and polygraphic industry Food, drink and tobacco industry B Co-operative enterprises

8.8 9.3 2.4 13.7

16.8 16.1 8.7 20.3

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gross profit is calculated as the difference between the sales revenue and the variable production costs). Table 9.14 Gross profits of the state and co-operative enterprises from the productive sector (as % of assets in current prices) Indicator name

1986

1987

1988

1989

1990

Total gross profit Gross profit in the industry

12.01 18.29

10.60 15.63

10.87 15.25

10.56 14.09

10.25 13.02

THE BULGARIAN APPROACH ON PRIVATIZATION The strategy of privatization The strategy of reform and privatization Privatization in Bulgaria is an aspect of overall reform strategy for transition from a totally-centralized economy toward a mixed economy, formed mainly from expert opinions of such different sources as the International Monetary Fund (IMF), the World Bank (WB), the European Bank for Reconstruction and Development (EBRD) and a French group of experts with the French State Secretary for Planification Lyonel Stoleru. The basic premise in the strategy for reform is that privatization is a precondition for the development of an efficient market economy. It can radically change the behaviour of the enterprises, making them more adaptable to the new, competitive conditions and help gain increased efficiency. Increase of unemployment will be an adverse effect. So it will be important to create conditions favourable for the growth of private enterprises, especially in the small business sector, so as to create a large number of jobs requiring only moderate doses of investment. Privatization, aimed at achieving competitiveness, really represents an aspect of the restructuring of enterprises. The major government dilemma is whether restructuring should precede the divestiture of an enterprise (see Ira Liberman 1990). The restructuring of an enterprise can be: physical, organizational and/or financial. The physical restructuring encompasses upgrading or replacement of obsolete plant and equipment, introduction of new technologies and investments to improve overall capacity utilization and energy efficiency. Plant closures can also be considered as a part of the process. It could include relocation of production facilities to take advantage of lower wages, better skills, advantageous market access, infrastructure or new manufacturing possibilities. Organizational restructuring incorporates measures to revise the organization, improve capacities and adjust the human resources for production, marketing and financial gains. These changes are considered even more important for competitive performance than mere improvements in capital stock. In this kind of

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restructuring are included: product and market reorientation, reorganization, staff reduction and redeployment of the redundant personnel, design of management information and control systems, enterprise autonomy, management development and worker training, introduction of incentive compensation schemes, introduction of management contracts, joint ventures, marketing arrangements and joint investments with foreign companies. Financial restructuring will be necessary since many state enterprises accumulated significant debts in local and hard currencies. Debt restructuring is important. Additional aims include: eliminating subsidies and government transfers of resources to the enterprises, financial autonomy, possibilities of borrowing from commercial (trade) banks, floating shares and bonds, joint ventures with domestic and foreign investors and creating a heterogeneous capital mix suited to the financial needs of the enterprise. Privatization without restructuring usually results in the low sale price of the enterprise. At the same time it is difficult, expensive and time-consuming; and it is difficult to motivate the management and staff to improve performance if their jobs are at risk from privatization. Further restructuring measures pursued before privatization may differ very much from the direction intended by the possible buyers. In the case of Bulgaria it is hardly possible to adopt the scheme of ‘restructuring before privatization’. The scheme will have to be ‘restructuring after privatization’ with all the incidental negative effects for the government budget, national economy and society. Further, due to lack of clarity regarding the types of ownership, the responsibility and motivation for such restructuring remain unclear. This is compounded by the difficulty in defining the precise role for the state without conjuring up past mistakes and mistrusts. Hence the need for rapid privatization, even if with an embryonic market. It will be necessary, in the first place, to create all the necessary preconditions for eventual sale of all or a portion of the enterprise assets. These include: (a) transformation of accounting documentation according to the new Law for the Enterprise Accounting System (State Gazette 11/5 February 1991), on western lines; (b) elaboration of a sound programme of sale; (c) evaluation of assets and determination of the equity to be offered; (d) preparation of a prospectus; and (e) preparation of all the legal provisions governing the future sale of the assets. Most of these could be worked out only by consultancy firms from abroad at present. An immediate education system should be created under the direct control of the Ministry of Finance, to prepare local experts. Possible privatization approaches to be used in Bulgaria Privatization approaches in Bulgaria should be different for different categories of enterprises. For instance, the large enterprises require diversified ownership structures. In the case of a majority of small-and mediumsized enterprises it will be possible to sell an entire enterprise or a substantial portion of it to a single buyer, or to adopt employee buy-outs and leasing of assets. (a) Large enterprises require, eventually, methods of mass privatization. The Polish idea of free transfer of some shares to the citizens is too complicated and calls for certain financial infrastructure. It could hardly

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be used in Bulgaria. Conventional methods of privatization, suitably adopted to local conditions, will be more efficient. There are three particular objections to the free vouchers technique in Bulgaria. First, it requires creation, in advance, of a financial infrastructure consisting of financial intermediaries (key elements of the approach), pension funds (preferably private), mutual investment funds (initially operating as closed funds), investment banks, Stock Exchange and securities commission. Second, the biggest need of the Treasury, namely, income, is not satisfied; and if the equity of the privatized enterprises is underevaluated, the losses for the Treasury will be big. Third, the application of this method will be cumbersome; there will be too many actors in the process and there are possibilities of fraud and financial speculation. Some large enterprises could be privatized using some modification of the traditional buy-out procedure. Major investors (local or foreign), whom the enterprises themselves might identify, can be invited to bid for large blocks of shares. The shares sold in this way can be the basis for development of a financial market and particularly a Stock Exchange. Past and present foreign partners of enterprises (with an established name) could be invited to take part in the buy-out transactions. (b) In Bulgaria, the category of small enterprises is an important one. With the process of ongoing decentralization, small-scale enterprises will increase. The decision to split up a large enterprise may come from the founding body of the enterprise, from the enterprise itself or one of its divisions, from the government or from the future anti-monopoly agency. It is supposed that an increase in the number of the small and medium-scale enterprises will foster competition. The privatization process should be decentralized to the extent permitted by the Privatization Law and the regulations of the Agency for Privatization. The privatization itself should be carried out by a group for privatization with representatives of the Ministry of Finance, the founding body, the enterprise itself and independent experts, as empowered by the Agency for Privatization. The largest possible initiative should be given to the enterprises themselves. The Agency for Privatization will have to supervise the privatization process to prevent de facto take-overs by some top managers, essentially in their own interest. There are two broad methods of privatization: (i) In the first stage the enterprise will be commercialized through its transformation into a joint-stock company held entirely by the Ministry of Finance. In the second stage shares or participations may be made available for potential investors of any type (individual, group, local and foreign), including the employees (eventually at preferential prices as allowed by the Privatization Law). An expert group, authorized by the president of the Agency for Privatization, will manage a process of an internal or external evaluation of the enterprise by a consulting company. (ii) Liquidation followed by the lease of assets and facilities could be an important step for effective ownership transformation in the case of small-scale special service enterprises. (This is not appropriate for the medium- or large-scale enterprises which need large foreign investments and/or new or high technologies and/or access to foreign markets). However, leasing should not be permitted. Transformation of co-operative enterprises Because the co-operative enterprises are in fact small- or medium-scale state enterprises, they could be privatized using the aproaches mentioned above.

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This group comprises all the agricultural enterprises (and the Bulgarian population is very keen on the land). The eventual privatization could start only after solving all the ownership-definitional problems. After that, at least three main results are possible: the creation of a new (real) co-operative enterprise, according to co-operative principles (rather egalitarian), followed by autonomous management, involving all members in the ownership and control of the enterprise; liquidation of the enterprise and creation of a number of other private companies on the basis of the new ownership type; and after specific compensations, transformation of the enterprise into a state enterprise, which will then continue to operate as state-owned or be privatized. In all these cases, social justice is much more important that the creation of a private sector. Privatization of municipal property The offer of rights for the local authorities to hold property is another channel of privatization. Here again steps should be taken to define ownership (for example, which is state and which is municipal). After the separation of municipal property from state property, the former can be privatized if the local public opinion favours it. Procedures could be designed only at the central government level (the Agency for Privatization) with the assistance of representatives of the local authorities (or experts authorized by them). The process of privatization itself should be controlled in the same way (the best is by a mixed central/local authority privatization commission). Again, the first stage of privatization namely, the commercialization of the municipal property, is very important. During this stage the Ministry of Finance should be entitled to be the only shareholder of a joint-stock company, based on the municipal property. The preparation of a prospectus with all the necessary information, the public offering and the preparation of a list of possible buyers will be the duty of the Agency of Privatization (or of an authorized expert group). All possible buyers should be requested to present proposals, which will be a basis for bargaining. The final decision relates, among other things, to the portion of the shares which will be held by the local authority, and the portion of shares that will be sold to individual investors. Institutional framework for privatization The major institutions concerned with privatization would be: the Ministry of Finance (existing), the agency for privatization (existing), local authority privatization commission (not existing), anti-monopoly agency (not existing), founding body of an enterprise (existing), boards of directors of the privatized enterprises (not existing) and specialized consultancy companies (not existing). PRIVATIZATION ACTIONS TAKEN IN BULGARIA In Bulgaria some actions in privatization, legal, organizational and economic, are already taken. Legal actions The most important action is the passing of the Law for Land Ownership and Land Usage (State Gazette 17/ 1 March 1991). The law itself and the government regulations (ordinances of the council of ministers following the law) aim to solve the problem of land ownership. Local Land Commissions are organized, which will determine the ex-private property, the former owners and/or their heirs, and all possible compensations.

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The legal basis for creating the institutional infrastructure for the Bulgarian privatization has to be established adequately—for example, Privatization Law, Commercial Code, and the Law on the State Enterprise. Organizational actions Two important organizational actions have been taken. First, a State Agency for Privatization (SAP) was created (State Gazette 12/12 February 1991). The SAP is the state organ (equal to a ministry) for privatization of the state and municipal property. Its main responsibilities are: to collect the necessary information from the ministries and the committees for their privatization programme; to propose appropriate measures for privatization; and to propose a methodology for the valuation of assets of the privatized enterprises. The SAP has a board with nine members, including a president, hired and fired by the Prime Minister for a period of five years. The board decisions, concerning the privatization are mandatory for all state and municipal bodies, legal and natural persons. As per government regulations (Ordinances of the Council of Ministers) issued for sales of state and municipal assets (State Gazette 23/22 March 1991), the sales could be done only by an auction, in which local and foreign legal and natural persons may participate; local, state and municipal companies may not. Economic actions Economic actions aimed at enterprise marketization include the refusal, practically, of all enterprise subsidies through the government budget. (The total amount of the subsidies in the budget is 4,068.3 Lv.m: 1308.7 Lv.m. for industry; 330.0 Lv.m. for agriculture; 1,500.0 Lv.m. for exports; 500.0 Lv.m. for prices; and 429.6 Lv.m. in other directions) (State Gazette 15/22 February 1991). These total about an eighth of the subsidies for the previous year. From the end of March 1991 a drastic increase in the interest rates on bank loans (from 2–6 per cent up to 49 per cent) was effected. This step was followed by updating the old interest rates of the enterprise loans to the new ones. There was also a request by the Central National Bank to all enterprises to start repayments immediately. In the past, many enterprises used to accumulate big amounts of loans very often refusing to make payments. A short period of time is allowed during which the enterprises can make repayments at the old interest rates. After this period the Central National Bank will be prepared to start legal bankruptcy procedures in cases of default. From the end of March 1991, real steps toward decentralization of management and demonopolization of state and municipal enterprises were taken (State Gazette 28/9 April 1991). The ministers and the presidents of state committees (bodies equal to ministries) were obliged to produce by 15 April 1991, suitable programmes in these respects. They have to organize commissions for the valuation of the assets, to update their interrelations with the government budget, to assess their bank debts and all the terms for transferring their assets and liabilities to newly-organized companies. Until the end of the process all actions of the enterprises concerning their property as well as fixed asset transformation were treated as illegal. This was a precaution against the so-called ‘spontaneous privatization’ of state enterprises and possible fraud. Liberalization of all the prices (from 1 March 1991) has been an important action too. It has an impact toward rapid marketization of enterprises. As prices are freed for the final products as well as for the raw materials and other inputs, a large number of enterprises seem to be on the verge of bankruptcy. Naturally they are forced to look for new possibilities of development, including privatization.

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PROBLEMS ENCOUNTERED It is certain that privatization will create some unpredictable problems for the Bulgarian population (as shown by Paul Marer 1990). (a) There is insufficient accumulated domestic private capital This will be an obstacle in finding local buyers for more than a small fraction of the enterprises to be privatized. On the other hand, those who possess significant amounts of capital often have acquired it in ways which the public do not consider legitimate. This problem may call for modifications in the privatization policy—for example, to change the scope and speed of the privatization (to suit the level of available capital), and/or to adopt the approach of privatization by vouchers, and/or to finance a portion of the equity acquired by nationals of the country with special lines of credits, and/or make large sales (placements) to workers, pension funds, mutual funds, local governments, insurance companies, non-profit foundations and like organizations. (b) Severe problems may arise from the valuation of assets procedures The problem is that costs, prices and financial indicators could be arbitrary. The buyers will be willing to pay the price suggested by the enterprise’s existing level of efficiency and earnings. On the other hand, the public (population, politicians and mass media) would like the buyer to pay for the future earnings. This problem is as much economic as it is political. (c) Increasing the inequalities of income and wealth Even if successful privatization eventually makes the society better, during the stages of implementation it will increase the inequalities of income and wealth, particularly as the public faces accelerating inflation, unemployment, and stagnating (or declining) living standards. Therefore, the political tensions that privatization is likely to generate can become an obstacle to successful transition toward market economy. CONCLUSIONS In conclusion, is there a ‘third way’ for Bulgaria? If we assume that there exists a ‘third way’, we immediately assume that the market itself does not exist, but there exists a mechanism which functions better than the market. That cannot be central planning, however, hence it has to be some version of the ‘mixed economy’. The question is ‘how “mixed” should the target economy be?’. In terms of Paul Samuelson’s analysis, what shall be the proportion between pure market operation (Adam Smith’s invisible hand) and regulation (the visible fist) in the economy? The answer has necessarily to be postponed to a convenient moment after the creation of even an embrionic market. Privatization is the only possible way for the creation of the capital market in a totally-centralized economy. Neither the necessary financial institutions nor the divestment channels exist, however, unlike in the western market economies. Yet we have to start the privatization process, even using non-standard

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privatization procedures, possibly with some negative political and economic results. This is the only possible solution for Bulgaria. REFERENCES Books and papers Lyonel Stoleru )1990) A Second Plan Monnai (The Transition from Planned toward Market Economy) Paris, 6 February 1990. Ira Liberman (1990) Industrial Restructuring Paper for Workshop A2— Restructuring the Enterprise Sector, Conference ‘The Transition to a Market Economy in Central and Eastern Europe’, Co-sponsored by the World Bank, Centre for Co-operation with the European Economies in Transition, Paris, November 1990. Paul Marer (1990) Pitfalls in Transferring Market Economy Experiences to the European Economies in Transition, Conference ‘The Transition to a Market Economy in Central and Eastern Europe’, Co-sponsored by the World Bank, Centre for Co-operation with the European Economies in Transition, Paris, November 1990.

Bulgarian official sources Decree 56 on Economic Activity State Council of the People’s Republic of Bulgaria, 1989. State Gazette 12/12 February 1991, Ordinance no 16 of the Council of Ministers/8 February 1991. for Creation of State Agency for Privatizaion. State Gazette 15/22 February 1991 Law for the Government Budget of Republic of Bulgaria for 1991. State Gazette 17/1 March 1991 Law for Land Ownership and Land Usage. State Gazette 23/22 March 1991 Ordinance No 42/14 March 1991 of the Council of Ministers for selling-up state and municipal assets. State Gazette 28/9 April 1991 Ordinance No 54/3 April 1991 of the Council of Ministers for decentralization of management and demonopolizatin of state enterprise unions, state combinates, state and municipal companies and enterprises.

10 Privatization in Yugoslavia* Matija Skof and Branko Vukmir

THE INSTITUTIONAL ENVIRONMENT (Matija Skof) INTRODUCTION Entrepreneurship actually started to develop in Yugoslavia in the mid-1960s when constitutional amendments paved the way for the formation of business entities on quasi-entrepreneurial principles and above all helped to encourage interconnection of the enterprises either in Yugoslavia or abroad. But, the property of the enterprises continued to remain in social ownership and the enterprises continued to be managed by their employees through the workers’ councils. The constitutional amendments adopted in 1974 and the Law on Associated Labour passed in 1977 still concentrated on the non-proprietary concept and self-management, and blocked, by over-standardization of business and status co-operation, every entrepreneurial initiative. And the expansion of foreign investments was impeded as well. Blocked entrepreneurial initiative and the economy based on agreements on the selfmanagement principle had negative influence over macro and microeconomic policies in Yugoslavia resulting in hyperinflation and nearly in the collapse of the economy in the second half of the 1980s. An unendurable economic situation prompted the rapid introduction of radical changes in the realm of macroeconomic policy and development of entrepreneurship. In 1988, 1989 and 1990 the following laws were adopted or amended: the Enterprises Law, the Law on Banks, the Law on Foreign Trade Operations, the Law on Accounting Operations, the Law on Financial Operations and some other systemic and pertinent laws which would abolish the economy based on agreement and affirm normal economic and entrepreneurial criteria. All these amendments were based on the programme for restructuring and health of the Yugoslav economy which was inaugurated by the Prime Minister, Mr. Marković, in 1989 and which has been effectively conducted so far. The first step in the implementation of this programme was made by the adoption of certain systemic laws (stimulation of entrepreneurship and liberalization of foreign trade operations). In December 1989, the dinar was declared convertible; its value was closely linked to the German mark so that one German mark was worth seven dinars. The convertibility of the dinar is no more the subject of the decision of the Yugoslav government, but has already been recognized by foreign banks and has attained an international value. This is, undoubtedly, conditioned by a considerable increase of foreign exchange reserves in 1990 from US $ 6.7 billion to US $ 9.5 billion.

* This paper was written before the disintegration of Yugoslavia.

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The next phase of economic reforms was announced in the autumn of 1990; the reforms apply to the restructuring of ownership. Social ownership over the enterprises’ property has still been a basis of the proprietary relations in the Yugoslav economy. The announced reforms in this field anticipate the sale of socially-owned property (socially-owned capital). It is expected that private initiative will be promoted by sale of socially-owned capital to employed workers through internal shares. The same applies to other fields that are important in the process of economic reforms in Yugoslavia. CONSTITUTIONAL AMENDMENTS ALREADY ADOPTED The Enterprises Law As of 1 January 1989, the basic law in the realm of entrepreneurship— The Enterprises Law (Official Gazette SFRY 77/88)—came into force; it replaced the Law on Associated Labour. In 1989 it was amended (Official Gazette SFRY 40/89). The following are the most important amendments: (a) First of all, there was the introduction of the proprietary structure over the enterprises. The existing enterprises have still retained the postulate of social ownership with an undefined owner, whereas, all newly-established enterprises have a defined owner. The recognition of private and co-operative ownership over the enterprises is an essential change, namely that an enterprise may be founded by domestic and foreign natural persons and legal entities independently or together with other entities (socially-owned enterprises as well). In this way, new enterprises either in social or in private, cooperative and mixed ownership are being established. (b) By introducing the proprietary structure the conditions for defining organizational forms of newlyestablished enterprises, after the pattern of West European market economies, have been created. Beside the already existing social enterprises, the Law enables the establishing of joint-stock companies, limited liability companies, limited partnership companies, unlimited solidary liability companies and co-operatives and provides interconnection of these companies (enterprises) into composite forms (holdings). The main characteristics of these companies are similar to the forms found in market economies; yet, they have some features of the self-management system which could not have been avoided (but are expected to be changed), especially in the field of managing. (c) New managing organs have been established in new enterprises: assembly, managing board and supervisory board. Besides founders and owners, the workers employed in the enterprise will also have their delegates in these organs (the percentage being fixed, but not limited, in the founding act). (d) In the earlier system the total profit was automatically assigned to social capital, whereas, in newlyestablished enterprises the owners of capital decide upon allocation and disposition of the profit (still not affirmed in existing socially-owned enterprises). Other characteristics of the new organizational forms of enterprises do not differ from the forms found in market economies. On the contrary, often the actual problems are sought to be solved with the help of foreign standards.

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THE LAW ON SECURITIES The new Law on Securities was enacted within the enterprise and market economy development programme at the end of 1989 (Official Gazette SFRY 64/89) and amended in June 1990 (Official Gazette SFRY 20/90). The basic aim of this Law was the facilitating of all kinds of securities in the Yugoslav economic practice. Though legislation had already authorized the issue of bonds, treasury bills and commercial notes (which, however, have never become a conventional means of the long—and short-term financing and investment), the actual novelty concerned the shares. The law itself, with its definitions and frame-settings, is rather loose and enables the issuer to determine independently all particulars of each security. That means that an organization enjoying a good financial standing may issue any class of shares (ordinary or preference, cumulative or non-cumulative, registered or bearer shares), different types of bonds and various kinds of short-term securities as well. According to Yugoslav legislation, securities may also be denominated in foreign currency, a remarkable benefit during the high inflation times. Further, the securities must be marketable, in order to achieve their operative effect as without an organized securities market (Stock Exchange) the introduction of these instruments would not be feasible in practice. For this purpose, and pursuant to the Money Market and Capital Market Law (Official Gazette SFRY 64/89), the stock exchanges trading with long-term securities have been established in Ljubljana, Zagreb and Belgrade. The Stock Exchange in Ljubljana, for example, was started early in 1990 and is rapidly developing its operations. The institution is organized and operating after the German pattern. Yet, irrespective of the wide legal opportunities, only a small number of our enterprises have decided on issuing long-term securities so far. For the time being, only a few bonds, shares and treasury bills of the Yugoslav banks are quoted at the Stock Exchange in Ljubljana. In any case, far better progress may be anticipated when, after the privatization process, further joint-stock companies are established and when also ‘bonds’ are used to a large extent for financing project investments. Admission to the Stock Exchange quotation, the issue of securities and stock trading are not possible without publishing important particulars on the company’s business results and financial standing, inclusive of auditing and rating. In this regard significant changes in the accounting directives and a new law on the auditing procedure can be expected in the near future. Besides, more and more companies are offering enterprise appraisal and evaluation services which most probably will be extended also to auditing. In spite of almost unlimited legal opportunites and the keen interest of both Yugoslav enterprises and their foreign business partners to start issuing securities, there are certain problems at present in connection with the valuation and rating of companies, chiefly if registered securities are involved. Regretfully, the specific economic situation in our country does not enable the interested parties to transfer and apply directly world-wide models and criteria which are accepted and approved. Several corrections and modifications are still necessary. EMPLOYMENT RELATIONSHIP The enactment of the Law on the Basic Rights Stemming from Employment (Official Gazette SFRY 60/89) as the new systemic Federal Law, and of the relevant republic laws, has brought sub-stantial changes to the entire Yugoslav employment system, which up to now has been based on labour contracts, a strong protection of workers and a minimal benefit in case of unemployment. The new legislation, however, has introduced collective contracts and employment contracts which govern the employer-employee relationship and regulate in detail such particulars as conditions and terms

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of employment, the employee’s assignment to other jobs, working hours, breaks, absence and leaves, disciplinary measures, personal income and compensation, termination of employment and so on. The contracts of employment must be made with workers as with top managers, though the manager contracts are not identical to the common contracts of employment; they contain individual and special clauses and provisions which have been separately agreed between the manager and his employer. In this field, too, the recently adopted Yugoslav employment system is coming close to the methods and techniques of the free market economy. Thus, several practical solutions of foreign statutory provisions could be advantageously applied in Yugoslavia. In case of a termination of employment, the workers’ protection is no more so absolute as it has been until now. According to the new regulations, employment may cease for workers who have been found to be economical or technological surplus. In that case they must be given the option of receiving a severance pay amounting to at least twenty-four average personal incomes or of an additional training and qualification possibility at the cost of their employer. Financial operations, foreign exchange system and credit relations with foreign countries In this field no substantial changes in the sense of maximum liberalization and support of the market economy system have been effected so far. Financial operations conducted by legal entities in inland trade are still being performed through the Social Accountancy Service (SAS) which is a kind of state ‘clearing house’ or such office authorized by state. All legal entities have their current accounts opened in the SAS, and their mutual payments are effected through the SAS on the basis of ’orders’ given by legal entities for relevant enterings to the credit and debit sides of their accounts. Actually, changes are announced in this area as well, although not in the first period of reforms. It is foreseen that payment transactions between legal entities should be effected through banks or directly. In foreign exchange transactions, too, legal entities cannot act directly, but only through authorized banks. Apart from some exceptional cases provided by Federal Law, no legal entity may keep its own foreign exchange account. Accordingly, all foreign exchange transactions are to be carried out through authorized banks, while accounts payable to or receivable from companies on the basis of foreign exchange transactions have to be covered in the local currency (dinars). In this area no essential changes can be expected in the near future. However, there are no limitations to foreign exchange transactions in either direction (to or from Yugoslavia), including repatriation of capital and transfer of profits from capital invested or some other source. The same principles are applied also in credit relations with foreign countries. Domestic firms are not allowed to enter any such co-operation (or to grant loans) directly, because the domain of credit operations with foreign countries is reserved for authorized banks. This restriction is very likely to be lifted within the scope of changes expected in the near future, in which case companies will be entitled to enter directly into credit relations in foreign trade. In inland trade, however, no restrictions in this sphere exist, and credit transactions may be carried out by enterprises themselves without the involvement of banks. FOREIGN TRADE SYSTEM By enactment of the Law on Foreign Trade Transactions (Official Gazette SFRY 63/89) and executive acts, the conditions for the engagement of Yugoslav firms in foreign trade transactions and economic cooperation with foreign partners have been greatly improved. This refers, in the first place, to liberalization

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of imports and exports, as import restrictions for certain kinds of goods have been reduced to a minimum. Now, an import licence by federal or customs authorities is required for less than 10 per cent of commodities, whereas earlier such a restriction was imposed on almost 90 per cent of all goods. Restrictions are applicable only to the export and import of goods for strategic and health purposes (drugs), while trade in all other kinds of goods is free, Recent changes in legislation have also facilitated the establishment of various forms of co-operation with foreign partners, and shortened the procedure of obtaining approvals for special business activities (such as long-term co-operations, compensations, foreign investments and so on). THE LEGISLATION1 (Branko Vukmir) The first Yugoslav law on privatization was enacted on 22 December, 1989 (Official Gazette SFRY 84/ 89).2 Important amendments of the said law were enacted on 10 August 1990 (Official Gazette SFRY 46/ 90).3 The amended law entered into force on 18 August, 1990. The law of 1989 was named the ‘Law on Sale of Social Capital’. The amended name is simply the ‘Law on Social Capital’. THE QUESTION OF OWNERSHIP The question of ownership of assets belonging to Yugoslav enterprises has been a thorny legal issue ever since the introduction of the concept of ‘social property’ into the Yugoslav legal system. Under the Constitution of 1974, Yugoslav enterprises were not considered as state enterprises and their property was not considered as state-owned property. Enterprises were managed on the basis of ‘self-management principles’, while the assets belonging to enterprises were considered a ‘social property’. This property did not belong to anyone in particular.4 Workers in Yugoslav enterprises had an ‘inalienable right to manage’ the social property of their enterprises.5 Once the ideas of privatization took hold, the legal problem of who owns the property of Yugoslav enterprises had to be solved before the Yugoslav enterprises could be offered for sale. These concepts created a serious bar to the sale of social property because it was not clear who actually owned the property and who was entitled to sell it. Through the latest constitutional amendments (1988), the name of ‘social assets’ has been changed to ‘social capital’, while the earlier definition has been abolished.6 The present legal position, created by the latest constitutional amendments and the new laws on privatization, is such that enterprises are fully entitled to dispose of ‘social capital’.7 The present privatization legislation has authorized them to sell this property to foreign and domestic physical and legal persons. The proceeds of the sale go to a special ‘Fund’. Once invested, they are considered as assets which the respective republic has permanently invested into the Fund.8 As a consequence of all these changes, it seems that the legality of the sale of social capital itself is no longer questionable. After the enactment of the Law of 1989, an initiative was started before the Federal Constitutional Court challenging the constitutionality of the said law. However, the basic question of the legality of sales was not challenged. The provisions which seemed questionable were only the ones that provided direct payments to employees out of the Fund as some kind of a compensation in cases of sale of enterprises. Similarly, payments of purchase prices by the buyers to other enterprises associated with the one which was sold, instead of payments to the Fund, were also questioned.9

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WHAT IS BEING SOLD? In the Law of 1989 the emphasis was apparently on the sale of ‘social capital’. In the context of the Law it meant the assets of enterprises.10 The possibility that enterprises may be sold as ‘ongoing concerns’, whose price may be different from the prices of its assets, seems to have been neglected. Contrary to this, in the Law of 1990, the sale of enterprises as such has been specifically provided for.11 RIGHT OF WORKERS TO BUY ‘INTERNAL SHARES’ The Law of 1989 did not elaborate the possibilities for the employees of enterprises to organize a buy-out of enterprises. The law provided that employees could receive some compensation in the form of shares from the Fund in which the proceeds of the sales were to be deposited. However, such pay-outs were left entirely to the discretion of the Fund and employees could not be sure whether anything would be paid to them at all. The law only summarily mentions the employees’ buy-out as a possibility but without giving any details as to how this could be accomplished.12 The Law of 1990 made a radical change in this area. For purposes of employees’ buy-outs it created the so-called ‘internal shares’. These are considered as shares sold to the workers of enterprises and to some other categories of citizens not actually employed by the enterprises. The shares are called ‘internal’ because they are different from other regular shares. ‘Internal shares’ may be sold through an instalment plan. They will gain the status of ‘regular’ shares only after they have been fully paid up. ‘Internal shares’ may not be traded on capital markets as long as they are not fully paid up. They shall acquire the full status of ‘valuable papers’ only after they have been fully paid.13 It is not clear from the law, if internal shares may be sold over the counter before they have been fully paid. Similarly, it is not clear if enterprises may organize schemes which would enable workers to trade their shares within the enterprises when they need cash before the shares have been fully paid. If an enterprise decides to be offered for sale, internal shares may be sold only to certain categories of people. First of all they may be sold to the employees of the enterprise itself. They may also be sold to persons who have been employed in the enterprise for at least two years, to retirees, to other local persons, and to various pension funds. Employees of enterprises may acquire internal shares with a reduction of 30 per cent of their nominal value. For every year of work in the enterprise a further 1 per cent reduction may be allowed, but the total amount of such reductions may not overpass a total of 70 per cent of the nominal value of the shares.14 Internal shares may be issued either when the whole enterprise is being sold or when only additional capital is being subscribed. In this latter case, the total reduction in the price of the shares may not be larger than the total value of the social capital which the enterprise has. On the other hand, the value of the social capital of the enterprise shall be decreased for the value of the reduction approved for internal shares.15 The total amount of reductions under which the employees of an enterprise may obtain internal shares may be equal only to the total of three net amounts of their annual salaries. Other people entitled to buy internal shares will be limited in their purchases according to the decisions of the enterprise.16 Holders of internal shares have the right to participate in the distribution of profits of the new company in proportion to the paid-up amounts for the shares. This proportion shall be derived by increasing the value of the amounts paid for the amount of the deductions to which they were entitled when buying the shares. The important point in this respect is the fact that employees participate in the distribution of profits in proportion to the paid amounts and not in proportion to the nominal value of their shares. However, when it

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comes to the right to participate in the management of the enterprise, holders of internal shares may participate in proportion to the nominal value of internal shares they hold.17 Internal shares may be bought on a ten-year instalment plan. It seems that the credit facility may be given by the enterprise itself. That means that the employees will not necessarily be given outside (bank) credits in order to buy the internal shares, but that the enterprise itself may give credits to its employees by simply deferring their payments. In order to prevent the diminution of the value of monies to be received on such an instalment plan, the Law of 1990 provides an obligation of the enterprise to revalue each year the unpaid portion of internal shares. The percentage of revaluation should correspond to the percentage changes of the retail price index.18 It seems that the government has gone very far in order to facilitate the acquisition of enterprises by their employees. On the one hand, the ten-year instalment plan appears to be a very generous one. On the other hand, enterprises may have difficulties in realizing full benefits of their sales if they have to provide, by themselves, the credit facilities for a ten-year purchase financing plan. A further facility afforded to workers is the provision whereby the value of the enterprises to be sold on the basis of internal shares should be based on the last year’s balance sheet value of the enterprise.19 This value is, in principle, the book value. Obviously, this value may not reflect the actual earning potential of the enterprise and therefore the book value of the enterprise may be quite different from its real value. Having all these provisions in mind, one can visualize that the Law of 1990 opens possibilities for some very favourable sales of enterprises to their workers. TRANSFORMATION OF ENTERPRISES The present legal framework of Yugoslav enterprises is such that it does not guarantee either the efficiency of management or the motivation of workers to increase the value of the property of the enterprises in which they are employed. Therefore, the Law of 1990 reflects the government’s desire to have the social enterprises change their status as soon as possible and on as wide a scale as possible. In order to achieve as fast a transformation as possible, the Law of 1990 provides that enterprises to be sold have to change immediately their legal structure from ‘social enterprises’ into joint stock or limited liability companies.20 For the same reasons, the employees were given a rather short term in which they might use the credit facilities provided by the law for the purchase of internal shares. They have to do it within one year from the date the law has entered into force. It means that workers have to exercise this privilege before 18 August, 1991.21 At the same time, the repayment of internal shares must be completed within ten years from the date when the decision on issuance of internal shares was made.22 From the speed with which the government wishes to accomplish the transformation of Yugoslav enterprises, it is obvious that it expects a radical change in the behaviour of workers, once they become shareholders. In this connection, one could point out that the influence of workers on the management of enterprises in which they are shareholders may not necessarily be more efficient than their influence as ‘self-managers’ in the earlier self-management system. Their participation in management and their effectiveness as controllers of managers is under both frameworks heavily impaired by the fact that they depend on managers in their everyday status, in their careers and in their over-all positions within the enterprise. Employees who depend on managers are not in the best position to censure them, regardless of whether they are expected to do so as ‘self-managers’ or as shareholders. Furthermore, due to the limited rights of workers to dispose of their ‘internal’ shares, it cannot be expected that a fast change in the ownership structure could be accomplished. As a result of the restrictions

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in the sale of ‘internal’ shares, it is very probable that these shares will not change hands and that therefore outside shareholders will not be able to gain much influence in the control of enterprises. In such a situation it would appear that the government may have to undertake further measures to underline the profit of enterprises as the principal criteria for judging the success of its management. It could also introduce provisions for mandatory secret balloting in the assembly of shareholders in the Law on Enterprises. Such measures could facilitate the controlling potential of employees-shareholders. As long as further measures in this direction are not undertaken, managers, in our opinion, may not be under sufficient pressure to perform well and in a profitable manner, even when the enterprises are transformed into joint-stock or limited liability companies. ‘FUNDS’ FOR REINVESTMENT A very important question connected with the sale of enterprises is what to do with the proceeds of such sales. The Law of 1989 gave a very simple answer to this question. It stated that all the proceeds of sales should be deposited into a ‘Fund’ which is to be established in each of the federal republics. Once the proceeds have been so deposited, they shall become a ‘permanent investment’ of the respective republic in that Fund.23 The basic status of these Funds remained unchanged in the Law of 1990. These Funds are to have the status of ‘public enterprises’ and their main function is to make further investments where needed. Republics may establish one or several of such Funds. They can do it alone or in conjunction with other domestic or foreign physical or legal persons.24 According to the Law of 1989, the Funds had the right to initiate an ex parte procedure in courts if the sales of social capital were effected at prices lower than their book values.25 Since the Funds are to be also the main beneficiaries of the sales of enterprises (for they are to receive all the proceeds of such sales), one could see a potential conflict of interest in this function of the Funds. In their wish to get the sales proceeds, they may not always be interested or persistent enough to obtain the best possible price. Fortunately, the Law of 1990 has abolished this function of the Funds and has instead entrusted certain controlling functions to agencies which shall be established in all the republics.26 According to the Law of 1990, the Funds will only function as bodies which will receive the proceeds of the sales and will reinvest such proceeds in accordance with the law. The assistance to enterprises in their efforts to be sold and in valuation of their property is now to be performed by the agencies, who have also been entrusted with certain administrative functions. THE USE OF PROCEEDS FROM SALES The Law of 1989 did not give any directives on how monies deposited into the Funds would be used or reinvested. It apparently left the discretion for reinvestment to the Funds themselves. In this connection, it would not seem unreasonable to doubt the wisdom of the Funds as future potential investor of the monies it received. The Law of 1989 did not have any indication as to how these monies would be re-invested and one could doubt if these Funds would be a wiser investor than the state in the earlier period. The Law of 1990 has introduced certain changes in the freedom of the Funds to make investments. According to the Law, the Fund is now authorized to invest in other enterprises an amount equal to 5 per cent of all the monies deposited with the Fund. However, if a sold enterprise needs further investments, Funds may invest their monies in such enterprises without any limitations.27 It is supposed that such ‘investments’ may be made either in the form of bonds or in the form of different classes of shares.

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The principle that workers may also be paid a certain value in the shares of the sold enterprises out of the proceeds received by the Funds, has been maintained in the Law of 1990. However, such remuneration may be paid only if the workers did not use the credit facility to buy internal shares. The total amount of such remuneration has been the same in both laws. It may be equal to the total of six monthly salaries of each employee.28 The Law of 1990 has also made an important distinction in the identification of social capital held by the enterprises. The Law of 1989 did not differentiate the capital acquired by the enterprise in the course of its operations from the capital given to it by its founders.29 The Law of 1990 has now stated that the capital which the enterprise received from its founders at the beginning of its operations cannot be sold. If an enterprise is being sold, these initial investments given by founders are now being reverted to the founders. Consequently, the founders have the right, if they so wish, to participate in the management of the new enterprise and in the distribution of its profits . It is assumed that their rights will be proportionate to the value of their capital to the total value of other investments.30 If an enterprise sells one of its parts and this part becomes another enterprise, the proceeds of such sales do not belong to the Funds but to the enterprise which has sold its part.31 Similarly, if an enterprise opts only to increase its capital base and issues shares in order to acquire ‘additional’ capital, such acquired capital belongs to the enterprise.32 An interesting feature of the Yugoslav legislation is that the state did not try to get a direct hold of the proceeds of the sale of social capital. Decision on the future investments of such proceeds, if not reinvested in the same enterprise which has been sold, has been left to the Funds. Nevertheless in our opinion, it would be normal for the state to desire to secure a certain share of the proceeds for its budgetary needs. No such desires have been foreseen in the present Yugoslav legislation. At a recent conference on privatization held in Yugoslavia, opinions were expressed that part of the social assets should also be reserved for previous owners. They should thus be compensated for the property taken away from them in the wave of the post-war nationalizations.33 It is certain that it would be quite difficult to implement such a solution due to changes in owners and in property during the last forty-five years. Nevertheless, representatives of the Croatian Government who attended the conference seemed to have had sympathy for such proposals. Although the Federal law does not provide for such a compensation, it is not impossible that governments of some of the republics may adopt such solutions through their own legislation. VALUATION OF SOCIAL CAPITAL The Law of 1989 stated that the prices of social capital have to be based on the values as established in the last balance sheet of the enterprise, and that the sales will be effected under ‘market values’. If the social capital is sold under the book value or below the value as established by an authorized organization, such sales would have no legal effect. The Funds were given in the law certain authority to initiate court proceedings in order to nullify such sales.34 The Law of 1990 makes a distinction between sales to employees of the enterprise and sales to other buyers. In the first case, the value of the social capital is to be established on the basis of the balance sheet of the previous year. In the second case, enterprises shall be sold according to their market value.35 As stated, the Law of 1990 prescribes that if the enterprise is issuing internal shares, the valuation of the enterprise has to be made on the basis of the value based on the balance sheet of the previous year. However, the law also allows that the management organ may decide that even in such sales the valuation is

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done on the basis of an ‘assessed’ value.36 It is not clear from the law if the ‘assessed’ value may be lower than the balance sheet value. One would assume that it may not be, but the law is silent on this point. ‘AGENCIES’ FOR VALUATION OF SOCIAL CAPITAL As pointed out earlier, in the Law of 1989 the valuation of the social capital and of enterprises as a whole was entrusted to the Funds. They had an obligation to initiate court proceedings if the social capital was sold below its book value. The Law of 1990 has taken this authority away from the Funds and has entrusted it to institutions called ‘Agencies for Restructuring and Recapitalization’ (hereinafter referred to as ‘agencies’). Similar to the Funds, agencies are to be established in each of the federal republics. They will have the status of ‘public enterprises’. However, agencies may be established as ‘social’ enterprises, but they may also be in mixed ownership. Republics may establish one or several of such agencies. The Government is apparently anxious to have the necessary infrastructure for the privatization procedure. Therefore, it has decreed that agencies have to be formed within three months from the entering into force of this law.37 According to the Law of 1990, agencies have in the sales procedure basically the function of expert advisers to enterprises. They are supposed to assist the enterprises in their efforts to be sold. However, it seems that the legislators do not expect the agencies themselves to value the property of enterprises since the Law states that the agencies are authorized to select the organizations which may perform the valuation of the assets to be sold.38 On the other hand, although the agencies are clearly described in the law as consultancy organizations, they are also authorized to give the permission to enterprises to effect the sales outside of a public bidding process.39 Similarly, the law states that the contract of sale of social assets may be concluded only after the agency has given its ‘opinion’.40 It is not clear from the Law whether the ‘opinion’ of the agency related only to the valuation of the property or also to other aspects of the sale. The law also does not clarify what the consequences are if the opinion of the agency is unfavourable. Furthermore, the law does not clarify what happens if there are several agencies in one republic— which one of them is authorized to give the required opinion. DECISION TO SELL AND APPROVAL OF SALES An interesting feature of the law as it now stands, is that the state has apparently not reserved for itself any controlling or approving functions in the sales procedure. The only relevant provision concerning approval is the provision of Article 2b which states that a sales contract may be concluded by the Fund, or by an association of enterprises or by enterprises themselves, ‘after they have obtained the opinion of the agency’. The Funds may be in a position to make a sale if the social assets of an enterprise have been transferred to the Fund in order to facilitate the sale to the employees or to other persons. Such a possibility is provided in the Law of 1990.41 The decision to be offered for sale has been entrusted to the enterprises themselves. This approach is in conformity with the long-standing Yugoslav approach to enterprises which made them quite independent in making business decisions. The decisions on prices and other relevant conditions of sale are to be decided by the management organs of the enterprises.42 The Law of 1989 has stated that all sales of social capital have to be made through public bidding.43 Although public bidding cannot be discarded as a way to privatize, it may sometimes not be feasible to have public bidding as the only way to effect such sale. The Law of 1990 has introduced some flexibility in this area

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MATIJA SKOFAND BRANKO VUKMIR

by stating that the agency may, in cases provided by law, approve sales of enterprises without a public bidding.44 CONCLUSIONS The Law, as it now stands, provides a clearer framework than the earlier law for the sale of enterprises to its employees. The emphasis on such sales may have been introduced by the government in order to achieve a faster transformation of enterprises since it became apparent that privatization through foreign capital may take a longer time than desired. However, for such an important law, the present text is quite inadequate. Furthermore, it does not contain all the necessary details for the administration of such sales. Many of its provisions leave many questions unanswered. It would be desirable and it would certainly help all those who are interested to buy Yugoslav enterprises, that the laws regulating such sales give clearer answers to pertinent questions related to such sales. Such questions, among others, are primarily matters related to the authority to sell and the authority to approve such sales. In all privatization sales, one of the most important questions is the valuation of the property to be sold. The absence of governmental controls of the valuation procedure may be very beneficial for the speed with which sales may be effected, but the experience of other countries shows that abuses are likely to take place. It would be prudent that the government kept some prerogatives in this area. The amendments contained in the Law of 1990 are so extensive that they have practically replaced the Law of 1989. However, certain provisions of the Law of 1989 were maintained. As a consequence of this merger process of the two laws, the readability of the text as it now stands is poor. It would be most desirable if very soon a consolidated version of the law were published. The Decrees of Croatia setting up the Fund for the Development of the Socialist Republic of Croatia and the Agency for Restructuring and Development are summarized in Appendix 1 and Appendix 2 respectively. NOTES 1 Copyright Branko Vukmir. Views expressed in this article are not necessarily the views of the United Nations Centre on Transnational Corporations. 2 Hereinafter referred to as ‘the Law of 1989’. 3 Hereinafter referred to as ‘the Law of 1990’ 4 Under the Constitution of 1974 (introductory part, Chapter III) ‘…no one has the right of ownership over the social assets, no one—not socio-political communities, nor organizations of associated labor, nor individuals— may appropriate on any grounds the products of social labor or manage or dispose of social means of production and labor…’ 5 Constitution of 1974, Article 13. 6 The new definition of the social capital is contained now in the Amendment X to the Constitution (Official Gazette SFRY 70, 26 November, 1988). 7 Constitutional Amendment X, para. 4. 8 The Law on Social Capital, Official Gazette SFRY 84, 22 December, 1989 and 46, 10 August, 1990, articles 1 and 3. 9 Article by Prof. Vojislav Rakić, ‘Aktuelni problemi prometa društvenim kapitalom’ with an analysis of the questions raised before the Federal Constitutional Court, Pravo i drustvo, July 1990:5–6. According to the Law of 1989 employees of enterprises could receive certain payments in the form of shares from the Fund or the shares of the enterprise sold as a compensation.

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10 In article 1, a definition was given of the term ‘social capital’. Basically it included the business fund and the reserves. 11 Law of 1989, article 1 and Law of 1990, articles 1, 2, 2a. 12 The Law of 1989, article 3. This Law had a provision (article 7) whereby the respective republic or the Fund may provide some credit facilities to the employees for buying the stock of enterprises put up for sale, but no further relevant details were provided for in the Law. 13 The Law of 1990, article la and 1b. Basic provisions on issuance of shares and their Legal status, are not contained in the Law on Enterprises as it could be expected, but in a special Law on Valuable Papers (Official Gazette SFRY 64/89 and 29/90. 14 The Law of 1990, article 1c. 15 The Law of 1990, article 1d. 16 The Law of 1990, article 1e. 17 The Law of 1990, article 1g. 18 The Law of 1990, article 1h. 19 The Law of 1990, article 1h/5. and 1j. 20 The Law of 1990, article 1a. 21 This Law was published on 10 August, 1990 and it entered into force eight days later. That is on 18 August, 1990 (art. 17). 22 The Law of 1990, art. 14/1 and 2. 23 The Law of 1989, article 3. 24 The Law of 1989, article 3. The Republic of Croatia, for example, established the Croatian Fund for Development at the end of April 1990 (Decree published in Narodne novine 18, 30 April, 1990. 25 The Law of 1989, article 4. 26 In the Law of 1989 it was provided that specially authorized organizations will assist the enterprises to value their property (article 4/3). The Law of 1990 provides for establishment of ‘agencies’ in each of the republics. These agencies have partly advisory and partly administrative functions. 27 The Law of 1990, article 3. 28 Laws of 1989 and 1990, article 3. 29 Under the Yugoslav laws, founders of enterprises could be socio-political communities (republics, communes) or other enterprises, association of enterprises and similar bodies. 30 The Law of 1990, article 7a. 31 The Law of 1990, art. 2/3. 32 The Law of 1990, art. 1/1. 33 The conference was organized by the Zagreb Business School and was held in Opatija from 6 to 8, September, 1990. 34 The Law of 1989, art. 4. 35 The Law of 1989, art. 4; Law of 1990, art. 1j and 4. It seems obvious that this time the law provides for sale of enterprises as ongoing concerns. 36 The Law of 1990, art. 1j. 37 The Law of 1990, art. 13. 38 The Law of 1990, article 2a/5. 39 The Law of 1990, article 2a/6. 40 The Law of 1990, art. 2b. 41 The Law of 1990, art. 7. 42 The Law of 1990, article 2/4. According to the Law on Enterprises, social enterprise, that is enterprises where all the assets are ‘social’, have workers’ councils as the main management organs. The directors of social enterprises are the principal business executive organs. Decisions on the sales of social enterprises have to be made by workers councils. 43 The Law of 1989, art. 1/3.

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44 The Law of 1990, art. 2/7 and 2a/6.

APPENDIX 1. REPUBLIC OF CROATIA Decree on the Fund for Development of the Socialist Republic of Croatia (Official Gazette of Croatia, 30 April 1990). Croatia has established the Fund for Development as a legal entity with rights and obligations based on the Law on Sale of Social Capital as published in the Official Gazette of Yugoslavia, 84, 1989. The assets of the Fund shall be formed: from the proceeds received through the sale of social assets; from interest paid by the National Bank of Croatia; from payments out of the budget of the Republic from payments out of some other funds. Art.4 Assets of the Fund shall be used for buying valuable papers and other permanent investment aimed at restructuring the existing Art.5 Enterprises wishing to have the investments made by the Fund have to elaborate a development programme which is to be submitted to the Agency of Croatia for Restructuring and Development (to be established under another decree). Art.6 All programmes for restructuring and development have to be elaborated according to a certain methodology. Art.7 The Fund shall be managed by a board composed of a President and six members. The President and members shall be nominated by the Government of Croatia, except for one member of the board who shall be elected by the workers of the Fund. Art.8 The Fund shall be managed by a Director to be nominated by the Government of Croatia. Art.9 Operation of the Fund shall be supervised by a committee composed of the President and four members, to be nominated by the Parliament of Croatia, except for one member who shall be nominated by the workers of the Fund. Art. 10 The board of the Fund shall report twice a year to the Government of Croatia on the results of the Fund’s operation and the government shall report to the Parliament at least once a year. Art. 11 For its work, the Fund is responsible to the Government of Croatia. The Fund’s financial plans shall be confirmed by the Government of Croatia. Art.12 The Fund shall have its statute. Art.13 The Fund shall start its operation not later than 1 July 1990. Art.14 The Fund shall not be subject to bankruptcy procedure. Art.3

APPENDIX 2. REPUBLIC OF CROATIA The Law on the Agency for Restructuring and Development (Official Gazette of Croatia, 18, 30 April 1990) Art.1

The Agency for Restructuring and Development is a specialized organization of the Republic.

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The task of the agency is to organize and render expert assistance in the elaboration of development or restructuring programmes of enterprises in accordance with the programme of the Government of Croatia. This article contains elements which must be contained in such a programme. The agency shall make valuations of the social capital and of the enterprise itself, through expert legal personnel. Art.4 The agency shall be managed by the Management Board made up of the President and four members. The President and two members are to be nominated by the Government of Croatia, one member is to be nominated by the workers of the agency and one member by the Chamber of Commerce of Croatia. Art.5 A director shall be elected by the Government of Croatia. Art.6&7 The agency is responsible for its work to the Government of Croatia and shall report twice a year on its work to the government. Art.8 The funds for establishment and work of the agency shall be procured from the republican budget and from income for services rendered. Art.9 The agency shall have its statute. Art.10 The agency shall start its operation not later than 1 July 1990. Art.3

11 Privatization in Canada Jan J.Jörgensen and Taïeb Hafsi

Although much has been written about management of Crown corporations in Canada (Berkowitz and Kotowitz 1985; Boothman 1987; Brooks 1983; Hafsi, Kiggundu and Jörgensen 1987; Kirsch 1985; Knubley 1987; Laux and Malot 1988; Sexty 1980), less is known about the privatization process (Doern and Atherton 1987; Hardin 1989; Hart 1985; Schultz 1988; Sexty 1987; Stanbury 1989). In our own research on the privatization process,1 we have found it useful to subsume the many forms of privatization under the more general phenomenon of divestment. As Coyne and Wright (1986) observe, public sector restructuring through privatization is analogous to divestment in the private sector (Ellsworth 1979; Gilmour 1973; Hamermesh 1976; Hayes 1972; Nees 1981; Porter 1976). The phenomena covered by private sector divestment are also diverse. Divestment in either sector can be broadly defined as any reduction in the scope of the parent organization’s activities or control over a sub-unit. This includes the following phenomena: (a) sale of the company or a subsidiary unit, whether by private sale, sale to a government, public share offering, or leveraged buyout by managers or workers; (b) an organizational restructuring that reduces top management’s control, such as a shift from a whollyowned subsidiary to a joint venture; creation of a more autonomous subsidiary from a former department;2 or commercialization of a sub-unit so that it is more subject to market forces and less subject to administrative control (Ramanadham 1988; Sexty 1987); (c) contracting out or franchising services and intermediate products formerly produced internally; or, (d) retrenchment, either internal, as in employee layoffs, or external, as in the abandonment of a product/ market or closure of a subsidiary unit. In Canada privatization encompasses closure of state firms (CANAGREX and LOTO CANADA) and transfer of control from one government to another, as in the federal sale of NORTHERN CANADA POWER to the Yukon government or the sale of CDC LIFE SCIENCES (Connaught) to Institut Mérieux controlled by the French government. Moreover, studying privatization over long periods shows that sale of a state firm to private owners is often preceded by commercialization or restructuring that reduces direct government control. For example, the addition of ‘contemplation of profit’ to AIR CANADA’S mandate in 1977 proved to be an important step on the road to its eventual public share offering; and a reorganization such as the establishment of Canada Development Investment Corporation (CDIC) in 1982 presaged the sale of its holdings in TELEGLOBE CANADA, DE HAVILLAND, CANADAIR and other interests. Finally, firms such as DE HAVILLAND and CANADAIR have moved in and out of the public sector more than once.

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Three forces have made divestment more common in both the public and private sectors in the past decade: (1) greater external financing; (2) globalization; and (3) recognition of the challenges of managing complex organizations (Jörgensen and Hafsi 1990; Ostry 1990; Trebilcock et al. 1982). In response to these forces, the strategic motive for divestment has changed markedly. In the 1970s, divestment was associated with poor performance and the stigma of failure. Today, divestment is as likely to be associated with the quest for improved strategic fit between the organization and its changing environment. Divestment has thereby acquired a more positive connotation, as a means to focus on core skills that contribute to the organization’s competitive advantage (Coyne and Wright 1986; Duhaime and Grant 1984; Hamermesh 1975; Harrigan 1982; Montgomery and Thomas 1988; Tuzzolino 1988). The volume of divestment activity has increased.3 Public sector divestment can also be viewed as a means to achieve better ‘fit’ between the government and its environment. Effective management of the public sector requires that government focus its scarce managerial resources on critical issues and disengage itself from non-essential activities (Hafsi and Jörgensen 1990). Privatization is one such form of disengagement. Public sector firms might be divested due to lack of fit with the prevailing ideology or political agenda or in order to refocus government activity to address current (as opposed to past) policy goals and correct current market failures. Even so, the rationality of the forces for divestment and the search for strategic fit may be overstated. These are forces which influence but do not determine outcomes. What happens in each individual case in both private and public sectors is the product of the divestment process in which competing rationalities, cognitive limitations, emotional attachments, ‘lessons’ from the past (Miller 1990), and internal politics play a role (Gilmour 1973; Kingdon 1984). THE SCOPE OF PUBLIC ENTERPRISE IN CANADA At the federal level, Canada has used public sector corporations to pioneer new industries, to address sectorial problems and regional disparities, to meet national security goals, to bail out failing private sector firms, and above all to promote nation-building by creating east-west links that counter the southern pull of the United States, as in AIR CANADA (Trans-Canada Airlines) and the Canadian Broadcasting Corporation. During the Second World War, the government set up thirty-three new public enterprises, mainly to co-ordinate supplies and private sector activities and provide needed inputs such as synthetic rubber and wartime housing. Although most of these enterprises were divested after the war (Borins 1983), the total number of public enterprises continued to increase, especially in the 1960s and 1970s, often to address regional disparities, to rescue failing private firms, to prevent foreign take-overs, or to address sectorial problems. Overall, government-owned and controlled enterprises accounted for 26 per cent of net fixed assets of all Canadian corporations in 1983, and for over 35 per cent of all public sector employment (government plus public agencies and enterprises), but for less than 5 per cent of total employment in the economy (Economic Council 1986:7). Public enterprises dominated the electrical power sector with 95 per cent of all assets, and were major participants in transportation (50 per cent of assets), communications (25 per cent), and mining and petroleum (22 per cent) (Economic Council 1986). The number of parent public enterprises at the federal level in 1985 totalled fifty-six with another eightyone subsidiary firms (Economic Council 1986; Knubley 1987). As shown in Table 11.1, federal public enterprises were concentrated in three sectors: financial with 31 per cent of assets (Federal Business Development Bank, Canada Deposit Insurance Corporation, Farm Credit Corporation, Canada Mortgage and Housing Corporation); transport and communications 25 per cent (Canadian National Railway,

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CANADA POST, AIR CANADA, St Lawrence Seaway, VIA Rail, Canadian Broadcasting Corporation, TELEGLOBE CANADA, CANADA PORTS, and so on); and mining, petroleum and energy 18 per cent (PETRO-CANADA, Atomic Energy of Canada, ELDORADO NUCLEAR, and so on). Total assets were 60 billion Canadian dollars in 1983, while budgetary funding for public enterprises was $C4.7 billion in fiscal 1982–3. At the level of the ten provinces, the creation of public enterprises stemmed from the need for transportation and communications links. Furthermore, a Conservative government in Ontario started a hydroelectric enterprise in 1906, a move copied by other provinces (Economic Council 1986:13). In addition, provinces acquired a monopoly on sale of alcoholic beverages in the 1920s after the repeal of prohibition, and a monopoly on gambling through establishment of lotteries in the 1970s. In the 1950s several provinces established development corporations which became holding companies. Finally, provinces established public enterprises as tools in jurisdictional disputes with the federal government or with other provinces. Examples of these include the nationalization of electric power in British Columbia in 1961 and the purchase of Pacific Western Airlines by Alberta in 1974 (Economic Council 1986:19–20). The number of parent public enterprises at the provincial level in 1985 totalled 203 with 187 subsidiaries (Economic Council 1986:7). Assets were concentrated in mining, petrolum and energy 58 per cent (HYDRO-QUEBEC, ONTARIO HYDRO, British Columbia Hydro and Power, New Brunswick Electric Power, Manitoba Hydro-Electric, and so on) and finance 25 per cent (Caisse de dépôt et placement du Québec, Treasury Branches Deposit Fund [Alberta], Alberta Home Mortgage Corporation, Régie de l’assurance-automobile du Québec, Alberta Housing Corporation, Insurance Corporation of British Columbia, Société générale de financement du Québec, etc.). The SC129 billion assets of provincial public enterprises were twice as large as those of the federal government (Table 11.2). In addition there were smaller municipal public enterprises in transportation and utilities. The public sector enterprise accounted for a larger share of the economy in Saskatchewan than in any other province, but Quebec led in the total number of public enterprises (forty-nine enterprises with total assets of $C52 billion in 1983) (Table 11.3). The distribution of returns on assets for the largest 171 federal and provincial firms varied greatly: seventeen enjoyed returns on assets higher than 20 per cent while twenty-one suffered negative returns greater than −20 per cent. Nearly half the returns (eighty-three) were clustered in +5 per cent to −5 per cent range (see Table 11.4).4 Many of the enterprises carried a high debt load; about half (eighty-seven) had debts equal to 50 per cent or more of their assets (see Table 11.5). Table 11.1 Sectorial distribution of federal government public enterprises (1983) CanadaFederal Government Public Enterprises, 1983

Numberof firms

Firms with Adjusted Assets by Return full data assets ($C sector (%) assets ‘000)

on Debt ‘000)

($C Budgetary funding ($C ’000) (1984)

Agriculture, fishing, forestry Mining, petroleum, energy Manufacturi ng

5

3

4,338,465

7.2%

13.4%

2,527,253

120,682

7

6

11,079,612

18.4%

1.1%

1,856,636

526,859

6

5

3,338,695

5.5%

−2.2%

6,353,183

0

PRIVATIZATION IN CANADA

CanadaFederal Government Public Enterprises, 1983

Numberof firms

Firms with Adjusted Assets by Return full data assets ($C sector (%) assets ‘000)

on Debt ‘000)

Transport and communicati ons Commerce Banking, insurance, etc. Construction , real estate, land Other services Total

33

29

15,359,770

25.5%

−7.4%

4,362,145

2,256,729

3 6

3 6

7,363,519 18,603,918

12.2% 30.9%

.0% −1.2%

4,887,347 17,267,178

17,168 1,692,394

8

6

78,647

.1%

−64.0%

–

97,665

5

4

38,731

.1%

−42.8%

241

16,613

73

62

60,201,357

100.0%

−1.4%

37,253,983

4,728,110

149

($C Budgetary funding ($C ’000) (1984)

Table 11.2 Sectorial distribution of provincial government public enterprises (1983) CanadaProvincial Governments Public Enterprises, 1983

Number firms

of Firms with full Adjusted assets Assets by sector Return data (%) assets

on Debt ($C ‘000) (1983)

Agriculture, fishing, forestry Mining, petroleum, energy Manufacturing Transport and communicatio ns Commerce Banking, insurance, etc. Construction, real estate, land Other services Total

18

15

1,373,936

1.1%

−4.1%

993,447

31

28

75,338,150

58.3%

2.2%

57,069,689

21 30

17 26

2,691,756 7,351,518

2.1% 5.7%

−9.0% −4.0%

1,773,441 5,810,810

18 36

16 32

747,206 32,932,893

.6% 25.5%

218.3% 3.6%

68,439 16,861,987

21

19

7,635,221

5.9%

−8.9%

6,482,424

53 228

45 198

1,127,149 129,197,829

.9% 100.0%

33.7% 2.8%

485,177 89,545,414

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Table 11.3 Sectorial distribution of Quebec provincial public enterprises (1983) Quebec Provincial Governments Public Enterprises, 1983

Number firms

of Firms with full Adjusted assets Assets data Sector (%)

on Debt ($C ’000) (1983)

by Return assets

Agriculture, 6 3 256,152 .5% −1.6% 103,535 fishing, forestry Mining, 5 5 26,020,796 49.8% 2.8% 17,785,099 petroleum, energy Manufacturing 5 2 1,076,657 2.1% −13.7% 594,544 Transport and 6 4 174,375 .3% −33.5% 93,630 communicatio ns Commerce 2 1 154,593 .3% 167.2% 24,887 Banking, 10 9 21,592,991 41.3% 6.5% 12,560,670 insurance, etc. Construction, 3 3 2,685,288 5.1% −10.9% 2,125,453 real estate, land Other services 12 11 266,237 .5% 49.9% 138,532 Total 49 38 52,227,089 100.0% 3.9% 33,426,350 Source: Calculated from data in Economic Council of Canada (1986: Table B-1, Statistical Summary, 157–64) Table 11.4 Return on assets of top 171 public enterprises (1983) Canada—return on assets—top 171 federal and provincial public enterprises (ranked by Number of firms % assets and revenue) 100% and above 20–99% 15–20% 10–15% 5–10% 0–5% −5–0% −10–−5% −15–−10% −20–−15% −99–20% −100% and less Total

11 6 2 4 12 42 41 11 8 13 17 4 171

6.4 3.5 1.2 2.3 7.0 24.6 24.0 6.4 4.7 7.6 9.9 2.3 100.0

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Table 11.5 Debt/assets ratio for top 171 public enterprises (1983) Canada—ratio of debt/assets—top 171 federal and provincial public enterprises (ranked by Number of firms % assets and revenue) More than 100% 18 10.5 75–100% 39 22.8 50–75% 30 17.5 25–50% 17 9.9 5–25% 20 11.7 >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.

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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

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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)

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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 –

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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

—

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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

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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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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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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

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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.

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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

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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).

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CRISTIAN LARROULET VIGNAU

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.

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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.

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CRISTIAN LARROULET VIGNAU

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

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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.

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CRISTIAN LARROULET VIGNAU

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

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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)

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CRISTIAN LARROULET VIGNAU

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

PRIVATIZATION IN CHILE

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

CRISTIAN LARROULET VIGNAU

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

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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

PRIVATIZATION IN GUYANA

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.

190

PRIVATIZATION IN GUYANA

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

PRIVATIZATION IN GUYANA

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).

CARL B.GREENIDGE

193

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

194

PRIVATIZATION IN GUYANA

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

196

PRIVATIZATION IN GUYANA

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

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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.

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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).

CARL B.GREENIDGE

2 3 4 5 6 7 8

9

10

11 12 13

14 15

16

209

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

<0

Agriculture 2 Mining 5 Energy 0 Industry 5 Sugar 1 Other agroindustry 1 Chemicals 0 Other industry 3 Services 16 Building & public works 0 Banking 1 Commerce 1 Transport & communications 5 Other services 9 Total N 28 % 10.6 Source: Ministère des Finances, DEPP, DEE Note: US $1=9.621Dh.

0–10

10– 49.99

50– 99.99

100– 999.99

>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

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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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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.

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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

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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

PRIVATIZATION IN ALGERIA

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.

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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

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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.

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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

PRIVATIZATION IN ALGERIA

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.

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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

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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

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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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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%

268

40 41 42 43 44 45 46 47 48 49

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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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269

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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271

(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

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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%

<25%

37 13 – 6

4 2 – –

1 3 – –

nies on a sector-by-sector basis with the respective shareholding by ZIMCO Ltd on behalf of the state. Size structure of public enterprise ZIMCO is the major holding company with some 100 companies under it. Below the ZIMCO level are other sector holding companies, the main ones being ZCCM (Mining), INDECO (Industry and Manufacturing) NIEC (Trading) and other giant companies. Table 18.1 sheds some light on the size structure of these public enterprises by sector. The holding company status is indicated in Table 18.2.

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275

General structure of public ownership Public equity ownership has been increasing in a number of companies (see Table 18.3). Table 18.3 General structure of public ownership Public equity ownership (%)

No. of public enterprises

100 51–100 25–50 <25

62 32 5 2

Table 18.4 Profitability structures of the companies as a percentage of capital employed Percentage return on capital employed (RoCE)

No. of enterprises

Above 20 16–20 11–15 6–10 0–5 Source: ZIMCO Ltd.

63 4 5 4 10

Profitability structure of public enterprises The harsh economic environment in which most of these enterprises have been operating has made some of them turn less profitable. Companies in the manufacturing sector, for instance, that depended to a large extent on imported raw materials for their operations, suffered reduced profits. This is particularly the case in the face of insufficient allocations of foreign exchange and some difficulties faced to substitute foreign for local raw materials in the short run. The price control regime was a further contributor to the reduced levels of profits as profit margins were maintained at a low level on some commodities. Table 18.4 indicates the profitability structures of the companies as a percentage of capital employed. The ZIMCO Group averaged a return of 16.1 per cent during the 1988–9 period as against 8.5 per cent for the previous year. Despite improved profitability RoCE levels continue to be low in some companies. However, given the present pricing mechanisms in which most commodity prices are decontrolled, most companies’ profitability and RoCE level have started making further improvements. Table 18.5 Losing/gainful enterprises

Actual no. (K.m.)

1985–6

1986–7

1987–8

1988–9

Actual no. (K.m.)

Actual no. (K.m.)

Actual no. (K.m.)

Actual no. (K.m.)

18 (123) 73 (1,097) 91 (974)

17 (123) 79 (2,084) 96 (1,961)

13 (62) 85 (4,644) 98 (4,582)

Loss-makers 20 (160) Profit-makers 68 (632) Total 88 (472) Source: ZIMCO Ltd.

1989–90

2 (6) 92 (1,618) 94 (1,612)

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E.C KAUNGA

1985–6

1986–7

1987–8

1988–9

1989–90

Actual Actual Actual Actual Actual no. (K.m.) no. (K.m.) no. (K.m.) no. (K.m.) no. (K.m.) Note: At the moment there are only two companies whose accumulated losses as a percentage of capital outlay are between 25–50% in the entire group.

The use of local raw materials on an increased scale further adds to this. Accumulated losses of public enterprises Some of the public enterprises in the country have, for various reasons, suffered losses in the previous year. Price controls over their profit margins, management bottle-necks in some cases and other social responsibilities could have contributed to these losses. However, in the present pricing regime, the number of loss-making companies has shown a steady decline. In 1985–6, for instance, such companies numbered 20, but over the past 4 years out of 98 companies only 13 recorded losses in 1989. Along with a reduction in the number of loss-makers, an appreciable reduction in the amount of losses is also evident as is shown in Table 18.5. Cashflows between public enterprises and the public exchequer Whereas, in the initial stages, the growth of the parastatal sector was partly reflected in the pattern of budgetary allocations, the picture in that direction has since changed. Presently, most of the companies in the group are earning profits from their operations. Dividends are being declared to the respective shareholders while some of the retained profits are ploughed back for reinvestment purposes. The ZIMCO group as a whole has turned a major contributor to the national budget directly through corporation tax, customs and sales taxes. Furthermore, the group is able to declare dividends on a yearly basis. Table 18.6 gives the group’s contributions to the exchequer. These show an increasing tendency over the years. The group’s total contribution to the exchequer which stood at Table 18.6 ZIMCO group’s total contributions to government

Proposed dividend (K.m.) Taxes (K.000) Source: ZIMCO Ltd.

1984–5

1985–6

1985–6

1987–8

1988–9

()

4

20

40

150

–

–

1,963

1,787

2,951

K.1,963m. in 1986–7 has been rising at a cumulative average annual rate of 25 per cent during the period to K.2,951m. in 1988–9 with further projections of an increase by 36 per cent to reach K.4,212m. in the year 1989–90.

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277

(i) Actual divestitures In terms of actual divestitures, there is not much information pertaining to the Zambian companies. The practice in the past has been for the public shareholding to rise to as high as 100 per cent. However, there have been a few companies whose shares have been sold to private entrepreneurs; but this has happened so far in only two companies, namely Livingstone Motor Assemblers in which public share-holding declined from 70 per cent in 1987 to 35 per cent. The Poultry Development Company, which was basically a processing company, also sold off about 40 per cent of its shares in 1988. THE THINKING ON PRIVATIZATION In tracing the evolution of thinking on privatization in Zambia, one should not restrict oneself to the narrow concept of privatization as the transfer of controlling ownership from public or government to private shareholders. It is necessary to consider all those statements of policy and measures that have had the effect of transforming parastatal companies into more-commercially-oriented entities as opposed to being merely appendages of the government. Perhaps the many efforts made at organizational restructuring of the ZIMCO group since the inception of parastatals after the 1968 Economic Reforms (Mulungushi Reforms) is testimony to the inner thinking on ways to bring the parastatal sector or state-owned enterprises (SOEs) to the level of operational efficiency generally characteristic of private companies. Restructuring of state-owned enterprises Reference was made in the first part to the major reorganization of ZIMCO in 1979. As a result of this exercise parastatal companies were delinked from direct supervision by respective sectorial ministries and placed instead under sectorial executive directorates created under a restructured ZIMCO Head Office. As part of this reorganization the boards of directors were reconstituted to effect a greater level of participation from many relevant institutions. In addition there was a deliberate attempt at infusing private sector discipline and business acumen by introducing private sector members on boards of directors. This measure was admittedly well intentioned although the effectiveness of such private sector representation might have been largely overshadowed by the restrictive environment under which most SOEs have operated. Further, the personal commitment of the directors may not be so deep as they do not own any shares in the companies and often the remuneration (directors’ fees) for their participation may be far from a true reflection of the value of their time. On account of the foregoing factors it has been the experience in Zambia that private sector board members have not in all cases performed up to expectations. Erratic attendance of board meetings on the part of some members is testimony to this. The restructuring exercise of 1979 ushered in a new air of commercial orientation. The monitoring role of the ZIMCO sectorial directorates placed parastatal companies for the first time under a full-time businessoriented management set-up. The management information systems that were created had the effect of increasing the level of accountability on the part of subsidiary company managements. It is important to note also that since the measures of 1979 the chairman of ZIMCO, who is the President of the Republic of Zambia, has often reiterated that ‘parastatals are first and foremost business entities’ (President K.D.Kaunda’s address at the opening of ZIMCO Chief Executives’ Seminar—Chichele/Mfuwe Lodges 9 October 1989).

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E.C KAUNGA

The essence of the President’s statement is that parastatal companies are expected to perform efficiently as any commercial undertaking. Their role as government companies is only secondary. This position assumed great prominence as the burden of subsidies from government to consumers and also some parastatals became too onerous. The government then realized that, given the right policy environment, parastatals could perform comparably well and generate surpluses and offer a return to the shareholders in the form of dividends. Table 18.7 Parastatal dividends 1986–7

1987–8

1988–9

Dividend (K) K.20m. K.40m. K.150m. Source: ZIMCO Audited Accounts and Annual Reports 1986/7–1989/90

1989–90 K.250m.

In the past four years the level of dividends paid by ZIMCO Ltd to the Government has been as shown in Table 18.7 Parastatal reform programme—INDECO Twelve companies in the Industrial Development Corporation (INDECO) group were the subject of a comprehensive restructuring programme undertaken with World Bank support between 1986 and 1988. This programme was quite successful and resulted in a turnround of many of the target organizations: Crushed Stone Sales Ltd; Kapiri Glass Ltd; Zambezi Saw Mills Ltd; Laungwa Industries Ltd; Mwinilunga Canneries Ltd; Zambia Steel and Building Supplies Ltd; Supa Baking Ltd; Zambia Ceramics Ltd; Consolidated Tyre Services Ltd; Monarch Ltd; Indeco Milling Ltd; Livingstone Motor Assemblers Ltd (no longer under INDECO as ZIMCO shareholding is now only 35 per cent). Parastatal reform—ZIMCO There has been a continuing interest in the country in the role and efficiency of parastatals in Zambia. As part of its structural adjustment programme, a comprehensive parastatal reform programme is to be undertaken under the auspices of the World Bank with funding from external donors (the German Government and the Economic Community). The study will be in two components—one looking at the global structural issues of ZIMCO and its relationship with subsidiary companies on one hand and the Government on the other; and the second will comprise detailed reviews of fourteen selected companies spread across many sectors. The micro study component will incorporate recommendations on how best to improve their operational efficiency. It is expected that work on the studies will commence by May 1991. The main terms of reference focus on three board issues:. (a) Economic and financial viability: it is expected that from this will emerge a clear strategy for financial and capital requirements for rehabilitation of viable parastatals. It is further envisaged that a strategy for enhancing the participation of the private sector in operations currently under parastatal control will be part of the outcome of this review.

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(b) Managerial, technical and operational efficiency: the object is to identify key skill gaps/deficiencies in existing managerial and technical cadres. From this will emerge recommendations directed towards closing the gaps and improving the compensation and appointment and deployment practices. (c) Institutional arrangements for effective monitoring of parastatals: an institutional arrangement which facilitates effective monitoring of the performance of individual companies while allowing operational flexibility and initiative on the part of individual managers is necessary. The study will address these institutional matters as well as the relationship between parastatals and government. Origins of recent thinking on privatization As one focuses on the subject of privatization properly, it is interesting to note the many direct and oblique references to the concept at various fora. Perhaps the most obvious initial focus was during the 5th National Convention of the United National Independence Party (UNIP) held from 14 to 17 March 1990. In his address to it President Kaunda spoke at some length on the importance of promoting entrepreneurship: The potential entrepreneurs can be grouped either into co-operatives or partnerships or managed by private individuals… These groups should be taught how to manage their units, simple accounting methods and other relevant disciplines. (Dr K.D.Kaunda, Address to 5th National Convention of UNIP, Mulungushi Hall, 15 March 1990:48– 9) The thrust of the President’s thinking here was on ways to promote the massive latent entrepreneurial pool which would in turn enhance the role of the private sector within the officially acknowledged mixed economy system. On the subject of privatization President Kaunda in the same speech had this to say: the answer at least for us, does not lie in privatization but in establishing competition against parastatals and exposing their inefficiency through better results. It is significant to note that at this same national forum (the 5th National Convention) the committee deliberations on the economy did address the question of privatization at some length. The resolutions which were adopted by the Convention, amongst other issues, referred to the issue of privatization and competition. The idea of privatization was accepted; but the feeling was that it should be directed into new rather than take-over investment. The Convention however felt ‘no national interests are threatened by the opening up of any public enterprise to direct and limited individual private citizen full or part ownership’. (Resolution of economic affairs committee as adopted by 5th National Convention). The idea of direct participation by individual citizens in the ownership of public companies was regarded in positive tones on account of the following expected advantages: (a) Providing an additional source of government revenue from sale of shares in companies or indeed outright sale of companies; (b) Providing an incentive for parastatals to improve on their capital structures;

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(c) An opportunity to fulfil the promise of wider participation in economic activity for ordinary nationals; for, there were no indigenous entrepreneurs ready to participate in some of the more sophisticated companies. (d) Promotion of economic democracy. (e) Opportunity to harness widespread savings held by the people at large. It is clear from the deliberations at the Convention that there was beginning to be a rethinking on the role of state ownership of companies. It was acknowledged in some cadres that perhaps the rationale of restricting the participation in some sectors to the government only may no longer hold good due to the changing social/economic dynamics. Report of the special Parliamentary Select Committee Following the momentum generated by the deliberations of the National Convention, and perhaps to some extent as a reaction to the riots of mid-1990, a Special Parliamentary Select Committee was appointed on 9 July 1990. The terms of reference of the committee included the following: to recommend any necessary actions which must be taken by the Government to introduce short term and long term measures aimed at radically reforming the economy in the field of trade. In its report the Committee was quite critical of the parastatal sector’s performance. The Committee noted that some of the parastatal companies had become ‘unmanageable’ mainly because of the following reasons: under capitalization, political interference, overemployment and mismanagement. The committee went on to express disappointment at the losses incurred by some parastatals. The committee therefore recommended that there was ‘need to privatise some of the parastatal companies through sale of shares to members of the public’ (p.28—Select Committee Report). This recommendation was in effect an endorsement of the measures announced by President Kaunda in his address to the Fifth Extraordinary Session of the Party National Council on 28 May 1990, which are outlined in the following section. Policy pronouncements on privatization Specific and oblique references to privatization in official policy documents and pronouncements can be traced back to the New Economic Recovery Programme, Economic and Financial Policy Framework 1989– 93 document of August 1989. The document reviews the measures taken by the Zambian Government to strengthen the operations of the parastatal sector such as the review of INDECO companies referred to earlier and the liberalization of prices as announced in June 1989. To complement the earlier efforts the Government was to facilitate a phase-out of nonviable parastatal operations, and encourage joint ventures with the private sector. (New Economic Recovery Programme document, p. 12)

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It was from the policy framework laid out in the New Economic Recovery Programme that the impetus for the ongoing parastatal reform was generated. However, the main thrust at this stage was on restructuring the parastatal companies and getting them to operate on commercial lines. The landmark pronouncement towards privatization came during the opening address by President Kaunda to the Fifth Extraordinary Session of the Party National Council on 28 May 1990 in the Mulungushi International Conference Centre in Lusaka. As a prelude to the fundamental policy measures that were to follow, the president had this to say on the concept of state participation as originally conceived in his speech of 19 April 1968: I have said several times that state participation is a holding position on behalf of the people as we organise for more democratic means for the people to fight exploitation of one man by another across anything as artificial as colour, race, creed, religion, tribalism or indeed sex. (Address to National Council, 28 May 1990) President Kaunda argued that the compelling considerations behind the programme of state participation in the commercial field were the following: lack of Zambian entrepreneurs; desire to break up monopoly pricing cartels which manipulated prices at the expense of the people; and concern of the government about the predominance of foreign investors and the resultant threat to sovereign integrity. Upon reviewing the evolution of the Zambian economy since the 1968 reforms it was now the view of the government that the programme of direct state involvement in economic activity had run its course, some great strides had been made, and some problems had also cropped up clouding the sustainability of the parastatal programme. It was, therefore, time for change. President Kaunda thereupon announced the government’s decision to ‘devolve more economic power to the Zambian people through a scheme by which the state will sell part of its capital in state enterprises to the general public’. (President Kaunda’s address to the Fifth Extraordinary Session of the Party National Council, p.28). For the purposes of this programme the SOEs were classified into two categories: (a) Public utilities (Zambia Railways, Tanzania Zambia Railway, Zambia Electricity Supply Corporation, Broadcasting Corporation, and so on); (b) Mining, industrial and commercial enterprises (mostly companies under ZIMCO in which the state has a controlling interest). The State was to offer up to 40 per cent and 49 per cent of the shareholding in enterprises in the first and second categories respectively. The basic objective of the new policy was to ‘give economic power to the people’. In addition the following broad benefits were expected: (a) A wider distribution of wealth subject, of course, to ensuring that safeguards were built in to prevent concentration of ownership and wealth. (b) Supplementing the incomes of shareholders (through dividends and bonuses). (c) Raising revenues for the government via sale of government shareholding. (d) Uplifting the quality of management of the companies upon transfer, largely, into private ownership. In the same address the President also directed the Minister of Finance to arrange for the setting up of a Stock Exchange in Zambia to facilitate the participation of members of the public in the ownership of

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companies. It is worth noting, in this respect, that the government had in fact made arrangements (legislation enacted in 1970) for the creation of a Stock Exchange several years ago—but for one reason or another this never took off. Coming in a long background of growing state participation resulting in a very much overblown parastatal sector, the pronouncements of 28 May 1990 were a very significant turnround in policy. For the first time in several years the stigma on the concept of privatization was beginning to be washed off. While the statement met with a lot of enthusiasm for the much-anticipated change in direction, there was still some lingering doubt as to how far-reaching a measure this would be in practical terms. The private business community argued that the measure was a positive one but not good enough to generate the desired level of interest on the part of private business. To be precise, they argued that the proposed share offer would in most cases still leave parastatal companies under the majority ownership of the state— which would not be acceptable to most private investors as they would wish the change in ownership to be accompanied by a change in control and management. In other words, they would wish to see a programme which would vest controlling shares in private hands and to divorce operations of companies from direct government intervention. To a large extent the above apprehensions were addressed by the Minister of Finance—Hon. G.G.Chigaga —in his Budget Address to Parliament of 16 November 1990. He expanded upon the earlier pronouncements of President Kaunda by saying: In addition, the Party and its Government have decided, in principle, to sell off some parastatal companies. The modalities for sales are being studied, including the possibility of selling some of the shares to workers and members of the public. (Budget Address—November 1990:15, para 90) What was particularly significant about the Minister of Finance’s statement was that perhaps for the first time the Zambian Government had made a categoric statement of interest in outright divestment of some of the parastatals. Although the full scope of the privatization programme still remained undefined, the intimation by the minister that the government was looking at a more comprehensive divestment programme struck a good note amongst the local business community as well as the multilateral organizations and the donor communities. ACTIONS ON PRIVATIZATION As outlined in the foregoing sections, the programme of privatization in Zambia is still in its very initial stages. It is not therefore possible to point to specific cases of privatization resulting from the policy pronouncements of mid-1990 and end of year. The focus in this section, therefore, will be on two areas: (a) Progress made in preparations to implement the policy guidelines as announced in the President’s address of 28 May and also extended on in the Budget Address of 16 November 1990. (b) Any other actions and/or measures undertaken by the Government of Zambia and ZIMCO to prepare the parastatal companies towards a more-commercially-oriented operational system as a prelude to actual privatization.

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Follow-up on privatization policy statement As a follow-up to the announcement at the end of May 1990, the National Economic Monitoring and Implementation Committee (NEMIC), chaired by the Minister of Finance in early September 1990, appointed a Special Task Force on Privatization whose terms of reference were as follows: 1 To examine and recommend modalities for implementation of the policy of partial privatization as announced by President Kaunda on 28 May 1990. 2 To review the overall policy of state participation and recommend: (a) sectors of a national strategic nature in which the state may wish to maintain a controlling interest; (b) areas where rationalization and streamlining of activities could be effected to improve efficiency; (c) sectors in which there may be no critical justification for continued state involvement and which could therefore be privatized; and (d) in relation to (c) to recommend priority candidates for early privatization so as to launch the programme on a high note. 3 To recommend prerequisite policy measures necessary for successful privatization. 4 To recommend institutional and other arrangements necessary for privatization; and 5 To look at any other matters relevant to the privatization programme. This Task Force was made up of senior executives from the ZIMCO group as well as a few senior government officers. The report of this Task Force was submitted to the government authorities in early January 1991 and indications are that the recommendations were accepted in broad terms. Of great significance is the fact that there has been a subsequent development which is meant to advance the privatization programme further. Around 25 February 1991 two important organs were constituted. The first was the Steering Committee of the Restructuring of the Parastatal Sector. This committee is meant to be the apex organ for supervising the privatization programme. It is supposd to be responsible for: designing, implementation and monitoring of the privatisation programme. In other words, the Committee will form the basic co-ordinating unit of all the various activities to be carried out under the programme. (Extract from terms of reference as conveyed by the Minister of Finance) The composition of this committee is quite broad-based and of a high level, bringing together relevant professional resource persons. The other organ was the Technical Committee of Privatization. This is a smaller team of technocrats who are supposed to be the full-time working group to do the necessary legwork and paperwork to get the programme moving. This team is expected to be accountable to the Steering Committee. The establishment of these two committees is further evidence of the commitment and determination on the part of the Zambian Government to get the privatization programme off the ground. It is reliably understood that in the revised policy framework paper (PFP) submitted to the World Bank recently, the government made a specific undertaking to launch the programme of privatization by mid-1991 at the latest. This may, even with all the goodwill, be a very tight time-frame considering the amount of work that

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still has to be done before any companies can be floated. Nevertheless, the indications so far are that implementation of the programme is receiving top priority. Some donor countries (notably, the UK, Sweden and Norway) had indicated willingness to offer technical assistance. It would be helpful, therefore, if such assistance were to materialize in good time, to expedite the critical preparatory states for the first sales of companies. Stock Exchange The establishment of a Stock Exchange was indicated as important in the package of actions to accompany the privatization programme. There is a committee working on this subject at government level. On this subject, as was the case with the initial work of the Special Task Force on Privatization, the World Bank has been helpful in engaging a short-term consultant to assist in working out the requirements for a Mini Stock Exchange. Restructuring of parastatal companies The government has embarked on a programme of liberalization (including deregulation of prices) to enable the parastatals to operate within a more competitive environment. In the Budget Address (of November 1990) the government announced the opening up to the private sector participation of the fields of insurance and the building societies, which had hitherto been monopolies (by Act of Parliament) restricted to the Zambia State Insurance Corporation and the Zambia National Building Society respectively. Another aspect of recent efforts by the government and ZIMCO (the apex holding company) at restructuring the SOEs has been the introduction of management contracts. The main object of engaging essentially private sector (mostly foreign) companies in running some problem companies was to infuse private sector discipline to effect turnround in performance. In some cases management agreements have been accompanied by equity participation in the form of joint ventures. In essence these constitute a form of privatization—that of privatization of management. The list of parastatals in which management agreements have been entered into is quite substantial. The following include the main ones: Zambia Sugar Company Ltd (Tate and Lyle); Premium Oil Industries (STEPS); (ROP) Limited (Tata); Zambia Coffee Company (Tate and Lyle); Luangwa Industries Ltd. (Tata); Kafironda Limited; Nanagfa Farms (CDC); Kafue Textiles Ltd; ZAMEFA (Phelps Dodge etc.); Panodzi Hotel (Taj Hotels—J.V.); Nitrogen Chemicals of Zambia (Enichem Agricola). The other initiative worth referring to is that of the Self-Management Enterprises. Just over two years ago the Government of Zambia decided to experiment with the idea of internalizing ownership and management of companies to company employees. This was to be designed along the lines of the Yugoslav model of worker ownership and management. This scheme was co-ordinated by the Industrial Participatory Department of the Ministry of Labour, Social Development and Culture. In the initial phase of the experiment two companies were picked and at this stage only the management was to be vested in the workers. Subject to the outcome the programme was to be extended with possible transfer of ownership to the workers. The companies picked for this initial phase of the Self-Management Enterprise scheme are Choma Milling Company Limited and Zambia Pork Products Limited. The scheme was the subject of a review workshop just about a year ago. While the two companies had performed satisfactorily there were some unanswered questions about the efficacy of the scheme and it was felt that more time would be required before a definitive assessment could be made.

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Perhaps the most critical issues relate to the divorce between management and ownership. The view was that as long as the workers do not participate in the equity of the companies they run, their attitudes would remain like those of mere workers or employees with no vested interest or stake in the long-term vitality of the entity. CONCLUSION Zambia is just embarking on a long road towards privatization or gradual de-emphasis of the government’s direct presence in economic activities. As no actual divestment has been effected one cannot make reference to any actual problems confronted in the process. While indications so far suggest that the Zambian Government is quite serious about pushing ahead with the announced policy, the full scope of the privatization programme is still to be publicized. Such a statement or blueprint, when it is issued, would spell out amongst other things the following: 1 Rationale/justification/goals of the privatization programme 2 Guidelines on how far to privatize 3 Modes of privatization, for example: Employee/management buyouts Debt-equity swaps Outright sales Trade sales Public share offers Equity consolidations, and so on. 4 Guidelines on extent of foreign ownership 5 Policy on treatment of proceeds from sales 6 Role of holding companies 7 Human resource implications 8 Policy on promotion of greater competition 9 Time-frame of privatization programme From the experience of other countries that have carried out similar programmes there is no doubt that Zambia must brace itself for a long and complex privatization programme. With a parastatal sector of the size that obtains in Zambia the process is not one that can be concluded overnight. The initial stages will be very critical to the long-run momentum that can be generated. It is important that, once agreed, the programme should be executed in a transparent manner and with resolve and consistency. After so many years of parastatal sector dominance, there is bound to be some resistance to the privatization programme from various quarters: workers who will be apprehensive about layoffs; some government bureaucrats who may be reluctant to let go of components of their ‘empires’; members of the public who may fear higher prices of goods and services under the private sector; and opportunistic politicians who will use any of the above factors as convenient. They may also be apprehensive about new foreign dominance of the economy. It should be acknowledged that the privatization programme will have a positive side and much support both internally and from the donor community, as mentioned earlier. However, its long-run success will depend on the extent to which the implementation process addresses the problems and issues outlined above. Finally it is neccessary to emphasize the point that at the end of the day pronouncements on privatization will come to nil unless and until the government resolves, in a fundamental and satisfactory manner, the

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question of the investment climate which provides the enabling environment for investors. In this respect the current endeavours at reviving the investment code will need to be expedited if the privatization programme is to take off. Needless to say, investors will need some reassurances from the government within the code that there will be no risk of future take-over by the government. NOTE The views are the author’s and do not necessarily represent those of the Zambian Government or ZIMCO. REFERENCES Kaunda, K.D. Address at Opening of the Fifth Extraordinary Session of the Party National Council, Mulungushi International Conference Centre Lusaka 28 May 1990. Government of the Republic of Zambia New Economic Recovery Programme Economic and Financial Policy framework 1989–93, Ministry of Finance, August 1989, Lusaka. National Assembly, Report of the Special Parliamentary Select Committee, July 1990, Lusaka. Budget Address 16 November 1990. Public Investment Programme 1990–93 April 1993. United National Independence Party. Resolutions of the 5th National Convention of UNIP 14–17 March 1990, Mulungushi International Conference Centre, 1990. World Bank Zambia:. Industrial Policy and Performance, August 1984.

APPENDIX TO CHAPTER 18 Table 18A.1 Data on public ownership Sector

Public enterprise

% Shareholding by Zimco

MINING Copper Industry Services Bureau Limited Roan Air Limited Mulungushi Investment Limited ZAL Holdings Limited Zambia Procurement Services (pvt) Limited Reserved Minerals Corp. Limited Kagem Mining Limited MINDECO Small Mines Limited

ZCCM Limited 60.3 60.3 60.3 60.3 60.3 100.0 55.0 100.0

60.3

Sector METAL MARKETING Metal Marketing Corporation (MEMACO) MEMACO Services Limited

Public enterprise

% Shareholding by Zimco

Maamba Collieries Limited

100.0

Limited 100.0 100.0

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Sector

Public enterprise

% Shareholding by Zimco

MEMACO Trading Limited MEMACO Trading Inc. MEMACO Farms Limited INDUSTRY (a) Food and agro-based AFE Limited EC Milling Ghirardi Milling Co. Limited INDECO Milling Limited Mwinilunga Cannery Limited National Breweries Limited National Milling Co. Limited Poultry Processing Company Premium Oil Industries Limited Robin Hood Products Limited ROP Limited Supa Baking Company Limited United Milling Company Limited Zambia Breweries Limited Zambia Coffee Company Limited Zambia Malting Limited Zambia Sugar Company Limited (b) Non-feed consumer Mansa Batteries Limited Nkwazi Manufacturing Limited (c) Packaging Kapiri Glass Products Limited National Drum and Can Co. Limited Norgroup Plastics Limited (d) Transport Luangwa Industries Limited (e) Drugs and chemicals Kafironda Limited Zambia Oxygen Limited (f) Engineering Metal Fabricators of Zambia Limited Monarch Zambia Limited (g) Construction related Crushed Stones Sales Limited Zambezi Saw Mills Limited

100.0 84.0 84.0 INDECO Limited

100.0

100.0 100.0 100.0 100.0 100.0 51.0 51.0 60.0 100.0 100.0 100.0 100.0 100.0 75.0 100.0 100.0 78.0 Kafue Textiles of Zambia Limited 100.0 86.0 Kabwe Industrial Fabrics Limited 89.0 100.0 100.0 Consolidated Tyre Services Limited 100.0 General Pharmaceuticals Limited

Lusaka Engineering Co. Limited 51.0 100.0 Chilanga Cement Limited 100.0 100.0

56.0

100.0

100.0 100.0

60.0

60.0

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Sector

Public enterprise

Zambia Ceramics Limited Zambia Clay Industries Limited Zambia Steel and Building Supplies (h) Property/real estate INDECO Estates Development Co. Limited (i) Associated companies Dunlop Zambia Limited

100.0 100.0 100.0 Anros Industries Limited 80.0 100.0 Duncan Gilbey and Matheson (Z) Limited 49.7 23.0

Sector (j) Other investments Scaw Limited AGRICULTURE Zambia Forestry and Forest Industries Corp. Limited Kawamba Tea Co. Limited Zambia Cold Storage Corp. Limited Nitrogen Chemicals of Zambia Mpongwe Dev. Co. Limited Zambia Cashew Co. Limited Zambia Seed Co. Limited ENERGY BP ZAMLUBE Refinery Limited Lublend Limited Tazama Pipelines Limited Zambia Electricity Supply Corp. Limited INDENI Petroleum Ref. Co. Limited Agip Zambia Limited TRANSPORT Zambia Airways Corp. Limited Africa Bound Limited National Air Charters (Z) Limited Zambia National Ship Lines Limited Zambia Railways Limited Contract Haulage Limited National Airports Corp. Limited Mpulungu Harbour Corporation Zambia Concrete Limited FINANCE Zambia National Insurance Brokers Limited

Public enterprise

% Shareholding by Zimco

% Shareholding by Zimco

Livingstone Motor Assemblers 35.0 Mukuba Hotel 8.0 2.0 Zambia Agricultural Development Limited 100.0 100.0 100.0 100.0 100.0 60.0 51.0 40.0 Zambia Limited 50.0 51.0 67.0 100.0 50.0 50.0 United Bus Company of Zambia Limited 100.0 100.0 100.0 78.0 100.0 100.0 100.0 100.0 100.0 Zambia National Commerce Bank Limited 85.0

50.0

100.0

99.8

PRIVATIZATION IN ZAMBIA

Sector

Public enterprise

Zambia State Insurance Corp. INDO-Zambia Bank Limited Zambia National B.S. Limited Auto Care Limited Avondale Housing Project Limited Zambia State Finance Company TRADING City Radio and Refrigeration Supplies (1975) Limited Zambia Consumer Buying Corp. Mwaiseni Stores Limited National Drug Company NIEC Overseas Services (Z) Limited National Home Stores Limited NIEC Agencies Limited Zambia Horticultural Prod. Limited Zambia National Wholesale and Marketing Co. Limited

100.0 40.0 (Administered) 75.0 100.0

Sector

Public enterprise

COMMUNICATIONS

NIEC Limited 100.0

289

% Shareholding by Zimco

100.0

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

% Shareholding by Zimco

Posts and Telecommunications Corporation 100.0 Limited (PTC) Zambia National Broadcasting Corp. (Transferred to ZIMCO still to be effected Limited. (ZNBC) by repeal of govt.) HOTELS National Hotels Development Corp. 100.0 Limited Eagle Travel Limited 100.0 Zambia Hotel Properties Limited 80.0 REAL ESTATES Zimco Properties Limited 100.0 Zambia Engineering and Contracting 65.0 Company Limited (ZECCO) OTHERS Engineering Services Corp. (ESCO) 100.0

19 Privatization in Uganda Samuel B.Rutega

PUBLIC ENTERPRISE SITUATION IN UGANDA For the purposes of this paper, I shall define the concept of privatization in the substantive sense of how far the operations of enterprises are brought within the discipline of market forces. To fully understand the need for the privatization programme in Uganda, it is important to appreciate how the parastatal sector, as it exists, reflects the confused and turbulent history of the past two decades. Initially, the parastatal sector in Uganda emerged for the following two reasons: 1 to carry out strategically and socially important functions, either at the national level, such as the Uganda Electricity Board, or on behalf of the East African Community, such as the Uganda Railways Corporation and the Uganda Posts and Telecommunications Corporation; 2 to help establish new industrial ventures, under the Uganda Development Corporation established in 1952. However, several political events caused the parastatal sector to expand over the period from 1969 to 1986 when the National Resistance Movement (NRM) Government came to power: 1 First, in May, 1970 the Obote Government nationalized several enterprises, including some multinational subsidiaries and acquired significant stakes in others, such as three of the commercial banks. 2 Second, during the Amin regime from 1971 to 1979, numerous Asian enterprises and properties were nationalized after the departure of the Asians in 1972. This action was never legalized and was, in principle, reversed in 1982, but, in practice, settlement of the ownership of most of the enterprises and properties, currently under the Departed Asians Property Custodian Board (DAPCB), still remains to be resolved. 3 Third, in 1977, the East African Community collapsed and the Government of Uganda was obliged to establish national parastatals to take over a number of activities, in particular the railways, airlines, and posts and telecommunications. After 1979, there were some limited, ad hoc, divestitures, mainly consisting of the return of a few companies, either fully or partially, to their original owners (reprivatization). These included companies owned by the Metha Group, the Madhvani Group, Lonrho, British American Tobacco, Bata Shoes and Mitchell Cotts. However, many foreigners are awaiting the return of enterprises still under the control of the DAPCB.

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The NRM Government now wishes to reduce the number of enterprises under public sector control through divestment, while retaining those companies of strategic and social importance. This will enable the government to concentrate on managing a few enterprises well for the benefit of the public. It could also result in the divested companies being run more efficiently in the private sector, thus stimulating rapid economic development. However, in a number of cases the most economically sound solution will be for the enterprises to be wound up. With a view to this divestment, the Government of Uganda has recently written a policy paper outlining which parastatals should be considered for privatization. The result is a classification of most of Uganda’s public enterprises into three categories (see Appendix 1). Category A consists of enterprises in which the government currently wishes to retain a 100 per cent shareholding. Category B includes enterprises in which the government wants to retain majority shareholdings, but would like them to be run as joint ventures with the private sector. Category C consists of enterprises where the government wishes to completely divest its interest to the private sector or to wind up the company. The Privatization Conference held in April 1989 confirmed the government’s desire for a ‘mixed economy strategy’ and helped to publicize the government’s support for the divestment of state enterprises. The World Bank’s second Structural Adjustment Programme also supports divestment and made funds available for a Public Enterprises Project. The project was designed to reform Uganda’s parastatal sector through divestiture, rehabilitation, improved supervision and management. In a more general sense, privatization in Uganda is but one step in the difficult journey to economic recovery. The adjustment process may be seen as having two elements. The first element involves macroeconomic policies relating to the budget, balance of payments and the exchange rate, to restore some degree of financial stability to the economy, which, in turn, could provide a positive environment for efficient investment by both public and private sectors. This process is neither swift nor easy, given the physical and institutional deterioration of the economy, resulting in the poor legacy inherited by the current government. Moreover, financial stability is only likely to be sustainable if there is accelerated recovery in the real economy—that is, in the actual production of goods and services. The second element requires that in the short term the existing physical capacity of the economy be put to more effective productive use, including assets currently used ineffectively in the parastatal sector. In the medium term what is required is a lively and efficient programme of investment in additional productive capacity which is more likely to be successfully carried through if substantial new actors can be added to those actively involved in the Ugandan economy. In particular, there will be a need to consciously encourage national and foreign firms capable of taking on large-scale industrial and commercial projects, to fill the gap left by the weakness of the existing parastatal sector and the decimation of many industries in the private sector during the previous two decades. THE THINKING ON PRIVATIZATION There is a general recognition within the government that the parastatal sector is in desperate need of reform and consolidation. Many of the enterprises, now under state control, accidentally became part of the public sector and it is felt that they do not belong there. The rationalization of the parastatal sector must be considered in the context of the government’s mediumterm strategy of restoring the country’s economic capacity and regaining growth momentum. Numerous statements by the government have indicated that a ‘mixed economy’ strategy is to be implemented

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involving a strong public sector, but also an expanding private sector, including national and foreign investors. The government has emphasized that rationalization could strengthen the public sector economy by raising revenue, and, relieving the government from heavy financial and administrative burdens. The Government also sees privatization as a means of restoring production. This would generate foreign exchange and provide much needed goods for the domestic market. In these terms the intention would be to use privatization to promote the restoration of a vigorous private sector in Uganda. Thus, in the medium term, probably the crucial contribution of parastatal rationalization will be to the revitalization of the private sector, as part of the broader process of economic normalization. This could be effected in two ways. The first would be to provide clear signals to the national and international private business community that their active participation would be welcomed and second, to provide specific opportunities for investors to engage in successful ventures whereby the viability and attractiveness of more extended private activity would be clearly demonstrated. Each of these motives for privatizing state enterprises would result in different divestment procedures with different time scales. If the government were to see the privatization programme mainly as a means of raising revenue, some of its more profitable enterprises need to be sold. Profitable enterprises are more immediately attractive to buyers and therefore could be sold in the shorter term, in comparison to enterprises in need of rehabilitation or restructuring. Some of these businesses might also be the best candidates for sale, so as to encourage a more vigorous private sector. In so far as the encouragement of new private economic actors is seen as the prime motivation, the criteria applied to the divestiture design will be somewhat different from maximizing immediate government revenues and linked with promoting future economic activity (which, in turn, may indirectly contribute to an increase in the government’s revenue). Revitalizing the private sector The immediate economic task facing the government is the restoration of the productive base of the economy. This suggests the need to divest two different sorts of ventures. First, there are clearly going concerns, which, under improved management, and with increased working capital and modest rehabilitation, could be expected to make a significant contribution to output and solve the balance of payments problems and at the same time provide attractive opportunities for private business. Their successful divestment will also provide a clear signal that the Government is serious about the encouragement of an active private sector in its mixed-economy strategy. The second category of ventures are those firms currently in a severely rundown condition which have good medium-term prospects (for example, cement). This category is more problematic, as it could require identification of potential investors willing to commit substantial funds in new investment with a view to realizing a reasonable return over the medium or long term. It should be noted that there are a variety of other modes through which to tap the contribution of the private sector. Besides actual changes in ownership through employee buy-outs, complete sales or joint ventures, there may also be increased scope in some instances for improved performance by private management of assets continuing under public ownership. In this regard, one possibility would be to promote a new private sector venture to which the management of some state enterprises could be contracted. The economic and financial return to a divestment programme, primarily motivated by the objective to revitalize private economic activity, should be seen as an increase in output and in the inflow of foreign exchange and future government revenue, rather than as immediate proceeds from the sale of assets.

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Raising revenue The government’s motive for selling state enterprises in order to raise revenue is a common aim of any privatization programme. Nevertheless, in Uganda the sale of companies to the private sector is unlikely to raise large sums of revenue. Many of the enterprises initially identified as possible candidates for privatization are no more than shell companies or are so badly run down that they are barely operating. Furthermore, some of the companies to be divested will be returned to their former owners, who are not prepared to pay for enterprises they originally owned and for which they received no compensation. Thus, if the government were to raise revenue through privatization, it has to sell some of its more profitable enterprises. Furthermore, profitable companies tend not to need state investment to make them ready for privatization, since they are immediately attractive to private sector buyers. The government is still considering which companies should be for sale, if the aim to raise revenue is to become more realistic. However, it must be appreciated that given the current state of Uganda’s public sector, a privatization programme of any form will not earn huge sums of money at the moment. Relieving the financial and administrative burden Another significant government objective, underlying the privatization programme in Uganda, is to relieve the public sector of its financial and administrative burdens. It was never the intention of the government to own and run small businesses, and it is difficult for the government to successfully manage risky commercial operations. The government does not have the resources and its bureaucracy is not structured to carry out such functions. In relation to some of the large-scale enterprises, the issues involved are more complicated. In the early years of the Uganda Development Corporation, its main function was to promote industrial development with firms to be floated off as private ventures as they matured. The current intentions of the government are less clear. The government’s preliminary identification of its divestiture priorities implies an intention to hold on to some of the larger enterprises which are potentially profitable concerns. The most obvious candidates for divestiture have been identified among those companies which have either been run down or left to decline, some of which have become nothing more than a drain on the limited financial and human resources. However, the government would not be able to mount a successful divestiture initiative based mainly on run-down enterprises. There will be two sides to the privatization: the seller’s and the buyer’s viewpoints. For Uganda’s privatization exercise to be carried out successfully, possible sales will have to satisfy two different sets of criteria: 1 those of the government reflecting short- and medium-term economic policy objectives; and 2 the profitability criteria of potential private investors, both foreign and Ugandan. Although the government is keen to divest unprofitable enterprises that are either dormant or operating at capacities too low to realize a profit, there will be few buyers for such companies as they currently stand. Many of these require large capital investments to become operational. Furthermore, some are encumbered with large external debts, the shilling value of which is building up as the Ugandan shilling is devalued. In the immediate term it might be possible to interest the private sector in rehabilitation and management contracts in return for a minority equity investment. This might be plausible in sectors such as cement and lime which have a large potential domestic market and are essential inputs in the construction industry. Cement is also a product with a high level of natural protection. However, in most cases the private sector will wait to see how the Ugandan economy develops before investing in companies which require large-scale

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rehabilitation. Therefore, many companies will need to be restructured in order to make them commercially viable and attractive to buyers. An example here is in the agricultural parastatals where the Coffee Marketing Board has been undergoing a restructuring exercise to make it competitive and viable as a business concern, before selling shares out to the public. Alternatively, some companies in less viable sectors will need to be wound up or given away. A possible strategy The parastatal rationalization is part of a challenging structural adjustment programme. In some cases, the existing management would be well qualified to take over full control of the enterprises and could be expected, under the more flexible conditions of private operation, to improve performance and provide a platform for a more vigorous development of the national private sector. In such cases, possible mechanisms for management buy-outs, given the Ugandan financial structure, are under consideration. Another possibility the government is considering is to attract outside buyers, both national and international. It is hoped that the recently-passed investment code will provide a good climate for this. International investment would be particularly appropriate where it is likely to provide good access to knowhow or markets, and where it might act as a first step in encouraging international enterprises to play a more active role in the future development of the Ugandan economy. In other cases, where there is no particular advantage in involving an international concern, methods of involving local buyers will be developed. In the longer term, once the macroeconomic environment has become more stable and businessmen become less cautious, it will be possible to divest some of the more risky enterprises which are in need of better management and larger capital investments. Meanwhile, some of these enterprises in the more viable sectors of the economy, such as cement and sugar, will be rehabilitated and after the government has taken final decisions, these will be managed by the private sector under a contract or lease arrangement. A good example, in the tourism industry, is the Sheraton Hotel in Kampala. It is hoped that other international firms will be willing to take a longer-term view of the commercial opportunities of gaining access to abundant raw material and to the local market, and make an investment commitment at this stage. ACTIONS IN PRIVATIZATION The divestiture design study In May 1989, the merchant bankers, J.Henry Schroder Wagg & Co. Limited, and the accounting firm, Deloitte Haskins & Sells, were appointed by the Ugandan Ministry of Finance to undertake a divestiture design study. The aims of the study were to advise the government on the feasibility of a privatization programme in Uganda. In accordance with the terms of reference, this included an assessment of some of the key constraints which the government would face when implementing a privatization programme in Uganda, along with recommendations as to how they might be overcome. They also identified, through screening and detailed analysis, a short list of privatization candidates. Their overall conclusions suggested that there were a significant number of companies which were suitable for privatization in Uganda, and in which many buyers would show a lot of interest. The study began with a thorough analysis of the government’s objectives for the divestment of enterprises to the private sector. The government has emphasized that rationalization of the state sector could revitalize the private sector; relieve the government from much financial and administrative burden;

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and raise revenue. It is believed that in the short term the first two aims are more realistic than the last, given the generally poor state of Uganda’s public sector enterprises. Company screening Taking into account the government’s objectives a pre-screening exercise, of 116 state-owned companies, was used to select enterprises representing the most promising prospects for short-term sale (see Appendix 2). Companies were classified as unsuitable candidates for immediate privatization for the following reasons: (a) they fail to satisfy the government’s privatization objectives; (b) the government has identified them as performing a strategically-or socially-important function and would like to keep them in the public sector: (c) they have ownership problems; (d) they are already majority-owned by the private sector; (e) they have little commercial potential in either the public or private sector; (f) they need substantial capital investment to become commercially viable. Following this initial screening, twenty companies were selected for detailed analysis. In making this selection, the consultants were asked to ignore the ownership issue since the government was attempting to release enterprises from the DAPCB and did not wish this to be a hindrance to a privatization programme. Of these twenty companies suggested to the government, fifteen companies were approved for further evaluation. Analysis of enterprises A comprehensive review took place in respect of each of the fifteen companies selected for further analysis. This included an investigation of each company’s background, along with a review and analysis of its financial and operational data (see Appendix 2). The analysis of the companies highlighted several common characteristics and problems. Many of the enterprises reviewed were making profits despite operating at low capacities. Low operational capacities were not due to an absence of a market for the goods or services produced, but were mainly due to the poor quality of the infrastructure, a lack of working capital to purchase inputs and a lack of foreign exchange to purchase capital equipment for rehabilitation. Finally, several of the companies investigated have large outstanding loans, which could act as a deterrent to privatization unless the government is prepared to either write off or take on some of the loans. Buyer interest Each of the fifteen companies, subjected to detailed review, was classified into a divestment category (see Appendix 3). This resulted in a short list of eight candidates recommended for immediate divestment. There is much interest in the possible divestment of these companies, both locally and from abroad. The government is keen for Ugandans to be the main purchasers of any enterprises to be privatized. However, lack of resources, both local funds and foreign exchange, are perceived to be the main constraints, as far as Ugandan businessmen are concerned.

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The divestiture design study recommended that investment and rehabilitation funds be set up to help finance equity purchases and to lend foreign exchange to finance any necessary rehabilitation. In general, foreign investors have, hitherto, been uninterested in investing new hard currency in Uganda, with the exception of existing foreign shareholders in some of the enterprises who are willing to consider an increase in their holdings. The new investment code will also be beneficial in outlining the government’s current attitude towards private investments, and will, hopefully, encourage new investors from abroad, since it clarifies the situation with dividend remittances and company taxation policies. Other potential investors include foreign holders of company debt, who are interested in converting those debts into equity shareholdings, and the original companies’ owners, who are keen either to repossess their companies or to receive some form of compensation. The final group of possible investors are company employees and managers who, in a few cases, that is, small workshops, would be the ideal buyers. Employee buy-outs would also have the additional benefit of diversifying share ownership in Uganda. Classification of enterprises Finally, each of the enterprises regarded as suitable for short term divestment has been classified according to a recommended method of sale (see Appendix 4). Privatization and rehabilitation funds Several entrepreneurs felt that they might be able to raise enough Ugandan shillings, but were concerned that refurbishment would be a problem due to the scarcity of foreign exchange in Uganda. Some of the smaller Uganda entrepreneurs and company employees will also need assistance financing equity purchases. The divestiture design study recommended that, if the government was serious about divesting industrial enterprises to Ugandans, funding mechanisms must be designed to facilitate and encourage this process. It was also proposed that three funds should be set up and administered by the Privatization Task Force: 1 Two Privatization Investment Funds: (a) to purchase equity directly in the companies concerned, and (b) to lend Ugandan shillings to local entrepreneurs (especially employees) who lack the financial resources to fund fully the purchase of equity in companies to be privatized; and 2 Rehabilitation Loan Fund to ensure that foreign exchange was available to the new private owners, to rehabilitate the companies. Privatization investment funds The aim of the Privatization Investment Fund (a Loan Fund and an Equity Fund) is to facilitate Ugandan Shilling equity investments in privatized enterprises. The Loan Fund will be a source of Ugandan shillings either lent or donated by international organizations. Ugandan entrepreneurs and company employees wishing to hold equity investments in a company to be privatized can apply to the Privatization Task Force to borrow shillings from this fund to help finance their investments.

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Funds will only be lent to individuals who can prove that funding is unavailable from alternative sources. With the exception of employees, individuals would be unable to borrow more than, say, half of the total value of their investment from the Loan Fund and must either use their own savings or borrow from a commercial bank to finance the other half of their investment. The fund will only lend to individuals who can prove that they have the necessary management expertise to run the company concerned. They will need to submit a long-term business plan to the Fund containing cash-flow projections, including costs for any rehabilitation required. The Loan Fund will hold, as security, any shares purchased and will gradually release them to the borrower as the loan is repaid. A percentage of company profits will be dedicated to repaying loans. The Equity Fund will consist of Ugandan shillings, held on behalf of investors, to invest directly in a selection of privatized companies. The Fund will be professionally managed and will purchase shares in companies for its investors. The Fund will hold the companies’ shares and pass on any dividend payment, minus a management fee, to the original investors. In order to stimulate investors in the Equity Fund, the government might consider providing investors with incentives: for example, a lower capital gains tax, as provided for in the investment code. It is expected that development finance institutions might be interested in investing in such a fund, especially if it can be used as a vehicle for converting government debt, they either hold or purchase, into equity which the fund can invest in companies. Other investors, for example, some of the multinational companies who are having problems in remitting their dividends, might also be interested in investing Ugandan shillings in the Equity Fund. It might be possible for them to invest their Ugandan shilling dividends in the fund at the time they are declared, and then to remit them two to three years later through the sale of their shares to other company shareholders or to new investors. The government will guarantee that foreign currency would be made available at this time in exchange for the Ugandan shillings, in order that funds could then be remitted (this is why it has liberalized the sale of foreign currencies by allowing the operation of the Forex Bureaux). An investment of this nature could provide holders of Ugandan shillings with a means of maintaining and possibly increasing their real value. Once the companies, in which the Equity Fund holds investments, reach their potential, it will be easier for investors to liquidate their holdings. New investors might also be encouraged to put money in the fund. Furthermore, investors such as insurance companies or pension funds who, as previously mentioned, are unlikely to contribute much at this time, may be in a better position to invest in the future. It is also possible that the Equity Fund could be developed into an Investment Fund or Unit Trust. Rehabilitation loan fund Potential purchasers of companies to be privatized must submit to the Privatization Task Force, as part of their business plans, estimates for rehabilitation costs. The foreign exchange costs of any required equipment or spare parts must be demonstrated. It is recommended that the Rehabilitation Loan Fund acts as a source of foreign exchange purely for the new private sector owners of companies purchased from the government. It has been suggested by donor organizations that foreign exchange could be lent to the government for such a fund. The government has yet to negotiate with donors their exact requirements with regard to the amount and length of the loan. In the first year of the privatization programme, it is envisaged that up to eight companies might be divested. The Privatization Task Force will be responsible for the evaluation of entrepreneurs’ rehabilitation plans for the companies to be privatized and will lend up to that sum, via local banks, to the new private sector owners of the companies concerned in return for their new assets as security.

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Since it is important that the Rehabilitation Loan Fund should be ‘revolving’ and has a continuous supply of foreign exchange for the rehabilitation of privatized companies, the ultimate borrowers will take on the foreign exchange risk and either pay back the loan directly in foreign exchange (if the company has export earnings) or in Ugandan shillings, at the exchange rate of the day for non-export companies. Ugandan shilling repayments will need to be exchanged for hard currency at the Bank of Uganda, or the Forex Bureaux, and then deposited in the Fund’s external account. The fund shall then receive priority at the Bank of Uganda for converting any Ugandan shillings to foreign exchange in order that funds can be re-lent in foreign exchange. Alternatively, if any aid organization will be bringing hard currency into Uganda to convert into local shillings to fund a local project, it might be possible for the foreign exchange to be put into the fund in exchange for Ugandan shillings. It was recommended that the Rehabilitation Loan Fund should be administered by the Privatization Task Force, which would recruit and train new staff in project evaluation. The Public Enterprises Secretariat was set up in late 1989, and a co-ordinator for the privatization exercise has since been hired. The Secretariat is independent of all government bodies, so as to have the trust of the private sector and of the international agencies. PROBLEMS FACING THE PRIVATIZATION PROGRAMME During the detailed company reviews, a study was also carried out to investigate the main economic, financial and commercial issues and constraints that are expected to affect any privatization programme in Uganda. Probably the most important are the financial constraints. Of particular concern was the shortage of private Ugandan equity funds, due to the absence of a capital market in Uganda and limited liquidity in the banking sector. There was also found to be a general shortage of foreign exchange to purchase inputs and to rehabilitate some of the parastatal bodies. Among the most important government-related constraints are: a delay in the remittance of dividends; a contentious and unpredictable method of assessment of company taxation and the prolonged settlement of the DAPCB ownership cases. The latter will need to be dealt with urgently if a privatization programme is to be implemented in Uganda. There are, also, a number of key aspects regarding the actual privatization transaction itself. It is possible that the buyer’s estimated value of the business will be less than a professional valuation based on revalued assets. In some cases, for privatization to proceed, the government might need to either assume debts or write them off. Accounting practices will also need to be standardized if buyers and sellers are to negotiate on the basis of an accepted set of financial records and current statements. Furthermore, the lack of long-term financing from the commercial banking sector and other unforeseen difficulties may impede the privatization process. Need for expansion of Ugandan capital markets At present non-professional investors and individuals represent a large source of untapped funds for equity investments in Uganda, since there are few capital market institutions or instruments in Uganda. It is uncommon for individuals to hold shares in Ugandan companies. There are scarcely any opportunities to purchase shares in such companies and moreover it would be extremely difficult to liquidate or sell any such investment. In addition, under the prevailing environment of high inflation, negative real interest rates and the devaluation of the Ugandan shilling, there are no incentives for individuals to hold local currency savings.

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To the extent people accumulate savings, these are invested in real estate, trade goods or in foreign exchange, all of which hold their value. Finally, there are virtually no institutional investors in Uganda. Institutions such as pension funds and insurance companies, which play an important role in equity investment elsewhere, are virtually nonexistent as equity investors in Ugandan companies. Because of the financial situation previously referred to, the real value of most funds has been reduced drastically and any funds they do hold tend to be invested in property. Moreover, just as for individual investors, there are no means for institutions to invest in equities even if they wish to do so. Overall interest in companies In general there is a great deal of private sector interest and support for privatization in Uganda, although there is some scepticism concerning whether the government will actually divest its companies to the private sector. Many businessmen are keen to expand their operations, but would prefer to start new business from scratch to avoid any political problems associated with privatization. However, there is much interest in purchasing government enterprises, especially on the part of businessmen who already own companies operating in the same or related sectors. Ugandan investment could be stimulated if certain constraints are resolved. It is necessary to take into consideration the Ugandan private sector’s reactions to the idea of investing in government enterprises, since these represent constraints that need to be dealt with in the execution of a successful privatization programme: 1 Ideally the government should not be a shareholder There is much concern as to whether the government would maintain its own holdings in the enterprises to be privatized. Businessmen express reluctance to purchase shareholdings in companies where the government either has the majority holding or has management control. A significant proportion of Ugandan businessmen would only consider the government maintaining a small shareholding in companies on the understanding that the government will be a passive shareholder and will not interfere with the management of the enterprises. About 50 per cent of the businessmen interviewed said they would not consider investing in a company where the government was a shareholder. Some of the fears about the government as a shareholder (even as a passive investor) are: (a) The government can drain a company of its profits and therefore make a company commercially unviable; (b) The government interferes with management and causes companies to fail; (c) Confidentiality is at stake if the government is a shareholder; (d) Political beneficiaries might interfere with the management of a company, making it uncommercial; (e) Corruption could become a problem. 2 Ugandan private sector prefers joint ventures with foreign partners to joint ventures with other Ugandans in the private sector Joint ventures with private sector partners are only viewed favourably if the partner has something to add in terms of technical expertise and financing (that is, foreign partners). There is little interest in joint ventures with other Ugandans due to lack of confidence, which is an inevitable outcome after

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twenty years of civil war. Although the situation is improving, in general the Ugandan private sector would either prefer to purchase a company outright, possibly with members of one’s own family, or to have a joint venture with a foreign partner. Foreign partners are viewed positively because of their technical and management expertise and access to foreign exchange. 3 Management and employee shareholdings are viewed with scepticism The Ugandan private sector is sceptical about owning companies where the managers and employees have shareholdings. There is concern that if employees owned shares in a company, it would be difficult to make decisions since all shareholders would want to be involved and thus efficiency would be reduced. There is also a fear that it would be impossible to sack employees who are shareholders. Much of the concern over employee shareholdings might be due to the fact that Ugandans are unfamiliar with employee and management buy-outs. To sum up: The three biggest constraints, as perceived by the Ugandan private sector, to purchasing or investing in government enterprises are believed to be: (a) the government’s interference in the companies; (b) lack of management expertise; and (c) limited availability of foreign exchange for company rehabilitation. Furthermore, it is widely felt that the government is charging its companies excessive management fees; for example, the Uganda Development Corporation charges 4 per cent on gross sales. The non-availability of sufficient local management expertise is another important issue. Ugandan purchasers must have access to foreign exchange to rehabilitate their companies. There is a general concern that companies might be sold to political beneficiaries, who might milk the companies rather than invest in them to increase their capacity and profitability. Great care will need to be taken in selecting the managers of any privatized company in order to ensure that it is run with efficiency. The government will also have to be careful not to select the highest bidder, unless he is well qualified to manage the company. The question of valuation is a key concern in the privatization transaction, as potential buyers will not be prepared to pay asset replacement cost for companies to be sold. Most of the companies on the privatization short list fall under the DAPCB. This is naturally of concern to potential purchasers who fear they might purchase companies which are not transferred to them legally or which may be expropriated once again. Any claims from previous owners must be fully resolved before a company can be sold to a new owner. Legislation will then need to be introduced to fully protect the new purchasers of companies which were previously under the DAPCB. CONCLUSION The privatization programme in Uganda will benefit the economy through the revitalization of the private sector. The more successful or potentially successful companies will be divested first to give positive signals to the private sector that Uganda is serious about privatization. Meanwhile other companies will be restructured for divestment in the long run. Privatization candidates will receive priority at the DAPCB, in order that ownership disputes can be quickly resolved and the enterprises released for sale. Investment and Rehabilitation Funds are in the process of being set up to stimulate Ugandan investors in the privatization programme. Policies concerning dividend remittances and taxation have been clarified in the investment code, so as to stimulate foreign investment in Uganda.

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It has been decided to begin divestments immediately, and to deal with any problems as they arise, rather than to delay the privatization programme until all constraints have been resolved. Privatization in Uganda has come to stay. The public sector and the private sector should get together to ensure that the whole exercise is a great success. APPENDIX 1 List of public enterprises in Uganda (screened for privatization) KEY: Companies with * fall under the Discharged Asians’ Property Custodian Board (DAPCB). A, B, or C indicates the government’s categorization of enterprises. X indicates companies not on the original list, but included in the Divestiture Design Study. 1 UNCLASSIFIED X General Equipments Ltd X International TV Sales X Mulux Ltd X National Industrial Credit (EA) Ltd X Uganda Books Supply Ltd. 2 NON-OPERATIONAL COMPANIES C Agro-Chemicals Limited X Brooke Bond (U) Ltd C* Intra-African Trading Company B Lango Development Corporation C* R.O.Hamilton Ltd B TUFMAC C* Ugadev Properties A Uganda Tea Authority Uganda Toni Services 3 STRATEGIC AND SOCIAL IMPORTANCE STRATEGIC B* Agip (U) Ltd A Bank of Uganda A National Water & Sewerage Corporation A* New Vision B* Shell (U) Ltd B* Total (U) Ltd A Uganda Airlines A Uganda Electricity Board A Uganda National Parks A Uganda Posts and Telecommunications A Uganda Railways Corporation SOCIAL/DEVELOPMENT (a) Agricultural Marketing Boards A Coffee Marketing Board Ltd

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A A A A (b) B A B A A (c) A* A A* A B* A A* 4 C* B* C* 5 X X X X X X X X X B* B* B* B* B* X X B* 6 C*

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Lint Marketing Board Produce Marketing Board Uganda Dairy Corporation Uganda Tea Growers’ Association Finance Housing Finance Company of Uganda National Insurance Company Ugadev Bank Uganda Commercial Bank Uganda Development Bank Other Foods and Beverages National Housing & Construction Corporation People’s Transport Company Ltd Toro Development Corporation Uganda Cranes Industries Ltd Uganda Development Corporation Uganda Transport Company OWNERSHIP DISPUTES: NEC INTEREST Mukisa Foods Uganda Blanket Manufacturers Uganda Rayon Textile Industry Ltd PRIVA TE SECTOR MANAGEMENT PRIVATE SECTOR MAJORITY HOLDING Associated Match Company Ltd Bank of Baroda (U) Ltd Barclays Bank (U) Ltd British American Tobacco Chillington Tool Grindlays Bank (U) Ltd Uganda American Insurance Corporation Uganda Bags & Hessian Mills Ltd Uganda Clays Ltd PRIVATE SECTOR 49% HOLDING African Textile Mill—Mbale Cable Corporation East African Steel Corporation Kakira Sugar Works Lugazi Sugar Works (SCOUL) Toro Mityana Tea Company Ltd Uganda Tea Corporation UGMA Engineering Corporation POTENTIAL PRIVATE SECTOR INTEREST TO MAJOR CAPITAL INVESTMENT Itama Mines

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B A B B* C* B B B A X 7 C B C* C* C* C* B* C* C* C* B* X A X X A* A* X B* X B* C* X A B* C B C* X B* C* B* A

Kilembe Mines Lake Katwe project National Sugar Works, Kinyala Nyanza Textiles Industry (NYTIL) Sukulu Mines Tororo Chemical & Fertilizer Ltd (TICAFF) Uganda Cement Industry Ltd Uganda Livestock Industries Uganda Spinning Mill, Lira Wolfram Investments Ltd POTENTIAL PRIVA TE SECTOR INTEREST IN SHORT TERM African Ceramics Co. Ltd Agricultural Enterprises Ltd Associated Paper Industries Ltd Blenders Uganda Ltd Domestic Appliances Dunlop (U) Ltd East African Distilleries ECTA (U) Ltd General Merchandise Ltd Gomba Motors Jubilee Ice and Soda Works Ltd Kampala International Conference Centre Kampala International Hotel Corporation Kibimba Rice Company Ltd Kiira Saw Mills & Plywood Industry Lake Victoria Bottling Company Nile Breweries Nile Hotel PAPCO Paramount Manufacturers Printpak (U) Ltd Republic Motors SAIMMCO Transocean (U) Ltd TUMPECO Uganda Air Cargo Ltd Uganda Consolidated Properties Uganda Crane Estates Uganda Fisheries Industry Ltd Uganda Fishnet Manufacturers Ltd Uganda Garments Industry Ltd Uganda Grain Milling Company Ltd Uganda Hardwares Ltd

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B* X C B B A A B 8 A A* C* X B C C* B* B* A* A* A B* B* C* B* B* X B B

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Uganda Hotels Ltd Uganda House (Uganda High Commission, London) Uganda Industrial Machinery Ltd Uganda Leather and Tanning Industry Ltd Uganda Meat Packers Uganda Motors Ltd Uganda Pharmaceuticals Ltd United Garments Industries Ltd COMPANIES SELECTED FOR DETAILED ANALYSIS Uganda Airlines Peoples Transport Company Mukisa Foods Toro Mityana Tea Company Ltd Uganda Cement African Ceramics Co. Ltd Blenders Uganda Ltd East African Distilleries Jubilee Ice and Soda Works Ltd Lake Victoria Bottling Company Nile Breweries Transocean (U) Ltd Printpak (U) Ltd Uganda Fishnet Manufacturers Ltd United Garments Industry Limited Uganda Grain Milling Company Ltd Uganda Hotels Ltd Uganda House (Uganda High Commission, London) Uganda Leather and Tanning Industry Ltd Uganda Garments Industry Ltd APPENDIX 2

APPENDIX 3 Divestiture classification Immediate divestment Blenders Uganda Ltd* East African Distilleries Ltd Fairway Hotel*

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Figure 19A.1 Screening of companies

Jubilee Ice and Soda Works Ltd* Toro Mityana Tea Company Ltd Uganda Fishnet Manufacturers Ltd* Uganda Garments (1973) Ltd* Uganda Grain Milling Co. Ltd*

Financial restructuring African Ceramics Company Ltd Printpak (Uganda) Ltd* United Garments Industry Ltd

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Long-term stabilization Uganda Airlines Uganda Leather and Tanning Industry Ltd (ULATI) Liquidation or total restructuring Uganda Cement Industry Ltd (Tororo) Retention People’s Transport Company Ltd* *Ownership uncertainties (DAPCB properties) APPENDIX 4 Table 19A.1 Recommended privatization method Company

Divestiture locals

Blenders X(49%) Uganda East African Distilleries Fairway Hotel Jubilee Ice & X Soda Toro & Mityana Tea Company Uganda Fishnet Uganda Garments (1973) Uganda Grain X and Milling

to Divestiture to Return shareholders original who have owners preemptive rights

to Management/ Management/ employee buy- employee out shareholding

Debt: equity conversion

X(51%) X

X X

X

X

X X

X

X

20 Privatization in Israel Shlomo Eckslein

Privatization in Israel must be evaluated against the background of two major factors: the impact of the public sector on the economic system and the poor performance of the economy over the last decade. The drive for privatization is based on the thesis that these two are related: transforming the first is a necessary condition for solving the problems related to the second. In the structural transformation called for, divesting state-owned enterprises (SOEs) is considered central, and most recent debates about privatization circle around the issues related to the divestiture of SOEs. This paper addresses these issues, after briefly reviewing the developments that led to the present situation. In the first section we assess the role of the public sector in general and of SOEs in particular. The plea for and record of privatization is examined in the second section, against the current economic challenge faced by Israel. The third section is devoted to some of the major issues raised by the recent sale of SOEs to domestic and foreign investors. THE ROLE OF THE STATE IN THE ISRAELI ECONOMY The macro impact of the public sector The Israeli economy is unique with regard to the structure of economic institutions in the public sector and their impact on the economic system. Two major partners make up the public sector in the economic sphere: the state and the Histadrut (Labour Union). Each contributes about 20 per cent to gross national product (GNP), with the private sector making up the remaining 60 per cent. Thus contributions of the two “non-private” sectors to gross product were undoubtedly higher than in any of the Western industrialized economies’ (Barkai 1989b). This structure is not the result of political turnabout or a nationalization drive. Rather, it evolved almost naturally from the socio-economic conditions of the pre-state period, during the early part of the century. Almost all the agricultural settlements were initially organized by their founders along voluntary collective and co-operative lines (kibbutz and moshav), forming national federations along party or sector lines and eventually joining the nation-wide Labour Union. Co-operative marketing of inputs (Hamashbir) and products (Tnuva), and regional processing co-operatives followed naturally. Local credit co-ops grew into the Labour Bank (Bank Hapoalim), which is today one of the country’s three leading commercial banks. Construction and manufacturing enterprises, initially set up by the new immigrants to provide jobs to local groups, gradually grew into major industrial holdings owned by the Histadrut. Similarly, local health clinics grew into a mutual health fund (Kupat Cholim) to which 80 per cent of all wage-earners were eventually affiliated, and pension funds were set up to guarantee members’ retirement rights.

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When the state was created in 1948 the Histadrut had established itself as the single most powerful economic agent, in ‘its dual role— that of a labour union and that of a labour economy promoting and running production enterprises’ (Barkai 1989a).1 It has been argued that the State of Israel was created by its co-operative labour movement, rather than the other way round as in most countries. The relative weight of the Histadrut sector has since declined considerably. Several of its major constituents have recently experienced severe financial crises from which they have yet to recover. But even today it has an overwhelming weight in the economy which many observers believe to be excessive. The gradual divestiture of Israel’s ‘labour economy’ is no doubt a basic component of privatizaton in its broadest sense, but is still in its perception stage and is not treated in this paper. Let us therefore turn to the ‘state economy’, where privatization is already well under way. In 1948, the newly-established state had to take over several functions inherited from the British Mandatory regime, such as the provision of electric power, the railway system, a refinery complex, and an incipient potash industry. Within a short time new needs emerged which had to be satisfied by an infant public administration: sea and air communications, water for irrigation, housing for immigration, and infrastructure for industry and commerce. No private entrepreneurs of capital were on hand at the time and parastate enterprises were set up to fill the gap. They were headed by young energetic leaders whose enthusiasm and idealism often made up for their blatant lack of professional training. This is the origin of Israel’s SOEs, which at present make up about 10 per cent of GNP. Privatization in Israel centres around the divestiture of SOEs, as described and analysed in this paper. SOEs were established to meet specific needs. But at an ideological level, as well, the founders of the state envisioned, from the outset, a welfare economy intended to provide a broad array of public services. The ratio of expenditures on public civil services to GNP has not changed since statehood to the present, oscillating around 20 per cent throughout the entire period. Education and health account for one-third, each. The share in employment has risen, however, from 20 per cent in 1960 to almost 30 per cent in the mid-1980s, all of it in education and health services, due to rising standards and the incorporation of female labour (Ofer 1986). On top of that, defence expenditures have risen sharply over the same period, from 10 per cent of GNP in the early 1960s to 25 per cent in the mid-1980s, reflecting the arms race in the region and the increasing cost of modern weapons. Another aspect of state interference with free market operation is the heavy weight of public transfer payment. Gross taxation has increased from 28 per cent to almost 50 per cent over the last three decades, whereas net taxes declined from 20 per cent to about 15 per cent (Ofer 1986). The difference is made up of subsidies to consumption and investment and other transfers, affecting the price system in many sectors of the economy. The impact of the public sector on Israel’s economy is not confined to its share in property rights or to its direct contribution to GNP. Of no less importance (some argue, of much more) is bureaucratic intervention in the operation of private business firms: starting with an endless list of permits and approvals required for the establishment of a new business through regulations regarding eligibility for support provided to preferred infant industries, foreign exchange regulations and other ‘red tape’ obstacles. This, too, is a natural outcome of excessive paternalism and a Utopian reliance on ‘popular socialism’, characteristic of, and perhaps justified during, the early statehood phase. As time went by, young leaders changed from public servants into experienced private entrepreneurs, while underpaid and often frustrated bureaucrats took their place. The principal-agent dilemma sharpened as ideological acquiescence dissipated, objectives grew further apart and asymmetry in information and preparation increased. In short, privatization of the economy at large involves privatization of the private sector as much as privatization of the public sector.2

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State-owned enterprises In order to cope with many economic functions for which no ready investors or adequate institutions existed, SOEs were established following the foundation of the state. The SOE Authority, founded in 1958 within the Treasury Department, is responsible for supervising and monitoring the operation of all SOEs, and presently of selling them. The underlying principle is stipulated in a special law governing their operation: ‘An SOE will function by the same business criteria which guide a private firm’. The legislature was aware of the fact that this creates an inherent conflict since SOEs were established in the first place in order to pursue certain national or social goals, such as the development of infrastructure, encouraging certain activities or geographic regions, and in general fostering economic growth. The law tackles this conflict by requiring the board of directors to act solely in the best business interests of the enterprise. When the ministers in charge choose to serve a competing ‘national goal’, they may instruct the board to do so, only after securing approval for their instruction from the Cabinet, usually also from the parliamentary Knesset Finance Committee. By 1970 a total of 104 commercial SOEs had been formed,3 spread over all major industries (Table 20.1). Two major groups can be distinguished: the largest group, by number of firms, is made up of 67 SOEs in manufacturing (25), construction (15), banking (14) and investment (13). They were established in the 1950s and early 1960s to encourage and support investments needed to provide housing and employment to the new immigrants. Most of these firms are relatively small, employing 500 workers or less in the manufacturing firms and earmarked for specific activities, like labour-intensive textile industries in development towns, construction of housing and infrastructure, and small banks for agriculture, mortgage loans, small industries, and the like. As a rule they were joint holdings, with the government in control of 50–60 per cent of equity, private owners controlling the rest and usually managing the enterprise. One exception was a 20 per cent share in the Histadrut-owned Koor holding company which then employed 16, 000 workers in over a dozen construction and manufacturing firms. The second group comprises twelve larger enterprises in three industries: (1) public utilities inherited from the British Mandate; (2) the two leading transportation lines (air and sea) that were founded with the state in view of Israel’s isolation from ground transportation; (3) an oil refinery and several smaller mining plants. In these SOEs the Table 20.1 State-owned enterprises (SOEs) in Israel (1969, 1989) Industry

1969

1989

Number of enter- Government Distribution of Number of enter- Government Distribution of prises share in equity gov’t equity (%) prises share in equity gov’t equity (%) (%) (%) Public utilities 4 Communication 5 and transportation Mining 3 Energy 5 Defence1 – Manufacturing 25 Banking and 192 commerce

78.5 99.3

15.4 12.3

6 11

96.3 99.2

44.0 19.1

82.9 72.0 – 50.5 55.8

12.7 10.4 – 8.4 26.7

15 13 8 5 33

100.0 83.4 99.0

12.7 8.8 7.5

62.7

4.8

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PRIVATIZATION IN ISRAEL

Industry

1969

1989

Number of enter- Government Distribution of Number of enter- Government Distribution of prises share in equity gov’t equity (%) prises share in equity gov’t equity (%) (%) (%) Agriculture 4 86.2 0.3 6 91.3 0.6 Construction 15 53.7 3.8 5 97.0 1.5 Tourism 10 62.1 2.1 3 100.0 0.4 Investment, 13 59.2 7.9 6 68.3 0.7 miscel. Total 103 66.4 100.0 83 92.0 100.0 commercial Non-commercial 51 – – 76 – – or inactive Total 154 159 Source: State Enterprise Authority, Annual Reports for 1969 and 1989 (in Hebrew), Jerusalem, 1970, 1990 Notes: 1 State defence industries were not registered as SOEs in 1970; some have since been transferred into SOEs, others are still in process. 2 Including fourteen commercial banks, most of them small and specialized. The leading banks ‘nationalized’ in 1983 (see text) are not included in the 1989 figure 3 Equity data for 1989 could not be separated between manufacturing and banking, due to revised classifications. Both categories together comprised only 4.8% of government equity in SOEs

government owned 80–100 per cent to begin with, due to their strategic importance and lack of private capital, Over the next two decades SOEs underwent several changes (see Table 20.1). The number of commercial SOEs declined from 103 to 83 with all the decline occurring in the first group.4 The state sold its share or dissolved thirty out of forty manufacturing and construction SOEs, including its share in Koor. Almost all the government-owned banking and investment firms (twenty-seven in 1970) were sold, many of them to the major commercial banks. In contrast, the second group of SOEs developed over the same period. The number of major SOEs did not rise, but they grew in size, capital and labour. As a result of the contraction of the first group and the growth of the second, the share of government equity in all SOEs grew from 66 per cent in 1970 to 92 per cent in 1989, maintaining full control over the large enterprises for which, until recently, state ownership was believed to be the optimal solution. These figures do not include the four major commercial banks, formally owned by the state since 1983.5 This shift of property rights is unanimously considered as a temporary condition and did not affect their management or adminstration. These banks are not considered SOEs, and are not covered in this paper. In all, the eighty-three commercial SOEs registered in 1989 were made up of forty fully-owned enterprises, thirty-five subsidiaries of the former and eight mixed enterprises.6 The book value of total assets in all SOEs amounted to US$17 billion, and the state’s share in equity reached close to US$5 billion. Total revenues reached US$8 billion, of which US$2.2 billion were generated by exports. Some 62,000 were employed in these enterprises (see Table 20.2). The economic weight of all SOEs in the Israeli economy varies according to the criterion used. They employ about 5 per cent of the total labour force, compared to 7–8 per cent in the UK and Germany and 15 per cent in France and Italy in the early 1980s, prior to the privatization drive in those countries. Their share in the GNP is somewhat higher, closer to 10 per cent because most are in the manufacturing rather than the service

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sector. They make up about 20 per cent of all exports, due to their high weight in mining, chemicals, transportation and defence items.7 In fact, the nine leading SOEs, listed in Table 20.2 within their respective industries, make up 81 per cent of the assets and 92 per cent of employment of the eighty-three commercial SOEs registered in 1989. Each of them commands assets of over a billion dollars, sales of a similar magnitude, and employs between 2,000 and 15,000 workers. These are large numbers for the Israeli economy. SOEs are presently dominant in five industries: Public utilities account for 29 per cent of all SOE assets and 21 per cent of employees. The two leading enterprises (electricity and water) were incorporated with the establishment of the state, and employ almost 90 per cent of this group. Communications and transportation take up another 28 per cent of Table 20.2 Leading SOEs in 1989, by industry (book value in millions of US $) Industry leading SOEs

Number of enterprises Employees

SOE

Subs1

Total assets

mixed

No.

%

(m.$) %

(m.$) Total

Gov’t

Public utilities, including 1 Electricity 2 Water Communication and transportation 3 Telecommunication (Bezek) 4 Airline (E1-A1) 5 Navigation (Zim) Mining, including 6 Chemical industries (ICL) Energy, including 7 Refineries (Israel Ref.) Defence industries, including 8 Aircraft Industries 9 Army Canteen (Shekem) Others, commercial Total, commercial Others, non-commercial

5

1

−

29

1,588

2,010

1,936

5

1

4,640

28

2,780

933

842

1

14

−

21 15.0 3.3 27 14.6 6.6 3.9 7

4,772

5

12,931 9,356 2,026 17,066 9,119 4,088 2,400 4,376

1,346

8

1,055

557

557

6

6

1

668

462

386

1,652

335

331

266 8,009

554 4,851

409 4,461

1,998 3 878 5 1,637 2.6 6 2 − 21,053 34 1,729 10 15,952 25.6 4,249 6.8 17 7 6 4,908 8 3,2282 19 40 35 8 62,332 99 16,593 100 53 1 22 667 1 93 36 30 62,999 100 Source: State Enterprise Authority, Annual Report for 1989 (in Hebrew), Jerusalem, 1990 Notes: 1 Subsidiaries of SOEs 2 Includes the Industrial Development Bank

Sales

Equity (m.$)

asset value. El-Al Airlines and Zim Navigation were established with the state. Telecommunications, on the other hand, functioned as a government department until 1985, when it was transformed into an SOE as a first step towards its divestiture which has recently started (see below). Mining (phosphates and potash) and derived chemicals (fertilizers, bromines, and others) are produced in fourteen subsidiaries incorporated under Israel Chemicals Ltd. (ICL), a wholly state-owned SOE. Most of

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the primary plants existed in the 1950s, and were merged under one holding in 1969. ICL is presently the main target for divestiture. The refineries were acquired from their previous private owners in the 1950s, and formally turned into an SOE in 1959. The remaining firms in this group are oil exploration groups, jointly owned with private investors. Defence makes up the fifth group. Most firms are classified manufacturers, affiliated with Aircraft Industries (incorporated as an SOE in 1966), and Military Industries, which are presently in the process of turning into an SOE. The only exception in this group is Shekem, the army canteen established back in 1950 and earmarked for early privatization. Four of the nine leading SOEs operate in an international competitive environment (4, 5, 6, 8); one has recently entered domestic competition (9); the remaining four are natural monopolies (1, 2, 3, 7) with prices regulated by the government, although one of them (7) may soon lose some of its monopoly power with the deregulation of the oil distribution industry. Most commercial SOEs were profitable in 1989, producing an aggregate net rate of return on equity of 6. 6 per cent. Eight of the nine leading enterprises in Table 20.2 showed profits and only one (water distribution) broke even. For natural monopolies this reflects, to some extent, the pricing policy of the government. But also when judged in a broader context, industrial SOEs have performed reasonably well. A comparative survey conducted by the World Bank in 1966 (Ayub and Hegstad, 1987) judged Public Industrial Enterprises in thirteen countries, including Israel. The evaluation was based on criteria normally considered as factors determining the performance of industrial SOEs, such as: competition, financial autonomy and accountability, market discipline, dividend policies, incentive systems, managerial autonomy and accountability. Israel was given a high grade on most accounts. Summing up, SOEs in Israel are, on the whole, profitable enterprises. They were created or taken over by the state to fulfil a definite need at the time. Unlike SOEs elsewhere, they were not nationalized from private owners following a political shift, although the state was born and grew up in a socialist atmosphere. Most of them were not seized by the state as losing concerns to avoid their collapse and the ensuing disruptions of essential services or employment (except the major banks—but these are not SOEs, as mentioned above). Yet there seems to be general agreement that divesting SOEs is warranted under the circumstances. To these we now turn. PRIVATIZATION IN ISRAEL The economic challenge The economic history of Israel and the role played in it by the public sector have been shaped largely by two major parameters: massive migratory waves and an extremely hostile environment. In the four years following the establishment of the State of Israel, in 1948, the population more than doubled (from’ 650,000 to 1,400,000) as a result of the absorption of refugees from post-war Europe and from Arab countries. After a few difficult years of adaptation and transformation, the economy entered a steady growth path of 9 per cent to 10 per cent per annum over the following two decades. Two major external shocks stopped this trajectory in the mid-1970s: (1) the successive wars and regional arms race, that brought defence costs from 10 per cent of GNP in the late 1950s to 25 per cent two decades later; (2) the rise of oil prices in the 1970s which, together with the increasing consumption of energy inputs, raised energy costs from 1 per cent of GNP in the late 1960s to over 10 per cent in 19808 (BenPorath 1986).

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The economy has not recovered ever since, failing to adapt to the new conditions. The reduction in available resources was absorbed by a fall in investments from 30 per cent of GNP to around 20 per cent, with most of the reduction occurring in the industrial sector, and a substantial rise in government deficits financed by foreign loans and assistance. The foreign debt rose from around US$1 billion in the early 1960s to close to US$20 billion in the late 1980s. The growth rate dropped from 9–10 per cent to 3 per cent and less throughout the second half of the 1970s and the entire 1980s, while inflation went up from 40 per cent in 1975, 130 per cent in 1980 to 300 per cent in 1985. In order to curb the inflationary spiral a stabilization programme was introduced in 1985, which succeeded in halting inflation at around 20 per cent ever since. But growth did not resume, and unemployment rose from a normal level of 4–5 per cent to an unprecedented high of 10 per cent. Unemployment of this magnitude was a new problem for a society whose commitment to provide jobs to all was a justification for state interference in the first place (Hillman 1990) Recently the state is experiencing another major migratory wave, reminiscent of the early post-state years. Close to one million Russian immigrants are expected to raise Israel’s population from 4.5 million to well above 5.5 million in the next few years. This poses a double challenge to the Israeli economy: to emerge from a decade-long recession, and at the same time absorb a 25 per cent increase in its population, on top of the 10 per cent unemployed to begin with. Restoring investment levels to the record 30 per cent of the 1960s will not, by itself, restore the growth rate of those years. Much higher investments and major structural changes are needed in the immediate future to meet these targets. Reducing the weight of the public sector is considered by many a major component of the required transformation. This is where privatization, in the broadest sense, comes into the picture. The plea for privatization There seems to be general agreement that the preponderance of public institutions was crucial during the initial stages of economic development, in the mandatory period and throughout the first decades of statehood. Over time, however, the state gained weight and became obese while new and different economic problems require a more flexible and efficient system. The centralized and rather paternalistic approach of the 1950s is now believed to hinder rather than expedite progress, and different tools and structures seem to be required. It is in this context that privatization, in the broadest sense, is considered crucial in order to move forwards. The shift towards greater reliance on market mechanisms and private initiative can be traced back to the early 1970s. It regained special momentum—at least in political rhetoric—after the political shift of 1977 (although the causal link is still in dispute). In that year a liberal right-wing government replaced the labour leadership which had directed the economy until then, since the turn of the century, well before statehood. One of the main aims proclaimed by the new regime was the reduction of state intervention in the economy and its transformation into a free market economy. The economic slowdown that started in the mid-1970s made the need for a structural reform more apparent. Privatization was one of the cornerstones of the proposed reform, others included the liberalization of foreign trade, exposure to international competition, encouragement of foreign investment, and so on. Achievements, however, fell short of many of these targets, in spite of the fact that governments with a manifest commitment to liberal principles have since remained in power. Of special significance is the fact that privatization has now been embraced by almost all shades of the political spectrum, and is advocated by a broad range of economists, practitioners and political leaders.

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PRIVATIZATION IN ISRAEL

Hence, even if the political trend shifts again, it is doubtful whether the drive for a more liberal economy will be reversed. The need for a far-reaching transformation of economic institutions, including the divestiture of publiclyowned (not only state-owned) enterprises, became more apparent and urgent in recent years. This followed a series of crises in several major sectors of the economy. The financial sector suffered a serious setback with the crash of the stockmarket in 1983. Shortly afterwards, as a result of the bank crisis, the government turned into the sole shareholder of the leading commercial banks. They are now being offered for sale to the private sector. No one advocates the idea that the state should continue to hold, much less manage them. Since three of the four banks were also previously owned by public institutions (like the Histadrut), their sale actually constitutes an act of divestiture. Other Histadrul holdings are facing serious economic problems. Rural co-operatives at the regional as well as the local level, of both the kibbutz and moshav type, have been lately beset by a deep financial crisis from which they have yet to recover. The Koor conglomerate is heavily indebted,and many of its major enterprises are being offered or prepared for sale as part of a radical programme of rehabilitation. The mutual health fund (Kupat Cholim) has lately been under heavy attack for inefficiency and plans to restructure the entire national health programme are now being discussed. The future status of the Labour Bank is still unclear, but it will most likely undergo a change of ownership as the state disposes of its shares. All of this will lead to the divestiture of the Histadrut from many of its traditional holdings. The private sector is now facing a double challenge: catering to the immediate needs in housing and employment of new immigrants, and preparing for an exposure to international competition as free trade agreements with the USA and Europe become effective. To meet these targets, greater freedom from bureaucratic ties and for private initiative is called for and will probably be implemented—what has been termed above, the privatization of the private sector. These current problems have been aggravated, if not prompted, by the long-run slowdown in overall economic performance. To meet both the long-run and the immediate economic targets, the need to trim the public sector and its interference in the economy is now taken for granted. This is what privatization, in the broadest sense, is expected to achieve. Foremost in this policy figures the divestiture of SOEs. In fact, only on this front has some progress been made, so far, although SOEs seem to have performed reasonably well, as compared with the crises observed in other sectors. Selling SOEs is now considered as leading the privatization drive and signalling the government’s commitment to open up the economy to market forces and to private initiatives. In addition, specific goals are pursued in each case and by different agencies, as discussed in the next section. The record of divestiture As mentioned above, the first acts of divestiture were implemented as early as the 1960s with the sale of government shares in mixed enterprises, and in most small and medium commercial banks, but on the whole larger and heavier SOEs continued to grow. In spite of the policy change proclaimed in 1977, not much was done until 1986 when the government decided to expedite the divestiture of major SOEs. A special ministerial committee, headed by the Minister of Finance, was appointed to select and approve the sale of specific SOEs and the government SOE authority was made responsible for the implementation of these decisions. The authority has engaged the services of a major American investment bank as the government’s financial adviser in all matters pertaining to the sale of SOEs, including their ranking, preliminary

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evaluation, technique of divestiture and, at a later stage, the search for potential buyers. Since then, there has been a marked speed-up in privatization as can be appreciated from the following review (based on recent authority reports). The policy itself has met with broad general approval, but the methods and techniques pursued have aroused vehement public debate regarding both past performance and future plans. The master plan approved by the government called for the sale of twenty-six companies over a period of five years, including all the leading SOEs. The techniques suggested by the consulting firm varied from case to case: direct sale to foreign investors, to domestic investors, issue on the local Stock Exchange, and, in some cases, on foreign stock markets. Until now, nine SOEs have already been offered for sale, in whole or in part. At present the authority is preparing the sale of another five companies, and eleven more are now under revision for eventual divestiture in the near future. With that, the state will have divested, wholly or in part, almost all its commercial SOEs. The nine SOEs divested in recent years are listed in Table 20.3. The first three (1, 2, 3) are chemical enterprises, of US $20–50 million each sold in part (1) or in whole (2, 3) to private investment groups. The second group of SOEs, divested in 1988–9, comprised five larger firms US $50–100 million each. Three (5, 7, 8) were partly issued to the public, with the state maintaining (so far) above 50 per cent. The other two (4, 6) were entirely sold to private investment groups. One, a US $70 million construction firm (4), was first issued in a 17.5 per cent offer on the Tel Aviv Stock Exchange. Later, in 1989 the remaining shares were sold to a foreign investment group which now controls the firm. The other (Paz, one of Israel’s three oil distributing chains), was directly and entirely sold to a foreign investor for close to US $100 million. This was the largest private sale of any SOE, implemented as part of the liberalization programme of the oil distribution industry now in progress. The sale of Paz will have little economic effect unless the industry, presently controlled by a three-firm oligopoly, is truly opened up to free entry and competition. This illustrates the statement made below that divestiture without privatization of the private (and privatized) sectors is of little avail; in the case of a monopolized market it may be counterproductive. None of the eight enterprises mentioned so far appears among the leading SOEs, listed in Table 20.2. It was not until 1990 that the process of divestiture affected, for the first time, one of the largest SOEs, namely Bezek, the state-owned Telecommunication Company valued at more than US $1,000 million. In the mid-1980s it was transformed from a ministerial department into an SOE, with considerable improvements in management and efficiency; now its divestiture has been set into operation. Initially, 9 per cent of the capital was offered in a broad public issue, for a total amount of US $94 million. The issue is considered a relative success, with a four-fold oversubscription, although the timing was unfortunate (the Persian Gulf crisis) and some details of the issue have been criticized. Investment and savings institutions picked up 60 per cent, and the Table 20.3 List of SOEs divested since 1986 Name

Activity

Year divestiture

of Technique divesti-ture

of Value of sale or Share of equity issue (US $m)

Private State 1

Periclase

2

Haifa Chemicals

3

Cables of Sion

Chemical 1986 industry Chemical 1986 industry Copper cables 1988 and wires

Issue of 25%

11.2

25

75

Sale of 29%'

14.7

100

–

Sale of 65%'

12.0

100

–

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PRIVATIZATION IN ISRAEL

Name

Activity

Year divestiture

of Technique divesti-ture

of Value of sale or Share of equity issue (US $m)

Private State 4

Jerusalem Econ. Construction 1987 Issue of 17.5% 12.5 Corp. and devm’t in Jerusalem 1989 Sale of 82.5% 54.7 100 – 5 Industrial Prefabricated 1988 Issue of 20% 10.8 Building Corp. housing 1989 Issue of 28% 68.6 48 52 6 Paz Oil Comp. Gasoline 1988 Sale of 100% 96.7 100 – distribution 7 Nafta Oil exploration 1989 Issue of 29% 18.1 29 71 8 Maman Cargo Air cargo 1989 Issue of 48% 21.9 48 52 Terminal handling 9 Bezek Telecommunica 1990 Issue of 9% 94.2 9 91 tion Total value of sales 415.4 Source: State Enterprise Authority, Annual Report for 1989 (in Hebrew), Jerusalem, 1990 Note: 1 These firms were partly divested in the early 1980s; the remaining shares were sold entirely in the years indicated

public at large the remaining 40 per cent, mainly through trust funds. Additional issues of up to 25 per cent of the shares are planned for the near future. The next phase calls for the divestiture of five additional SOEs, this time including three of the leading ones: the refineries, ICL and Zim Lines. The other two are smaller enterprises: a minor investment fund and an industrial plant regulated to the defence industry. Another major action planned for this phase involves the additional issue on the Stock Exchange of Bezek, reducing state holdings from 91 per cent to 75 per cent. As presently envisaged, state holding in the refineries and in three smaller firms will be eliminated altogether; in ICL it will be reduced to a blocking minority of 26 per cent; in Zim Lines it will be reduced below the present 48 per cent to a yet-undetermined minimum level; only in Bezek will a 75 per cent share be maintained, for the time being. These sales have been approved, in principle, and are widely supported. However, the technique to be used and the allocation of shares between private sales, public issues and the state are still being debated, in political and in professional circles. The main arguments raised in this debate are discussed in the section following. The third phase of divestiture comprises additional issues of the previous firms (like Bezek), and another eleven SOEs, which are now being examined and prepared for sale. They include other leading enterprises, such as El-Al Airlines and the Electrical Company. With that, seven of the nine major SOEs listed in Table 20.2 will have been affected, in part or in whole. The remaining SOEs are earmarked for sale at a later stage; they must first undergo major structural changes before a sale or public offer can be implemented. Upon conclusion of this final stage, almost all SOEs in Israel will have been divested, in major or minor part.

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ISSUES AND CONTROVERSIES The evaluation of recent experiences of privatization and the discussion of current issues can be meaningful only in the context of its objectives. Recent literature abounds in lists of objectives. In the Israeli context four main goals have been specified by the director of the SOE Authority: (1) reduction of government intervention in economic affairs; (2) mobilization of funds to reduce the internal and external public debts; (3) improving the efficiency of divested enterprises; and (4) curbing monopoly power through free competition (Refua 1988). The public debate on the divestiture of SOEs has centred around two main issues: the technique most appropriate to attain these goals and the role of foreign investors. The approach to these issues depends on the weight assigned to the different goals and the importance of privatization in meeting them, in light of the current economic challenge. Let us therefore start with the latter. Divestiture, privatization and the economic challenge The Israeli economy is presently facing a two-fold challenge— resuming economic growth and absorbing a massive immigration. The early 1980s witnessed three-digit inflation which has been successfully controlled by the stabilization policy in effect since 1985. However, two major problems have plagued the country ever since—unemployment and economic stagnation. On top of that, the massive immigration of Russian Jews, which started unexpectedly in 1990, has added a new dimension to the economic challenge. In the short run it aggravates the problem of unemployment and the scarcity of popular housing, although in the longer run it is expected to contribute significantly to growth and economic performance. Whether it will do so depends on the speed with which the economy will adjust to these new conditions. Whether facing these two problems requires more or less government action, and of what kind, is at the heart of the current policy debate. There is general agreement that the weight of the public sector in the economic sphere, is excessive. It is also generally agreed that the private sector, both domestic and foreign, is to play a major role in solving the two basic problems—employment and growth. There is doubt, however, as to the role the state has to play in solving the short-run problems raised by the recent migration. In a sense this new challenge is reminiscent of the early years of the state, although at present few politicians and even fewer professionals would endorse the paternalistic approach of those early years. The government is seen, at best, as a catalysing agent called upon to encourage and initially support private investment. This implies clearing the ground for free private initiative by contracting, not expanding, government intervention. Privatization in this broad sense is generally accepted as a necessary condition for future development. The debate concerns the question of whether this general objective is best served by selling SOEs, and if this is the most urgent problem to be faced at present. Privatization involves divesting SOEs, but not only that. Even if all SOEs were divested tomorrow the problem of excessive public sector impact would not be solved. It is definitely not a sufficient cure at the present juncture; it may not even be the most urgent one. Divestiture will be of little avail unless bureaucratic ties are loosened, business initiatives truly fostered, competition (including foreign) encouraged, and subsidies reduced to an indispensable minimum. This seems to be generally agreed upon, but since divestiture of SOEs is easier to sell on the political market than most other reforms, it is the former that is most addressed both by policy makers and public opinion.

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Conflicting goals Although all economic agents involved in the sale of SOEs seem to agree on the principle of privatization, they differ in the goals pursued by the specific divestitures. Moreover, these goals are often conflicting. This underlies the current debates concerning the speed, order, and technique of divestiture. Different goals can often be identified with specific ministries or agencies, each furthering the area of its specific responsibility. Raising revenue to help narrow a threatening budget deficit is the main concern of the Treasury Department. Selling SOEs seems an easy, tempting solution. For that purpose, the more and the sooner, the better; the most profitable and hence easiest to sell first; and to the highest bidder, who often seems to be a financially powerful investor. However, the immediate gain could conceal longer-term losses, both with regard to the revenue received and to trade-offs in terms of other objectives. If sold to local investors it is a mere transfer payment; it may have a crowding-out effect, and in any event must be weighed against other methods of taxation. If purchased by a foreign investor it may ease a foreign exchange constraint, but will not by itself help solve a balance of payments problem. Placing an initial offer on the stock market first, and offering bundles of shares to major investors at a second stage, may often produce a higher revenue in the longer run, but for budgetary reasons the immediate sale to a single buyer might seem preferable. The Ministry of Industry will pursue the objective of increasing efficiency by ensuring a competitive environment and attracting long-run investments in new technologies or lines of production. This may not always be achieved by selling an SOE to the highest bidder whose interest is in making quick profits in a protected market. Quite often the pressure for protection of private conglomerates can be politically more influential than that of regulated SOEs. Such considerations may prescribe more meticulous preparation and hence a lower speed. Some have argued that without setting an appropriate business environment, liberalizing domestic and foreign markets and eliminating bureaucratic constraints, the efficiency gains expected from divestitures cannot be achieved. Others believe that if privatization is not first seriously implemented in the public sector it will never reach the private sector. Public utilities and natural monopolies represent typical market failures that require government intervention even according to the most ardent free-market economists, many SOEs in Israel fall into this category. Transfer of ownership of such enterprises will not by itself improve efficiency. Regulation of private natural monopolies is not always easier than that of publicly-owned utilities. The experience with Bezek seems to show that much can be gained even at the stage of transforming a government department into an SOE. In all of these cases a legal regulatory framework must be instituted prior to divestiture, affecting the order and speed of the whole process. Expected profits and hence the price offered will depend, to a large extent, on the government’s commitment with regard to future non-market prices and special privileges. The Ministry of Labour will do its utmost to avoid unemployment, but major lay-offs may be the basic ingredient in trimming over-staffed SOEs. In the face of massive immigration, this may become a crucial consideration for the encouragement of channelling private investment funds into the creation of new jobs rather than into the purchase of existing enterprises. Moreover, the shadow price of labour under these conditions may differ substantially from the market price, a topic amply discussed in the social cost benefit literature. More, rather than less, public initiative may be needed, at least in the transitional absorptive stage. The optimal utilization of natural resources is another area where competitive forces and private initiative can significantly upgrade the benefit to the economy. Is the highest bidder the best bet for this purpose? It has been argued that if the price received reflects the present value of future profits then society has received its true value— no matter what happens to the resource afterward and how efficiently, if at all,

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it is utilized in the future. In this case, the revenue, efficiency and employment goals do coincide. Others claim that, here too, some degree of regulation is needed, since the private risk-discounted time preference may not concur with the social time preference, and upgrading of raw materials within the country may not always be in the immediate interest of a foreign private investor, although it may prove to be economically sound in the longer run. In the particular case of Israel, ensuring air and sea links with the rest of the world adds a further requirement regarding the reliability of ‘national carriers’ beyond the now obsolete prestige factor attached to operating a national airline or shipping line. Another partner to the privatization process is the domestic private sector. Local investors claim a major share in the national wealth now to be released which may run counter to the desire to attract foreign capital. Opening new avenues for local initiatives and professionals could outweigh in the long run—so the argument goes—the immediate revenue and efficiency criteria. In fact all taxpayers put a property claim on the SOEs, which would justify a broad public offering under favourable terms, even at the cost of probably reducing and definitely postponing the revenue to the state. Efficiency gains may also be slower in coming. Labour and management of the affected SOEs make the same claim, both as taxpayers and as ‘builders’ of the companies. Preferential offers could ease the process of divestiture and perhaps enhance productivity later, but fear of senior staff replacement and massive layoffs can create problems. The financial sectors are also interested in widespread, domestic public issues of large promising SOEs. The issue of new solid investment opportunities for small investors and for saving and pension funds is expected to strengthen and stabilize the domestic capital market. Again this could involve a trade-off in terms of other goals. The different weights attached to these conflicting goals have given rise to the current debates concerning the speed, order and technique of divestiture, although the need to divest has been generally accepted. Political interference and the incentive structure One goal on which everybody seems to agree is the disengagement of SOEs from their political dependence. The legal structure of SOEs in Israel is based on the notion that SOEs should operate as business enterprises and not be subject to political interference in their management. In fact, most of them have been profitable and scored high in a recent World Bank survey, as indicated above. None the less, political dependence has hindered their development in several ways. Political nominations of board members and senior executives have been heavily criticized by the state comptroller. Further, such political appointees are not always judged by their economic performance. Ministerial intervention in business decisions has also proved a major stumbling block. In theory, most of these maladies could be avoided by stiffening the rules of non-interference within the existing legal framework of SOEs and in accordance with the official policy of privatization. In practice, though, and in a rather paradoxical way, such intervention apparently became more blatant in the last few years, after divestiture had been decided upon and initiated. This contradicts not only the proclaimed overall policy but also the accepted recipe of ‘preparing SOEs for sale’, which invariably recommends loosening political ties on the eve of divestiture. This may reflect a natural tendency on the part of politicians and bureaucrats to maximize the output of an exhaustible political resource. It is probably another facet of the classical principal-agent problem characteristic, in this case, of the transition phase. It may have a long-lasting effect on the performance of divested SOEs and on the intra- and inter-generational distribution of benefits in the post-privatization era.

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Another negative effect of state ownership is its effect on the wage and incentive structures. Salaries in government departments are as a rule lower than in SOEs. In order to attract higher level management, and to impose budgetary discipline, many activities have been transferred from the former to the latter, on both the municipal and national levels. This is viewed as either a permanent solution or as a transitional phase towards complete divestiture. Telecommunications in Israel is a case in point. However, salaries in SOEs are also limited by governmental decree and profit-sharing is not allowed. On the whole, benefits and incentives are substantially lower than in comparable firms of the private sector. Incentives in the latter are more effective and attractive. This marks the route taken by many young professionals. They start their careers as government officials, rising to head of government departments; from there they proceed to SOEs or other parastate functions, eventually finding their way into senior executive posts in the private sector. At that stage when, as representatives of major private corporations, they face their young successors in public offices, their reputation and experience places them in a advantageous position. This three-stage migration creates a free externality for the business community in the course of career development, which has not been quantified. But it does generate pressure on, if not a drain of, qualified SOE personnel. All these considerations support the case for rapid divestiture of SOEs, although other facets of privatization at large may seem more crucial at this stage. Technique of divestiture Two major models have been used in Israel as elsewhere: public offerings on the Stock Exchange, and private sales to a single buyer or investment group. Variations on the first model have included limited allocations to employees and small investors, and issues on foreign capital markets. In the second model (private sale) a special problem has arisen with respect to foreign investors. Another issue that arises in all cases is whether to leave a part of the shares in government hands as a transitional or permanent safeguard. So far different models have been applied to different enterprises. However, some major issues are still the subject of public debate, concerning both acts of the past and plans for the future. To these we now turn. Most of the industrial SOEs divested so far were sold in private sales to the highest bidder from among a selected group of investors, mostly foreign. By this method, it was hoped to obtain the highest price, to attract strategic investors from abroad and, in general, to foster new business initiatives and connections. It is too early to judge the long-term effects, but dissenting voices have already been heard regarding the shortrun effects. It has been argued that in spite of the bidding the price obtained did not reflect the true value of the business at the time the purchase was made; this seems to be a common criticism everywhere and has been amply documented and rationalized. Obviously, if the sale produced the expected efficiency gains, the value of the firm must be higher at the time of the ex-post (critical) evaluation. A more critical point is the argument that some of the purchases were financed by loans repaid within a few years from hidden reserves or increased dividends—not to speak of outright leverage buy-outs (LBOs). In that case the revenue received by the government is illusory and the efficiency impact negative, since excessive cash withdrawals often replace investments. In the longer run loan repayment and dividends may reflect greater efficiency and profitability, which by all standards is commendable and justified; in the short run it has been doubted whether this could really have happened. The basic question in this context is whether these pitfalls could have been avoided if the sale had proceeded first through the stock market. Those who favour this model claim that an initial public offering will eventually—over a period of, say, two years—set the price per share at its true economic value. This will presumably be higher than the best possible initial offer, if the SOE has economic potential to start with

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and if subjection to Stock Exchange regulations rather than political constraints improves performance. Both of these conditions are likely to hold if private investors show interest to buy the SOE in the first place. In many cases it is reasonable to expect that the involvement of financially or strategically powerful investors will improve the economic performance of SOEs; sometimes it may even be indispensable for opening them up to new technologies and international markets. Even in these cases, it is argued that if the company is first listed on the Stock Exchange, Stock Exchange Commission (SEC) (or similar) regulations will prevent the deprivation of minority shareholders by short-sighted cash withdrawals or investment policies. This, it is claimed, is a more powerful watch-dog than any provision written into a governmentheld ‘golden share’. It has been argued that the domestic capital market is incapable of absorbing all SOEs earmarked for sale. This was the main reason for offering some of the larger industrial SOEs to private foreign investors. An issue of such magnitude would crowd out other public issues, investments in other, perhaps less attractive, SOEs as well as badly-needed private initiatives. Excessive issues will depress the price received for SOE shares below what could have been received from private bidders, even allowing for the qualifications mentioned earlier. Some local experts have maintained the opposite position: the capital market does not impose a limitation on the public issue of SOEs, but rather the issue of solid stock (Israel Chemicals is usually mentioned as example) will invigorate the market and stabilize it. The result would be expansion rather than crowding out, channelling private savings (especially the public at large and institutions) into long-run solid investments rather than into short-term speculative adventures (that have plagued the country in the recent past). Two recent events seem to support this view: first, the oversubscription to the first Bezek (telecommunications) issue, and second, the manifested interest of major investment firms to underwrite, and of leading provident and pension funds to purchase major issues of SOE shares. However, other developments have somewhat shaken the faith of the broad public in the stock market, not only as a source of finance but also as a safeguard for solid investment and management. The massive collapse of major US financial firms in the last few years has sounded alarm bells in Wall Street, the world’s shrine of financial worship, not to mention young newcomers to this volatile arena. Another problem concerns the timespan of visible gains to new shareholders. The issue of Bezek occurred a couple of days before a general fall of all stock, due to the vicissitudes of the Gulf Crisis. All stockholders lost, including the new purchasers of Bezek. In the longer run, the stock has recovered, although the immediate effect was a loss to those who put their faith in this issue. Such short-run fluctuations are unavoidable but do create some uncertainty. Another problem that has given rise to ardent debates concerns special allocations to labour and management. In practical terms, the question was not ‘whether’ but ‘how much’ and ‘under what conditions’. In the Bezek issue, employees were offered, at a substantial discount, a bundle of shares and options equivalent to approximately 4 per cent of the total offering. This provides a significant bonus and assures labour co-operation. In the case of Israel Chemicals, on the other hand, where the direct sale to a single investor was to precede the placement of shares to the public by two years, labour expressed opposition to the sale—although, there too, a 4 per cent share was earmarked for that purpose, but at a later stage. It is unclear whether this was the main reason for labour’s discontent: there was also concern about massive layoffs and the general fear of exclusion from decision-making at this crucial stage. Proposals of major participation submitted by senior management staff were met with the criticism of undue interference in the whole process of divestiture. Should they be allowed or encouraged to participate in the process? Arguments against the technique stress the possible conflict of interests; whereas arguments for it claim that

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a more palpable involvement of labour and management would ease the process, aside from considerations of motivation and social justice. Foreign investors Whether foreign investors should play a major part in divestiture is another issue of the present controversy. Opinions range from those favouring preferential treatment to those proposing severe restrictions —or a combination of both. The role of foreign capital in economic development in general and in the structural transformation of economic systems in particular, has been amply discussed and documented. In Israel, direct foreign investment in new and joint ventures is courted and encouraged in many ways, as set out in the Law for the Encouragement of Capital Investments. Efforts are made to attract genuine investors and streamline the bureaucracy involved in such new initatives. The debate in the present context concerns the sale of existing SOEs to foreign investors, in whole or in controlling part.The main arguments are briefly set out below. A distinction is often drawn between portfolio and strategic inves tors. The first comprise large holding companies and financial conglomerates. The advantages of selling an SOE to a portfolio investor lie in the expected injection of large amounts of foreign exchange, the opening of international capital markets and the capability to hire top level experts for senior executive posts. The major setback is the fear that this kind of capital is highly volatile, unstable and fluid. It may be withdrawn when a quick profit or a cash squeeze elsewhere in the holding, or a political crisis in the region, will make such a move desirable or necessary. It is further argued that most financiers of this type display an extremely high time-discount rate, expect a quick payback on their investment and a rather high turnover of capital commitments. Recent Wall Street scandals aggravate the fear of LBOs and reserve-plundering. All of these policies are perfectly defensible from a profit-maximizing angle, but are not conducive to long-run investment planning and funding which some consider to be the prime justification for the divestiture of SOEs. Obviously not all investors nor all SOEs fall into this category. None the less, in most countries it is considered legitimate and necessary to check the candidates’ long-run intentions, potential and credibility, beyond his ability to finance the purchase. Strategic investors are large foreign or multinational corporations, engaged in activities related to the activities of the SOE in question. The advantages mentioned in the preceding paragraph are not accompanied by most of the fears; investments of this kind are as a rule intended for the long run with an industrial rather than a financial approach to profit-making. In addition, acquisitions by large foreign corporations will provide access to up-to-date technology, broad-based Research and Development (R&D) ventures, and wider marketing styles. These, rather than the mere financial transfer of capital, are considered to be the main reason for selling the SOE because these connections are likely to provide the right business environment, knowledge and connections to put the enterprise on a growth course. But the same considerations cause concern under specific circumstances, particularly in the case of natural resources and raw materials. (This may be the reason why most countries impose restrictions in this particular area.) Markets for these products are unstable, with extreme fluctuations in demand and prices. When the prospective buyer produces the same raw materials in other parts of the world he might close down domestic plants during slumps. This could involve the transfer of technology developed in the host country —a fear often expressed in chemical or high-tech industries. His legitimate interests may diverge from those of the host country, where considerations of comparative advantage may justify the operation of a plant although it is inferior in production or location to foreign alternatives. Prospects of long-run employment

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may also outweigh short-run difficulties. In some extreme cases of contracting markets it may prove profitable to purchase a competing plant with the outright purpose of closing it down. One way of cushioning the impact of extreme fluctuations in commodity prices is to upgrade their production. In this respect selling the enterprise to a conglomerate that uses rather than produces the exportable raw material may help in two ways. First, it provides a captive market for the raw material, and second, it helps develop a domestic industry for higher level products. However, here too, world-wide profit considerations and existing facilities elsewhere could justify the diversion of this incremental activity to other parts of the conglomerate. Joint ventures rather than outright sales have been suggested in order to achieve the benefits of privatization without endangering long-run national interests that remain valid in a denationalized market economy. It has been suggested that the inclusion of a ‘golden share’ in the sales agreement will provide adequate insurance against the risks enumerated above. This has in fact been incorporated into the offer of major SOEs in Israel. Opinions vary about the effectiveness of such provisions, except for major decisions (such as take-overs considered ‘hostile’ from the host country’s point of view). However, when the ‘golden share’ includes provisions regarding investments, employment, upgrading or joint R&D (as suggested in several specific instances in Israel) this may contradict the prime objective of efficiency sought by divestiture. Even if such provisions are initially accepted by the buyer, it is doubtful whether the government will be able to resist his pressure for compensation when unforeseen developments in economic conditions affect profits. Furthermore, in most cases the ‘golden share’, where applied, is limited to several years and is not intended to interfere with business decisions except those with defence implications. In essence, the debate centres around the question whether, and under what circumstances, the profit goal of a specific foreign investor can become inconsistent with the national interest of what has come to be called a ‘social market economy’. The same dilemma applies to domestic investors as well and, in fact, to the entire privatization process. The question is one of degree, of probable regulatory cures and of the tradeoffs involved. NOTES 1 Barkai discusses at great length the role played by the notion of constructive socialism… From the very beginning the historical imperative of the Zionist settlementeffort imposed, therefore, a ‘constructionist’ credo on the individuals and social organizations set on carrying out this mission. This was a built-in feature of the fledgling Zionist-Socialist movement from its earliest days in the first decade of the century.

It seems undisputable that its economic power grew, as a co-operative movement, from the bottom up, and not as a political programme imposed from the top down. 2 Red tape obstacles to new investments have recently been streamlined, as part of the privatization drive, but there is still much room for improvement. 3 In addition, fifty-one SOEs were engaged in research, cultural or social activities, or were inactive or in liquidation. They are therefore classified as non-commercial. 4 The total number of registered SOEs hardly changed, but the number of non-commercial enterprises increased from 51 in 1969 to 76 in 1989. Of the latter, 62 were cultural or social institutions, and 14 were inactive or in liquidation.

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5 IN 1983 the government found itself, involuntarily, the owner of the four largest commercial banks. This ‘nationalization’ was forced on the government by rather exceptional circumstances. Israeli commercial banks were allowed, during the early 1980s, to purchase indirectly their own shares, in order to maintain their real price in a period of rapid inflation (100–400 per cent annually). In October 1983 this arrangement collapsed due to an excessive supply generated by an expected major devaluation. The government stepped in and bought the shares in order to protect the public at large, and thus turned, unwillingly, into the majority holder of shares in four of the five leading commercial banks. However, the government has not interfered with the management of these banks, including appointment of directors, and all of them have produced profits over the recent years. At present the government is in the process of selling the totality of its holdings to private investors. 6 ‘Mixed SOEs’ are enterprises in which the state holds 50 per cent or less of equity. 7 Perhaps a better indicator of the weight of public sector firms in Israel is the fact that the ten leading companies in the country, by size of total sales in 1990, included six SOEs, three Histadrut firms (two marketing cooperatives and one industrial enterprise) and one private firm—Paz.—a former SOE divested in 1988. 8 Most of this rise was due to the world oil crisis. Energy consumption in real terms rose by only 22 per cent between 1973 and 1980.

REFERENCES Ayub, M.A. and Hegstad, S.O. (1987) ‘Management of public industrial enterprises’, The World Bank Research Observer 2, (1), Washington DC. Barkai, H. (1989a) Economic democracy and origins of the Israeli labor economy’, The Jerusalem Quarterly 49, 17–39. Barkai, H. (1989b) ‘Fifty years of labor economy: growth, performance and the present challenge’, The Jerusalem Quarterly 50, 81–109. Ben-Porath, Y. (1986) ‘Introduction’ in Y Ben-Porath (ed.) The Israeli Economy, Maturing Through Crisis, Cambridge Mass., Harvard University Press. Hillman, A.L., (1990) ‘Liberalization dilemmas’, in A.L.Hillman (ed.) Markets and Politicians, Boston, Kluwer Academic Publishers. Ofer, G. (1986) ‘Public spending on civilian services’, in Y.Ben-Porath (ed.) The Israeli Economy, Maturing Through Crisis, Cambridge Mass., Harvard University Press. Refua, Z. (1988) ‘Privatization—necessity or fashion?—A symposium’, The Economic Quarterly, 39 (135–6), TelAviv, (in Hebrew). The Authority for State-Owned Enterprises (1970, 1990) Annual Reports Nos 9 and 29, The Finance Ministry, Jerusalem (in Hebrew).

21 Privatization in Bangladesh Abulmaal A.Muhith

EXPANSION OF THE PUBLIC SECTOR Bangladesh emerged as a new nation in the wake of a bloody liberation war in 1971. The ravages of the war warranted a significant public sector role in the reconstruction efforts. In industry and commerce a large number of units were abandoned by non-local owners, forcing the government to take them over. The government in exile, immediately upon return to the capital, had to take steps to bring under its control and management all abandoned properties. On 2 January, 1972, under Presidential Order 725, industrial units were taken over by the government. Boards of management were established for such units but they were badly managed, largely due to lack of experience and the greed of the managers to make money quickly. The next step was the establishment of a government monopoly in international shipping under another Presidential Order 10, dated 29 January, 1972. In the elections preceding the war of liberation most Bangladesh political parties espoused a limited measure of nationalization. But the liberation war radicalized views and the ruling party, The Awami League, became a strong exponent of state socialism. In March 1972, in a series of sweeping measures, industry, foreign trade and financial institutions were almost completely nationalized. Presidential Order 27 nationalized jute textiles, cotton textiles, sugar, steel, paper, fertilizer, pharmaceuticals, food industries, engineering and shipbuilding, mineral resources and oil and gas industries. Presidential Order 29 deployed the abandoned industrial units under public corporations, ten of which were set up to manage these along with the nationalized industries. The ten sector corporations owned 313 industrial enterprises whose fixed assets were valued at taka (Tk.) 5120 million or US $690 million.1 Public ownership of fixed assets in modern industry went up from 34 per cent in the pre-liberation period to 92 per cent in March 1972.2 This, however, meant that only 11 per cent of the indigenous private sector was nationalized as 34 per cent was already in the public sector and 47 per cent was owned by non-locals. Under Presidential Order 26, excluding the branches of foreign banks, all banking was nationalized and six nationalized commercial banks were established. Presidential Order 30 did the same thing in respect of the insurance business and two public corporations absorbed all insurance companies. Presidential Order 28 nationalized all mechanized inland water transport vehicles. These three steps were necessary as most units in these sectors were abandoned by the non-local owners and companies. Nationalization of the jute trade followed the election manifesto of all political parties. What was new, however, was the near monopoly of the public trading corporation in a number of import items. In the early days of Bangladesh trade with socialist countries provided the lifeline in commerce. Scarcities were excessive, while the country had no foreign exchange for required import, and trading houses who provided the link with the world were in the other region. Such a situation automatically promoted public sector

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monopoly in foreign trade. Large tonnage of foodgrains, petroleum, fertilizers and cement were all imported by the public sector in the early days of Bangladesh. MEASURES FOR PROMOTION OF THE PRIVATE SECTOR Commitment to socialist transformation of the economy, however, remained confined to public ownership of industry and public control of a large part of foreign trade. Agriculture or housing remained in the private sector and even domestic trade was not sought to be fully controlled by the public sector. But like the rest of the subcontinent, bureaucratic red tape and restrictive regulations were a prominent feature of the economic management system of Bangladesh immediately after liberation. The early clear direction on private initiative in industry was provided in July 1972, fixing a ceiling of Tk. 2.5 million (US $330,000) per private investment which could go up to Tk. 3.5 million through reinvestment of profits. In January 1973 a detailed industrial policy was announced. It confirmed the ceiling for private investment, allowed a five-year tax holiday provided 60 per cent of profits were reinvested in government bonds or business expansion, and offered a moratorium on nationalization for a period of ten years. Foreign investment was permitted as long as local equity was 51 per cent; and fair compensation was assured in case of nationalization at the end of the moratorium period. Thus the private sector could undertake only small-scale industry. Within the government there were ideological differences on this policy of public ownership of industrial assets. Even when nationalization orders were finally issued in the late hours of 26 March 1972 there was talk of leaving Bengali-owned enterprises alone. There was no dedicated cadre in any of the political parties to support (not to speak to manage) large scale nationalization. The performance of the public enterprises tended to be dismal. There was mismanagement, greed and cheating all around. There was no labour discipline. Labour productivity declined drastically while employment increased. There were problems with the supply of raw materials and finance which encouraged rent-seeking. Scarcity of supplies enriched the pockets of favoured traders and agents. Some industries, which lost the market in West Pakistan, had marketing problems. Capacity utilization was low, it generally varied from 30 per cent to 50 per cent. All important sectors suffered losses.3 Very soon the government started considering measures to provide better opportunities for the private sector, the first move towards liberalization was made in July 1974. The new industrial policy raised the investment ceiling to Tk. 30 million or US $3.4 million. Eighteen industries were reserved for the public sector and others were thrown open to both domestic and foreign private investment, and guarantee on nonnationalization was extended to fifteen years. Foreign investors could be equity partners of the public sector and the rigid limit on foreign equity participation was relaxed. The reserved list of industries has been amended from time to time: (see Appendix 1). About the same time restrictions on foreign trade were relaxed, especially in the case of import controls. Price controls were removed or relaxed to some extent. An important decision was in respect of the sale of abandoned units to the private sector. This liberalization process was further accelerated with the violent change of government in August 1975. In December 1975 the reserved list of sectors was reduced to eight and ten others were put on concurrent list. The private investment ceiling was raised to Tk. 100 million or US $6.7 million and a couple of years later it was virtually withdrawn. Guarantee against nationalization was no longer time-bound. The sale of abandoned units was expedited and to encourage buyers black money was freely permitted to be used for investment. The industrial finance institutions were authorized to support the private sector. The Stock Exchange which closed in 1972 was reopened, and in 1976 the Investment Corporation was set up to provide bridge finance and underwriting facilities. Other measures on trade liberalization and right pricing of capital and foreign exchange were taken a few months before the coup of August 1975. In May, agreement with IMF had

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brought about a large exchange rate adjustment, adjustment of interest rates, and adjustment of prices of publicly-produced or publicly-supplied consumer goods. In 1980 a liberal Foreign Private Investment Act was passed according the same treatment to foreign investment as that to indigenous private investment and assuring repatriation of capital and profits. By March 1982, 374 industrial units were transferred to the private sector. At the same time a large number of new investment proposals were also sanctioned, not all of which, however, materialized. The efforts up to March 1982 can be termed as an attempt to re-establish the private sector and restore the confidence rudely shaken by the nationalization moves of 1972. There was also a move towards economic liberalization and diminution of government controls. Privatization of retail marketing of fertilizers and irrigation equipment began in 1978. Rationing of foodgrains started giving way to open market sales of foodgrains, to meet the price pressure in the lean periods. Subsidization of these various supplies also began to be reduced. Price control was eliminated from a large number of industrial products and consumer items. In 1980 the government also decided to open commercial banking to the private sector. At the end of the year an Export Processing Zone was opened in Chittagong, welcoming both local and foreign investment for exports. THE DENATIONALIZATION PROGRAMME: ITS PHILOSOPHY AND EXECUTION Another coup in March 1982 brought about further changes in industrial policy and the role of the government in economic activities. Privatization in a very broad sense began in earnest. The global environment, the indirect pressures of international institutions like the International Monetary Fund (IMF) and the World Bank, and a genuine reconsideration of national priorities and strategies brought about this new approach. The military regime had the advantage of not countenancing any public resistance and undertaking fast measures. In practice, ‘Privatization in a very broad sense, which involved not only divestiture and sale of government assets but a general decline in the interventionist role played by the public sector, constituted a noteworthy part of the new adjustment programme’.4 The announcement of the new industrial policy in June 1982 accompanied by a spate of liberalization measures actually carried the privatization policy begun in 1974 to its logical conclusion. A significant denationalization programme was rapidly executed and open economy measures characterized the economic policy of the new government. Although any doctrinaire aproach was openly disavowed and pragmatism was claimed as the basis for the policy change, there was an underlying mission to undo the nationalization policy of 1972. Gaining revenues for the government played no role in the divestiture decision. A better public—private sharing of burden was certainly a moot concern. Directly productive activities like agriculture and industry were considered areas from which the government should withdraw and provide only support services. The government explained that the public sector would not take up activities which could be better performed by the private sector but, it would give precedence to the private enterprise whenever the latter was willing to come forward in any sector of economic activities. The public sector, where it would remain, would have to compete with the private sector on an equal footing, especially for scarce resources like credit, foreign exchange and markets. One of the stated reasons for privatization was to provide greater opportunities to the citizens to participate in the development process and allow private initiative and individual energy and creativity to contribute to national welfare.5 Another overriding principle, though not stated so explicitly, was the desire to reduce fiscal and credit pressures. The losses of the public corporations and appropriation of domestic credit by them was

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highlighted as one of the evil effects of nationalization. The performance of the economy was dismal in 1981–2 and this was advanced by the military leader as one of the justifications for assumption of power. Indeed, economic distortions were monumental, the exchange rate was overvalued, prices of publiclyproduced or publicly-provided goods were artificially held down, and short-term external borrowing was financing consumption expenditure. The new government had to take dramatic actions to justify its takeover. 6 It has been speculated that the military ruler wanted to build up a constituency of support among the business community, particularly those who were affected by nationalization.7 In a way there was a great deal of reprivatization; units earlier nationalized from, or abandoned by, private owners were resold or given back to private parties.8 The policy announced in June 1982 withdrew all restrictions on ceilings for private investment. Only six industries were reserved for the public sector. In the concurrent list the stipulation about majority share for the public sector was withdrawn. Sanctioning procedure for investment was simplified and decentralized. Fiscal incentives were clarified and standardized. Improvement in debt-servicing terms were stipulated, rationalization of tariff rates and tax structure was promised and executed as well. The most salient features were the expansion of the free list of investments where no sanction was necessary, and the denationalization of the jute and cotton textile industries. The policy statement was expressed as follows: In order to create a favourable investment climate and confidence in the mind of prospective entrepreneurs, it has been decided in principal to return the jute and textile mills owned by only Bangladesh citizens to them on the same basis as was before independence. In doing so, it will have to be ensured that sale of jute goods in foreign markets is not adversely affected.9 The principle behind this decision was very simple; if you are asking entrepreneurs to make new investments in these sectors, why not return what they had established earlier? Following the same principle it was decided to denationalize two banks whose major share-holders were Bangladesh citizens (that is, Uttara and Pubali). The policy also stipulated the vigorous sale of abandoned units and offloading of 49 per cent of shares from selected public corporations. A total of 782 units were identified for divestiture which included thirtythree jute mills and twenty-two cotton mills. In actual fact thirty-five mills out of sixty-eight and twentyseven textile mills out of sixty-eight were denationalized within a period of a year and a half. The denationalization of the two banks was announced in June 1983 and the process was completed in two years. The private sector was soon allowed to undertake insurance business as well. The government was in a hurry to implement the denationalization policy. The Minister for Industries knew the opposition that bureaucracy would put up (he was himself an ex-bureaucrat). He was also aware of the troubles labour could create and stipulated that no staff retrenchment could take place for a year. Since jute was essentially an export item and the market was very competitive, a centralized system of export was arranged (but this arrangement had to be abandoned shortly). The mills were transferred in situ, but their debt liability was not settled at the time of transfer. The creditors were not a party to the transaction and the joint audit of accounts was left for a subsequent period. The erstwhile owners were given the mills for indeed ‘a song’ as the compensation fixed in 1972 was treated as the price for reacquisi tion of the mills. All former owners were persuaded to reown the mills, even though many of them had neither the experience nor the financial backing nor even serious interest in operating the mills. The prohibition on transferring the mills till all dues were cleared appears to have been a faulty stipulation. The United Nations Development Programme (UNDP) study as well as the World Bank study faulted the government for hasty and unplanned denationalization. The consultant, Klaus Lorch, commented that the

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short-term effectiveness had cost in terms of long-term efficiency.10 The issue of liabilities is still unsettled in spite of many belated concessions by the government. The denationalization move did not vitalize the private sector and government minority shares could not be offloaded in the market. Further denationalization could not go forward and the performance of the two industries did not improve. The private sector did not undertake any restructuring of the mills and blamed the question of debt liability for their hesitance. Bangladesh Institute of Development Studies (BIDS) carried out two studies in 1984 and 1986 and found that divestiture had not improved performance of either the public or the private sector. They also cautioned the government to monitor concentration of wealth as a result of divestiture.11 The divestiture of the banks followed a different procedure. The valuation of the banks was made by auditiors and then shares were issued for sale. A little over half the shares of both the banks were taken up by the previous owners. There was adequate preparation and no problems were encountered after denationalization.12 This is not, however, to deny the myriad problems being faced by private sector banking in Bangladesh. For the sale of the abandoned units a system was already in place, the new policy only accelerated the process. These sales were reasonably well prepared. Enterprise profiles would be provided to buyers and bids accepted from them. If necessary there would be retendering. The buyer would make a down payment of 20 per cent of the sale price and pay the rest in three annual instalments and then only officially the ownership would be finally transferred. One hundred and two units have been sold since 1982, making a total of abandoned units sold to private parties of 497 units. The sale value was about Tk. 1,763 million of which so far Tk. 1,323 million has been realized. Four hundred and ten units have cleared all their dues while eight units have been resumed by the government due to default. In another move the government has sold 49 per cent of shares of twelve enterprises to the public.13 On the whole the divestiture effort has been quite successful in respect of abandoned units. The Divestment Board, according to Eliott Berg, did an outstanding job.14 Presently public ownership of industrial assets is less than 40 per cent. MANAGEMENT OF THE PUBLIC SECTOR The public sector organization can be broadly classified as productive enterprises, service enterprises and financial organizations. A list of public corporations is provided in Appendix 2. As mentioned earlier, they have been in existence since before the emergence of Bangladesh, but in the post-liberation period there was real anarchy in their management. Pakistan so intensely disliked the independence of Bangladesh that it left a country whose infrastructure and capital assets were completely devastated, its commercial links with the world were severed, its intellectual stock was ruthlessly decimated and its limited reservoir of public servants were detained in Pakistan during the formative years. While government responsibilities expanded, the politicians, bureaucrats, managers, economists and planners were too inexperienced to cope with the situation. Centralization of decision-making was so complete that autonomy of commercial or industrial units did not exist. The personnel policy, recruitment policy, compensation policy, sales and purchase policy, procurement policy and even staff deployment policy of enterprises and corporations were handled in the ministries. At one time, to ease things, the heads of corporations were made Secretaries to Government to avoid the centralized exercise of power. Beautiful studies, however, were completed for running the affairs of the enterprises on a commercial basis with complete autonomy at the enterprise level, converting the government corporation into a kind of holding company. Rules of business were to determine relations between the government, corporations and enterprises, but they were not formulated at all. In 1976 some

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guidelines were laid down to systematize relations between these entities. In 1983, as the public sector was considerably shrunk, more detailed rules of business were issued.15 But the rules or regulations seldom worked because of the arbitrary nature of the government where executive orders would always infringe on decentralized or delegated powers. For example, to undertake a sales mission, or to increase a price in response to an increase in the price of raw materials, or to purchase a vehicle, an enterprise or even a corporation supervising many enterprises would need presidential or ministerial approval. Interference in purchases and sales and contracting and ordering assumed scandalous proportions, especially during the last military regime. Some of the public corporations have long outlived their utility and some of them are a perpetual drain on national resources. In the transport sector privatization has made most public enterprises nearly redundant. In agriculture with privatization of input supply, the Bangladesh Agriculture Development Corporation (BADC) has almost no role to play. In the trade sector the operations of all three enterprises have largely shrunk. Railways, until the last military takeover, was an organization in small deficit but in the last few years, next to food, it needs the largest subsidy.16 All these organizations suffer from excessive manpower and excessive labour demand. But ironically, they all have very little work to do, their functions are minimal. In his budget speech the Finance Minister in 1986 stated that these public corporations had an investment of TK. 10 billion at the time, of which equity funds represented 30 per cent. But the return expected from this investment was only Tk. 3,690 million or 3.7 per cent in 1986–7.17 In subsequent years the rate of return has been even lower. As the public sector is being cut down, improvements in financial accounting and reporting of physical performance are being made. In 1986–7 a system for autonomous bodies reporting and evaluation (SABRE) was introduced and it covers almost all public enterprises, although department-type large bodies are still out of its purview. This is an excellent Management Information System (MIS) and the private sector should do well to introduce it.18 CONCLUDING REMARKS Privatization began in Bangladesh well before the global popularity of the concept. It was mainly a reaction to the nationalization process of 1972. That policy had virtually prohibited all private initiative in trade and industry. Instead it encouraged only promoters, agents and indentors for trade and industry. This created an intolerable situation and also promoted rent-seeking in the reconstruction phase of the economy. When the World Bank initiated its structural adjustment programme in 1980 and when supply-side economics took over the White House in 1981, Bangladesh was well-poised for dramatic moves in privatization. Divestiture of abandoned units have been made quite well. Various services and trades have been privatized including the supply of input to agriculture. Trade liberalization has gone a long way and exchange rate restrictions are limited. The exchange rate is adjusted periodically in relation to a basket of eight currencies in which main trade is conducted. Trade and industrial policy reforms, begun systematically in 1981, have achieved significant results in the last ten years. The new industrial policy of 1982 was revised in 1986 and again recently in 1991. There has been progressive liberalization in respect of investment sanctions, import licensing and infrastructure services. The trade and investment regime, and the macro-policy framework, represent very largely an open economy. But the greatest anachronism is the complete absence of vitality in the economy. Private investment and, for that matter, investment in general is low, there is hardly any efficiency improvement in any sector, the only exception being the clothes industry. Immediately after denationalization the public sector showed some

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improvement but as the threat of denationalization disappeared under political and labour pressure the situation worsened.19 What can be the reason for such an anachronism? A plausible explanation is provided by the nature of the ruling elite. First, successive military regimes tried to establish an elite which would support them both politically and financially. They sanctioned industries and offered credit to preferred parties who very naturally refused to undertake any obligations associated with industrial investment and debt repayment. This had the contamination effect on the genuine investors as well. This can explain to a large extent most of the unproductive, inefficient and wasteful investments, large defaults on bank credit, big loans without collateral, transfer of public assets to cronies of the rulers at no price and overall financial indiscipline which is holding up revitalization of the economy. Second, the nature of the arbitrary regime could never inspire confidence in the economy or stability in its political system, thus preventing investment in the country. Another oft-quoted complaint is the weakness of policy implementation which really means bureacratic caprices and political manhandling. The unaccountable despotic regime universalized corruption and every impediment to investment meant illegal gratification, commission and brokerage which went for the enrichment of the ruling class. There is also a lot of blame to be shared by the private sector itself. The private sector followed the easy way of accumulation through trading and continued with this process. Luxury expenditure is phenomenal in Bangladesh. Private residences, worth Tk. 10–20 million are, indeed, obscene in such a poor country. During the last military regime another way accumulation was used was in capital transfer. In addition, even the genuine investors did not have the private sector ethos. They do not want government regulations but cannot also stand on their own. At the slightest difficulty they rush to the government for help and relief. The culture of bankruptcy is unknown in Bangladesh. With political accountability now established, the propitious policy framework should benefit Bangladesh richly in a very short while. The government, of course, has to start governing instead of blaming the past and the opposition. Above all a conscious and long-term policy of contraction of government must be the basis of any future programme. The country does not need 1.5 million unproductive bureaucrats who are usually a hindrance to public welfare and productive investment. APPENDIX 1 Industries Reserved for the Public Sector 1 Industries reserved for the public sector in 1974 were as follows: (a) Arms and ammunition and allied defence equipment (b) Atomic energy (c) Jute industry (hessian, sacking, carpet-backing) (d) Cotton textiles (excluding handlooms and specialized textiles) (e) Sugar (f) Paper and newsprint (g) Iron and steel (excluding rerolling mills) (h) Shipbuilding and heavy engineering (including machine tools and assembly/manufacture of cars, buses, trucks, tractors and power tillers) (i) Heavy electrical industry (j) Minerals, oil and gas

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(k) Cement (l) Petro-chemicals (fertilizers, PVC, ethylene and synthetic fibres) (m) Heavy and basic chemicals and basic pharmaceuticals (n) Air transport (o) Shipping (including coastal ships and tankers above 1,000 dw) (p) Telephone, telephone cables, telegraph and wireless apparatus (excluding radio receiving sets) (q) Generation and distribution of electricity (r) Forest extraction (mechanized) 2 In 1975 only (a), (b), (c), (d), (n), (p), (q), were retained in the reserved list. 3 In 1982 items (c) and (d) were also deleted from the reserved list. APPENDIX 2 Public Corporations Productive enterprises Industry sector:

Bangladesh Textile Corp. Bangladesh Jute Mills Corp. Bangladesh Ship Building and Engineering Corp. Bangladesh Sugar and Food Industries Corp. Bangladesh Chemical Industries Corp. Bangladesh Forest Development Industry Corp.

Water, gas and electricity Sector: Bangladesh Gas, Oil and Mineral Development Corp. Bangladesh Power Development Corp. Dhaka Water Supply and Sewerage Authority Chittagong Water and Sewerage Authority (WASA) Transport sector: Bangladesh Shipping Corporation Bangladesh Inland Water Transport Corp. Balgladesh Biman (Air Services) Bangladesh Road Transport Corp. Chittagong Port Authority Mongla Port Authority Trade sector: Bangladesh Petroleum Corporation Bangladesh Jute Corporation Bangladesh Trading Corporation Agriculture sector: Bangladesh Agriculture Development Corp. Bangladesh Fisheries Development Corp. Services sector:

PRIVATIZATION IN BANGLADESH

Muktijudhya Kalyan Trust Bangladesh Film Development Corp. Bangladesh Tourism Development Corp. Civil Aviation Authority Financial institutions 1 2 3 4 5 6 7 8 9

Bangladesh Bank Bangladesh Agriculture Bank (BKB) Bangladesh Industrial Bank (BSB) Bangladesh Industrial Credit Bank (BSRS) Bangladesh Investment Corporation Bangladesh House Building Finance Corporation Four Commercial Banks—Sonali, Janata, Agrani, Rupali Bangladesh General Insurance Corporation (BSBC) Bangladesh Life Insurance Corporation (BJBC) Service institutions Bangladesh Handloom Board Bangladesh Inland Water Transport Authority (Regulatory) Export Processing Zone Authority Bangladesh Sericulture Board Rural Electrification Board Bangladesh Tea Board Bangladesh Small and Cottage Industry Corporation Chittagong Development Authority Rajshahi Development Authority Khulna Development Authority Capital Development Corporation (RAJUK) Bangladesh Water Development Board Government departments run as service corporation Bangladesh Railway Board Bangladesh Telephone and Telegraph Board Atomic Energy Commission

333

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NOTES 1 The ten corporations were actually created out of EPIDC. They were Jute Mills Corporation (BJMC), Textile Mills Corporation (BTMC), Sugar Mills Corporation (BSFC), Steel Mills Corporation (BSMC), Engineering & Shipbuilding Corporation (BESC), Paper and Board Corporation (BPBC), Food and Allied Industries Corporation (BFAIC), Fertilizers, Chemicals and Pharmaceutical Corporation (BFCPC), Gas, Oil and Minerals Corporation (BGOMC). In addition there were former pre-liberation corporations which continued, namely, Fisheries Development Corporation (BFDC), Forest Industries Development Corporation (BFIDC), Film Development Corporation (BFDC) and Small Industries Corporation (BSIC). Sena Kalyan Sangstha, a preliberation organization and Mukti Judhya Welfare Foundation, a post-liberation creation, were entrusted with the operation of some industrial units. Later a Tanneries Corporation and a Cottage Industry Corporation were also set up. 2 The estimate of non-local ownership is placed at 47 per cent and public ownership at 34 per cent of the fixed assets in the modern industrial sector. Asian Development Bank, Privatization Policies, Methods and Procedures, Manila 1985. Article of M.S.H.Chisty, The Experience of Bangladesh’, 263, 265. 3 World Bank (1974) Bangladesh Development of a Rural Economy, 1, Washington DC, 149–54. 4 Geeta Gouri (ed.) (1991) Privatisation and Public Enterprise: the Asia Pacific Experience, Oxford and IBH publishing New Delhi, 5. 5 Bangladesh Economic Association (1983) Seminar Report on Internatonal Trade and Economic Development, Dhaka, speech on Economic Policy of Bangladesh by A.A.Muhith, Finance and Planning Minister, 5 November 1982. 6 A study undertaken on June 1982 at the author’s initiative in the Finance Ministry revealed cumulative losses of public corporations of Tk. 10 billion. This was net of subsidies paid out to enterprises and took into account all profits whether transferred to government or retained by the corporations. Of the total credit available in 1981–2 of Tk. 64.6 billion, public sector agencies appropriated 25.5 billion. The exchange rate was US $1=Tk. 19.5 in December 1981 and it was adjusted to Tk. 24.00 in December 1982. The Power Board lost Tk. 550 million in one year and the Petroleum Corporation had a loss of Tk. 3,320 million, mainly accumulated in one year due to refusal to adjust rates consequent upon petroleum price increase. The growth rate in 1981–82 was an all-time low of 0.8 per cent. Contracting short-term loans for oil and food imports began in 1979–80. 7 T.E.Chowdhury (1987) Privatization of State Enterprises in Bangladesh (1976–84), paper presented at Korea Development Institute/Economic Development Institute joint seminar in Seoul, November (mimeo). 8 Elliot Berg and Mary M.Shirley (1987) Divestiture in Developing Countries, Washington DC, World Bank, (discussion paper). 9 Ministry of Industries, Government of Bangladesh, The new industrial policy’, June 1982. Reproduced in Planning Commission Handbook, Dhaka, November 1983, 199–213. 10 Berg and Shirley, op. cit, and Klaus Lorch (1988) The Privatization Transaction and its Long-term Effects: A Case of Textile Industry in Bangladesh, New York, UNDP. 11 R.Sobhan and A.Ahsan (1984) Disinvestment and Denationalization: Profile and Performance, Dhaka, Bangladesh Institute of Development Studies (BIDS), R.Sobhan and S.A.Mahmood (1986) The Economic Performance of Denationalized Industries in Bangladesh: The Case of the Jute and Cotton Textile Industry Dhaka, BIDS. 12 T.E.Chowdhury, op. cit. 13 Daily Sangbad, Dhaka, 8 December 1991. 14 Berg and Shirley, op. cit. 15 M.S.H.Chisty, op.cit, 265–8. 16 The deficit of the railway was as follows in the following years:

1980–81: Tk.

167 million

PRIVATIZATION IN BANGLADESH

1982–83: Tk. 1985–86: Tk. 1987–88: Tk. 1989–90: Tk.

335

101 million 503 million 1,490 million 1,394 million

Source: Ministry of Finance, Annual Budget Summaries, Dhaka, Bangladesh. 17 Government of Bangladesh, Ministry of Finance, Budget Documents 1986–87, speech of Mr. M.Syeduzzaman, Finance Minister, Dhaka, June 1986. 18 Government of Bangladesh, Ministry of Finance, Budgets of Autonomous Bodies—this has been published in two volumes since 1986–87. The latest one is for 1991–92. 19 M.S.H.Chisty, op.cit.

22 Privatization in Vietnam Andrew D.Cao

INTRODUCTION After a long period of economic central planning, Vietnam has joined the liberalization movement which is taking place throughout the world. Although actual privatization has not yet taken place, Vietnam took the first drastic steps toward economic liberalization with the ‘Doi Moi’ reforms initiated by the Sixth Congress in 1986. The purpose of this study is to describe current economic policy developments in Vietnam in order to determine the outlook for privatization and then to explore some potential privatization strategies. The first section analyzes macroeconomic conditions and reforms in Vietnam during the 1980s. In the second section, their impact on the microeconomic performance of state-owned enterprises (SOEs) is discussed. The third section analyses Vietnam’s transformation in light of the current global economic environment; and finally, the country’s major economic strengths and weaknesses affecting its future are presented, along with some strategic recommendations on how to proceed. The economic data in this study should be considered with caution due to the limited nature of privatization data in Vietnam, to the Vietnamese government’s data collection methodologies, which underemphasize the private sector, and to the transformation of data into standard international format. PRIVATIZATION ENVIRONMENT The macro perspective During the early 1980s, severe domestic economic dislocations—as well as international pressures— induced the Government of Vietnam (GOV) to liberalize radically its centrally-planned economy. Vietnam had a 1987 per capita income of US $109 compared to Bangladesh with US $160, US $212 in Burma, US $300 in India, US $450 in Indonesia or US $850 in Thailand. With a skyrocketing inflation rate, a negative savings rate and a government deficit equal to 45 per cent of gross domestic product (GDP) in 1985, Vietnam started to realize, like many other non-market economies, that liberalizing reforms were needed in order to raise productivity and living standards. Under central planning, persistent state budget deficits and money supply increases used to finance inefficient state industries caused rampant inflation: consumer prices rose 91.6 per cent in 1985 and 300 per cent in 1987. Since 1986, cuts in government spending, which include sharp reductions in state subsidies to industry, as well as tax reforms resulting in higher government receipts, have curbed inflation which fell to an annual rate of less than 7 per cent in the first half of 1990. None the less, the government deficit has

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remained high—30 per cent in the first half of 1990. This is due partially to the austerity measures which sharply reduced output in 1989, resulting in lower government receipts, as well as to a drop in foreign trade and aid from the Council for Mutual Economic Assistance (CMEA) countries. The GOV has also rationalized its financial policies and institutions. Due to high inflation and state controls, Vietnam experienced negative real interest rates prior to 1988 with resulting inefficiencies of capital allocation and dissaving. Fiscal and monetary austerity has since resulted in narrowly positive rates which have led to a rise in the public’s willingness to hold Vietnamese ‘dong’ (VND). The national savings rate reversed from −2 per cent in 1989 to +5.1 per cent by 1990. Bank credit to SOEs increased by only 28 per cent during the first half of 1989, down from a 350 per cent increase in the previous year. Two new state banks, the Bank for Agricultural Development and the Bank for Commerce and Industry, which were established in 1988, have taken over commercial activities previously run by the State Bank of Vietnam, which has in turn taken over the foreign currency operations of Vietnam’s Foreign Trade Bank. Several regional public banks have also been established and private and semi-private banking activities have increased sharply. The Doi Moi programme also included much-needed currency reform: the Vietnamese dong has been drastically devalued from VND 200/US $ in 1986 to VND $4500/ US $ by late 1988 and is now allowed to float at international market rates. At the same time, import and export trade was liberalized in 1989, ending the state trading company’s monopoly on external commerce. The recent currency reform has made Vietnamese products competitive on the international market despite the inadequacy of Vietnam’s production technology, Table 22.1 Industrial output growth (gross at 1982 prices) Annual rate of growth

1976–80

State −2.7 Central −4.2 Provincial and local 3.8 Small-scale industry 6.5 Means of production (Group A) 6.4 Consumer goods (Group B) −2.4 TOTAL 0.6 Source: Statistics, 1976–89, General Statistical Office

1980–85

1986

1987

1988

1989

7.8 7.5 9.9 10.8 6.2 10.7 9.1

6.2 5.9 6.2 6.0 4.5 8.0 6.1

8.6 6.4 11.1 10.7 4 9.6 9.5

13.4 10.6 13.6 11.7 3.8 16.8 12.6

−4.1 −1.8 −5.0 −3.8 −6.3 −3.0 −1.0

coupled by relatively low unskilled labour costs of approximately US $30 per month per person. The government also established tax- and service-advantaged export processing zones (EPZs) in Ho Chi Minh City and the Danang Peninsula. These new policies have dramatically boosted exports, which rose 118 per cent to convertible currency countries and 43 per cent to CMEA countries in 1990 over 1989, generating a trade surplus of US $309 million. As shown in Table 22.1, in response to the 1986 reforms, gross industrial output accelerated in 1987 and 1988 to 9.5 per cent and 12.6 per cent respectively, from an average annual rate of growth of 9.1 per cent between 1980 and 1985. Industrial output growth for SOEs shifted from an average growth rate of 7.8 per cent between 1980 and 1985 to one of approximately 9.5 per cent between 1986 and 1990; production then contracted by 4 per cent in 1989 as the austerity measures took effect. The production of light industry and consumer goods (Group B) has accelerated more than twice as rapidly as that of the traditionally favoured heavy industry and producer goods (Group A)—and contracted

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by only half as much during the 1989 recession. Over the past decade, light industry has risen from roughly 62 per cent of gross industrial output to 71 per cent, despite higher rates of investment in the heavy industry. While local SOEs initially expanded more rapidly than their national counterparts, the latter, possessing a monopoly on many state-produced export goods, benefited more from the 1989 devaluation. Broken down by sector, Vietnam’s largest industries in 1990 were: agriculture and food processing, with approximately 26 per cent of gross social production for both state and private sectors, followed by textiles and clothing with about 14 per cent, chemicals, fertilizer and rubber with 9.4 per cent, and forestry and wood products with 8.1 per cent. In terms of growth rates, liberalization has resulted in agriculture and trade expanding more rapidly than industry and construction, the former both growing over 5 per cent in 1989, the latter contracting by more than 3 per cent in that year. GOV projections for 1991–5 plan an annual output growth of 9 per cent. Total state investment as a percentage of GDP has decreased in real terms from a peak of 15 per cent in 1985 to about 9 per cent in 1989. The bulk of state investment (30–50 per cent) has traditionally been in industry, with under 20 per cent going to agriculture. Investment priority has traditionally been given to heavy industry, with an emphasis on new construction (70 per cent) and machinery acquisition (15 per cent) rather than maintenance or repair. Recent government planning measures have revised these priorities somewhat, with emphasis accorded to light export-oriented and consumer goods industries. A major plant and equipment renovation and modernization programme is also slated for the next five-year period. The micro perspective State-owned enterprises (SOEs) in Vietnam are owned and operated by the GOV at the central level as well as at the local and provincial levels. The private sector includes co-operatives as well as family-owned businesses. In 1989 there were 666 industrial SOEs under the control of the central government, employing approximately 406,300 workers. Provincial governments controlled 2,354 SOEs with 375,700 employees. Co-operatives and family businesses accounted for 23,185 industrial units employing around 1.7 million people during the same year. Since the initiation of liberalization reforms in 1986, the share of GDP produced by SOEs has been declining, while that of the co-operatives and family businesses has been rising. According to data published by the Statistical Publishing House of the Socialist Republic of Vietnam, the contribution of SOEs to national income in Vietnam has dropped from 37 per cent in 1985 to 33.8 per cent in 1990. Conversely, SOE’s share of ‘gross production’—a measure excluding the service sector—has risen from 56. 3 per cent in 1985 to 59.8 per cent in 1990, indicating a disproportionate growth in the service sector. There have been significant changes in the management of Vietnam’s SOEs since 1989. Prior to Doi Moi, production was planned by the central government and output was distributed through the state trading companies at state-set prices. Beginning in the early 1980s, price decontrols were introduced, initially on non-essential items, but gradually expanding to include all but key goods, such as rice and kerosene, by 1987. Subsidies are still maintained on a few ‘social benefit goods’ such as medicine, electricity, and housing, but all other prices are determined by the market. In 1987, the state ceased its supervision of production and distribution. While subsidies are still maintained in key industries, state enterprises were encouraged to move to self-financing. Wages were also decontrolled and hiring quotas abolished. Prior to liberalizing reforms, there was no incentive for SOEs to operate at high capacity to raise efficiency and lower unit costs; utilization capacity prior to 1986 was estimated at 40–50 per cent, At the same time, energy costs were subsidized. Inefficiency was worsened by obsolete technology, most of which came from China and the Soviet Union, coupled with lack of maintenance.

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Since the 1989 economic reform, SOEs have been free to plan their own production schedules, and the majority of their products are sold at free-market prices. International donors such as the World Bank have since reported that capacity utilization has improved in response to the liberalization. Inventories have been reduced and idle equipment has been liquidated in response to the credit tightening. In the personnel management area, SOEs have been laying off redundant workers to meet the new pressures. Estimated total layoffs by SOEs were close to 100,000 workers in 1989- a reduction of around 13 per cent. It is significant that the GOV is stable enough to risk short-run unemployment; it expects small-scale industry to create two million new jobs by 1995. Firms’ financial management has also been rationalized since 1989: SOEs used to receive hidden subsidies via zero-real-cost government loans or negative real-interest rate loans from state banks, and investment decisions were made regardless of rate of return considerations. Under this system, approximately 90 per cent of total bank credit went toward financing SOE’s working capital requirement. After the economic reform, credit cost has risen to about 2 per cent per month for heavy industry and 10 per cent for light industry. State and private enterprises now receive equal credit consideration by government financial institutions. Non-state enterprises are also allowed to retain their foreign exchange earnings to pay for imported inputs. In terms of taxation, the same favourable treatment of heavy industry prevails, with heavy industries taxed at 3–5 per cent and light industry at 10 per cent. All losses are covered by loans and grants from international donors, and any profits are channelled 50 per cent to the state, with the remainder distributed one-third to workers, one-third to benefits coverage, and one-third to reinvestment. THE THINKING ON PRIVATIZATION Vietnam’s liberalizing reforms of the late 1980s represent not merely a tactical reaction to economic difficulties but a fundamental transformation of the country’s self-conception brought about by international as well as domestic developments. Vietnam, and previously North Vietnam, has in the past looked to CMEA countries as its major export market, and to its dominant member, the Soviet Union, for development aid. Since the North-South unification in 1975 and the Vietnamese intervention in Cambodia, Vietnam has been embargoed by western donors for political reasons. These situations are both now changing due to the collapse of the CMEA system and the Soviet economy, and to the pending conclusion of a Cambodian peace treaty, allowing détente with the west. As the US $1.5 billion in annual foreign aid contributed to Vietnam by CMEA countries during the mid-1980s—assistance vital to funding the GOV budget deficit—is curtailed, Vietnam is likely to turn increasingly to western sources of aid. Furthermore, Vietnam has to face the reality of rising unemployment as soldiers start to return from Cambodia. Vietnamese policy-makers have also been deeply impressed by the results of economic liberalization and privatization in other countries around the globe, particularly by the former Soviet bloc countries’ adoption of those strategies. Unlike Eastern Europe, the GOV has adopted a policy of gradualism, first restructuring SOEs by increasing their financial and productivity autonomy and allowing them to negotiate directly with the market-place rather than immediately seeking to privatize them. It is likely, however, given the success of the Doi Moi reforms, that privatization will follow: the reforms’dramatic impact has demonstrated the responsiveness of the Vietnamese economy to liberalization and the latent entrepreneurialism of its population. Despite the private sector’s extremely limited access to financing and its small-scale, labourintensive production units, it none the less contributes over 50 per cent of the national income. This is a far larger proportion than in the East European countries.

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Central to Vietnam’s ongoing transformation is the reorientation of its economic and political life from the traditional socialist stance of autarky, with its emphasis on heavy industry and import substitution, to internationalism, with a focus on developing areas of comparative advantage. This new orientation should prescribe priorities for further Table 22.2 Foreign investment projects approved as of June 1989 Sector

No. of projects

Amount (US $m.)

Percentage (per cent)

Agri., forestry, and agri. processing projects Shrimp farming for export Oil exploration Other mining exploration Electronics assembly plants Mechanics (prod., repair) Light industry Transport & communication Tourism Other TOTAL Source: State Planning Committee

7 4 6 3 5 3 14 5 14 2 63

122.5 104.2 288.0 2.5 2.6 8.2 20.9 39.7 49.6 2.2 640.4

19.1 16.3 45.0 0.4 0.4 1.3 3.3 6.2 7.7 0.3 100.0

economic reforms, including building physical and legal infrastructures and developing human and financial resources in order to promote productivity growth and to attract international investment and trade. These issues will be addressed in the following section. Reflecting Vietnam’s international orientation, foreign investment was liberalized in 1987. The new foreign investment law allows foreign direct investors to own up to 100 per cent of all investment projects and to repatriate any portion of profits. Management may also be foreign. A minimum of 30 per cent of foreign joint venture capital must come from abroad. Corporate profit tax for foreign investors ranges from 15 to 25 per cent, with tax holidays and reductions stretching for up to four years. In 1989 the GOV established a State Committee for Co-operation and Investment to administer foreign investment in the country. As a result of these measures, 173 foreign investment applications worth US $1.7 billion were submitted by mid-1990, about half of which projects had begun operation at that time. As shown in Table 22.2, the majority of this investment was in oil exploration (45 per cent), with the second-largest share going to agriculture, marine farming, and forestry (35.4 per cent). Tourism (7.7 per cent) and transport and communications (6.2 per cent) also drew foreign capital. The majority of foreign investment originated in Hong Kong, Belgium, France, the United Kingdom, and India, with the Soviet Union and Czechoslovakia also participating. RESOURCES, PROBLEMS, STRATEGIES Resources Vietnam’s population of about 64 million is fairly well educated, with a literacy rate of almost 90 per cent. Coupled with Vietnam’s low labour costs, this gives the country a comparative advantage in labour-

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intensive industries such as electronics assembly, textiles and clothing, all of which sectors have been targeted by the GOV for development for international trade. Vietnam is rich in various natural resources, including agricultural and marine production, forestry, mining deposits, and petroleum. Agricultural production responded rapidly to the 1989 price liberalization, with the country swiftly becoming almost self-sufficient in terms of food. More than 70 per cent of Vietnam’s population is employed in agriculture; its main export crops are rubber, tea, and coffee. Mining deposits include manganese, titanium, chromite, bauxite, tin, copper, and zinc, as well as coal. Offshore oil exploration, begun in 1977 with the participation of foreign oil companies, rose to 2 million tons by 1989. Another area the GOV has targeted for development is tourism. Visa restrictions have been relaxed since 1986, and the number of tourists increased from 7,000 to 60,000 in 1989, with a target of 500,000 by 1995. Hotel facilities are at present inadequate, and several western hotel chains have invested in renovation or building. An important resource for private-sector development in Vietnam is the existence of a vast pool of Vietnamese businessmen who, prominent in the country before 1975, then left to pursue profitable businesses overseas. These entrepreneurs, who know the people, the country and overseas markets and potential investors, constitute a valuable source of capital and managerial talent. Problems Now that it has liberalized market conditions, Vietnam stands in need of major institutional reforms. Crucial to the success of privatization is the establishment of a legal framework of property rights. Also lacking is a sufficient financial infrastructure and sound accounting practices to support the development of private investment. As most banks are still under state control, credit is still not allocated according to the borrowers’ financial performance (which, without proper accounting standards, is in itself difficult to determine), causing misallocation of limited capital resources. Scarcity of capital has been a major constraint on economic development undermining the 1980 reforms. Significant interest in developing private-sector credit facilities has been demonstrated; in this area, foreign technical assistance could be of great importance in assisting the GOV on how to institute effective capital market reform. Another area that must be developed in order for Vietnam to raise productivity and attract much needed foreign capital to improve living standards is physical infrastructure. Extensive improvement is needed in water delivery and irrigation/flood control, transportation, energy, telecommunications. About 70 per cent of Vietnam’s urban population has a safe, clean water supply, in contrast with only 30–40 per cent of the rural population. Motor and rail links—particularly in a North-South orientation—are in desperate need of development; bicycle and small boat traffic are still the main means not only of personal but of goods transport as well! Electricity shortages are chronic, with coal remaining the main source of energy despite recent initiatives to develop other power sources such as hydroelectricity. The current ratio of telephone coverage is only 0.16 per 100 population; the equipment is obsolete and unreliable. The GOV has initiated a US $20 million investment programme to improve its telephone system over the next ten years. In developing Vietnam’s economy, special care must be taken not to exacerbate the already significant gap between the northern and southern regions of the country. Reflecting their divergent development since 1945, physical infrastructure is in far better condition in the South, where the US made considerable investments during the period of its participation in the Vietnam War. The South produces about two-thirds of Vietnam’s total output, and has a much larger concentration of non-state industry. The North’s industry was subject to stricter central controls than the South’s, and for a much longer period of time, resulting in a higher level of depreciation and obsolescence of plant and equipment. Foreign investment has also been

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concentrated largely in the South, due in no small part to the region’s superior infrastructure. The GOV hopes to use the existence of mining deposits in the North to attract capital investment to that region. Strategies Because the GOV has adopted a cautious and gradual approach to private sector development, it might consider starting with less controversial areas such as privatization of municipal services. Experiences in other developing countries such as Malaysia, the Ivory Coast, Morocco or Colombia have indicated that privatization in this area has generally met with minimal resistance while improving the standard of living. Government budget restrictions have already resulted in the shifting of some medical services to a fee-based delivery system. In municipal services, privatization could also take the partial form of leasing or management contracting, rather than total privatization through outright sales of the SOEs. The same strategy of partial privatization applies very well to the tourism sector and hotels. This has been done very successfully in Morocco and Egypt, where foreign managers come in to improve the management of the hotels and turn them into profitable SOEs which command a much higher price in case of privatization. Infrastructure projects, particularly in energy and transportation, could be built with foreign capital on a build-operatetransfer or build-operate-own basis. Regarding the financial instruments to be used in privatization, convertible bonds or convertible preferred stocks can be used to attract risk-averse investors: In the early stages of privatization these securities give investors the protection of fixed interest or dividend payments up front; once the SOEs start to become profitable, investors can convert them into straight stocks to participate in equity growth. Another strategy Vietnam might consider is to privatize blocks of SOEs from the same or from different industries and pool them to form a mutual fund; this would reduce investment risk due to portfolio diversification. This strategy would allow the GOV to privatize more profitable industries alongside less profitable ones which might not otherwise find an investor. In terms of privatization’s impact on the labour force, a useful strategy would be to project the number of redundant workers to be displaced based on different privatization scenarios—such as, for instance, gradual privatization or layoff of redundant workers who are close to retirement. This would allow the GOV to budget for unemployment management programmes including retraining and placement services for displaced workers. CONCLUSION After a long period of stagflation during which Vietnam’s economy was eroded by the distortions and rigidities introduced by central planning, Vietnam’s new economic reforms aimed at liberalizing the economy and unfettering the private sector have proved to be effective within a very short time span. In step with international developments, Vietnam is cautiously preparing for the next step of privatization. This approach of moderation and caution is typical of Asian culture. Its prospects are reasonably bright: indigenous Vietnamese have proved receptive to market disciplines, and there are many wealthy, experienced expatriates interested in investing in their home country. In order for Vietnam’s initiatives to pay off, a comprehensive commercial code must be established, commercial banks must be made administratively independent, and sound accounting methods must be instituted in order for economic transactions to take place along rational, efficient lines. The country’s

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infrastructure must also be renovated in order to raise productivity and living standards and to attract foreign capital. REFERENCES Cima, Ronald J. (1989) ‘Vietnam’s Economic Reform’, Asian Survey XXIX (8): 786–9. Fforde, Adam and Vylder, Stefan de (1988) Vietnam—An Economy in Transition, Stockholm: Swedish International Development Authority. Indochina: Vietnam, Laos, Cambodia Country Profile 1990–91, The Economist Intelligence Unit, London, June 1990: 6–31. Investing in Vietnam, Yasuo Konishi, Developing Alternatives, 1 (2) (1991): 8–14. Investor’s Guide to Vietnam, United Nations Industrial Development Organization (1990) Nguyen van Linh (1991) ‘Address by the General Secretary of the Communist Party of Vietnam’, Investment Forum for Vietnam, Ho Chi Minh City, 15 March.

23 Privatization in Australasia Anthony Browne

INTRODUCTION Australia and New Zealand are relatively small by world economic standards. Their combined population of around 20 million is a fraction of that of most European economies and developed regional economies such as Japan, Korea, or Taiwan. Despite its small size, Australasia is significant for a number of reasons. It is a politically stable area, with an English-speaking population that is highly literate. Both countries are price-takers on world markets. For this reason Australasia is very much subject to the World Economy. Structural change in the world economy has seen commodity prices slowly decline in real terms over the last century, and this broad trend appears set to continue. As this occurs, the Australasian economy is placed under great pressure. Australia and New Zealand have been slow to realize that their dependence on world demand for commodities is a major influence on their economic health. Only during the late 1980s did the general population realize that Australasia is supporting a western lifestyle from a Third World export base. The revenues of Australia’s governments have been subject to the .health of the economy over the years. The traditional approach to government budgeting for many years has been to finance recurrent shortfalls in revenue by borrowing. Australia has borrowed for many years to fund imports of a value far greater than export revenues. Australia’s foreign debt has mushroomed in recent years to around 40 per cent of gross domestic product (GDP). The Australian Federal Government has realized this, and since 1988 each annual budget has been in surplus. While this has removed the need for the Federal Government to borrow, it has placed pressure on State Governments’ finances, as their revenue from the Federal Government has been significantly reduced in real terms. State Governments have sought ways to reduce their borrowings and increase revenues. Thus, the Federal Government has seen privatizations and asset sales as a prime source of revenue, and State Governments have sought to do likewise as their revenues have fallen. This is the seed from which privatization in Australia has grown. New Zealand’s foreign debt stands at around 22 per cent of GDP and along with Australia has one of the highest levels of debt-servicing in the world. New Zealand has similarly seen privatizations and asset sales as a source of funds and has acted more quickly than Australia in this regard. Most of these have been by way of trade sale.

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PUBLIC ENTERPRISE SITUATION Public enterprises have evolved in Australia and New Zealand for a number of reasons. Typically, it has been the argument of public policy which has dictated government (or public sector) involvement in the establishment and running of business enterprises. This has been promoted as being in the public interest, such as with telecommunications, power, transport services, and other infrastructure areas. Governments have also seen a mandate for public sector involvement in other areas, such as offering the public government-sponsored banking, insurance, television, radio and other goods and services. In these areas, government enterprises have competed directly with private sector enterprises. This contrasts with areas such as telecommunications and power, which have been set up as tightly-regulated government monopolies. There has been a large amount of duplication in areas such as banking, with many state-owned banks competing against private sector enterprises. Public enterprise participation in Australia Australia has three levels of government—Federal, State and Local. The Federal Government is responsible for broad economic policy through fiscal and monetary policy. Its primary revenue source is income taxes. It operates a number of large enterprises, including Telecom, Qantas, the Commonwealth Bank, and Australia Post. State Governments administer the running of smaller geographical areas. Their primary source of revenue is a variety of stamp duties and charges on businesses and their transactions. State Governments operate enterprises such as banks, transport services, insurance, power generation, water supply, hospitals and commodity marketing boards. Local Governments typically cover small suburban areas. By levy of rates on property, they raise funds to provide services such as garbage collection, public libraries and health services. Identification of Local Government enterprises is difficult. Most Local Governments operate services from within their structure, and do not have separate enterprises. The majority of public enterprises are at the Federal and State levels. These enterprises are readily identifiable. There are a number of public enterprises which operate on a regional basis and are more difficult to identify. They operate below the state level, but above the Local Government level. Examples are electricity distribution, and water and sewerage services. There is a degree of anecdotal evidence which suggests the public sector is involved to a large extent in Australia’s economy. Some politicians assert that almost 30 per cent of the work-force is employed by government either directly or indirectly. Included within this, it is asserted, 7 per cent of the total workforce is employed by Government Business Enterprises. The demarcation between the various levels of government is not entirely clear, but it is clear that there is little private sector involvement at the Local Government level apart from some contracting-out of services. The main division is between Federal and State Governments. Measured by assets, the Commonwealth Government accounts for one-quarter, and State Governments three-quarters, of total Government Trading Enterprises (GTE) assets. Measured by total employment, around 3 per cent of the total Australian work-force is employed by Commonwealth GTEs and 3.5 per cent by State GTEs. New Zealand has also had a large degree of public sector involvement in its economy. Several large corporations such as New Zealand Telecom, Electricity Corporation of New Zealand and Air New Zealand have long been operating in the economy. New Zealand has also long supported a large public service in the same way as Australia.

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Public enterprises by sector At both Federal and State levels in Australia and in New Zealand, public enterprises have covered a wide range of activities. Transport and Communication is an area of significant involvement, including enterprises such as Telecom, New Zealand Telecom, Qantas, Air New Zealand, Australian Airlines, various railways, buses, ferries, and coastal shipping. Banking and insurance is another sector strongly represented by public enterprises, including the Commonwealth Bank, various State banks, and insurance companies, Areas of commerce, and the primary industries of agriculture, fishing, and forestry are also represented by a significant number of government enterprises in Australia and New Zealand. There is no significant public enterprise involvement in mining. Size and structure of public enterprises In the areas of telecommunications and transport, public enterprises have tended to be monopolies. This has made the enterprises very large, with revenues of up to $ A10 billion in the case of Telecom. The banking and insurance enterprises have grown to be of impressive size also. Public enterprises in the areas of agriculture have been smaller in size, and tend to operate as cooperatives or statutory authorities. This contrasts with the larger enterprises which tend to operate as corporations. There is a degree of public sector involvement in manufacturing, involving smaller firms, manufacturing specialist products in areas such as defence. Use of holding companies Government Trading Enterprises in Australia and New Zealand have typically been extensions of the structure of government. Many have been established as statutory authorities or boards, which have been controlled by government ministers and as separate entities which have been owned 100 per cent by government. There is little, if any, use in Australia or New Zealand of complex ownership structures for GTE’s. GTE’s have either existed as extensions of the Government, or as 100 per cent owned enterprises. It is quite rare to find a statutory authority owned by Government that is a holding company for other enterprises. Degree of public ownership Public equity in Australian and New Zealand GTEs is typically 100 per cent. There is no significant use of joint ventures, or other Table 23.1 Rates of return for Australian GTE’s (1989–90)* % Return on capital employed

Commonwealth

State

>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) <(15) * calculated as operating profit/assets for year 1990 Source: EPAC—media release 18/91

1 0 0

0 6 1

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arrangements where the public only holds a partial interest in public enterprises. However, this will change as the Federal Government in Australia intends selling 30 per cent of the Commonwealth Bank and 49 per cent of Qantas. The profitability of public enterprise The measurement of GTE financial performance is made difficult where accounting policies vary across entities. Further, the adoption by most GTEs in Australia of cash accounting fails to recognize many long-term and lasting transactions or obligations that accrual accounting encompasses. Accrual accounting is gradually being adopted in Australia but its speed of implementation varies markedly between states. The equity or asset base which forms the denominator for measuring rates of return is another area where caution is required. The asset valuation methods of GTEs can lead to misleading rates of return in some cases. Many Australian GTEs suffer depressed financial performance when measured by profitability or rate of return analysis, due to their expenditure on Community Service Obligations. This needs to be considered when comparing GTEs to the private sector. The enterprises included in Table 23.1 are a sample of Australian Commonwealth and state enterprises. It is clear that Commonwealth enterprises perform better than state GTEs overall. Table 23.2 shows aggregate data for the same sample of GTEs. It shows the clear difference between rates of return for Commonwealth and state GTEs. Commonwealth enterprises recorded an average 5.5 Table 23.2 Rates of return for Australian GTE’s by sector (1987–90) Sector

1987

1988

1989

1990

Communications Banks Electricity Transport COMMONWEALTH STATE TOTAL SAMPLE Source: EPAC media release 18/91

4.50 6.93 0.29 (12.58) 4.23 (2.63) (0.48)

7.22 10.10 0.38 (10.38) 7.22 (2.04) 0.77

6.95 6.78 1.01 (8.10) 7.25 (1.72) 1.41

7.12 4.31 1.35 (8.77) 5.54 (1.01) 1.48

per cent return, whereas the state enterprises recorded a loss overall. The overall return for GTEs at all levels was 1.48 per cent in 1989–90. Significant sectoral differences are apparent. Communications and Banking appear to have relatively high rates of return while electricity appears relatively unprofitable. Transport has a distinctly negative return.

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Progression of thinking During much of the 1980s, while many countries embarked on ambitious privatization programmes, Australia sat back and observed, but did little. The pressures on Australasian governments to raise capital for debt reduction, and improve the financial performance of the public sector, have operated to heavily promote corporatization and privatization since the late 1980s. The progression toward privatization has been rapid. Some Australasian governments have a clear tendency towards corporatization and privatization, while others approach each entity on an ad hoc basis. Those governments without a commitment to privatization are faced with oppositions which sometimes strongly support privatization and at other times appear strongly opposed. A number of discussions have occurred in Parliament over the years about privatization. The issues have been discussed in introducing a number of bills, and when handing down budgets. Various studies of specific industries have pointed to privatization as a means of solving a variety of economic problems. These have typically been Green or White papers, or reports by various commissions. The New South Wales (NSW) Government, which has been leading the states, has published a variety of documents since 1988 promoting corporatization and, to a lesser extent, privatization. These range from guidelines for private sector involvement in traditionally public areas such as infrastructure, to promotional brochures designed to encourage closer relations between the public and private sectors. A number of commissions and inquiries have suggested corporatization and privatization in many areas over the last three years. The frequency and thrust of these has increased markedly during this time. Governments generally in Australia have been making greater use of the private sector through contracting-out and other means. This has brought the government closer to the private sector. A trend has emerged to make government enterprises more like the private sector through means such as corporatization. This has effected a change in the relationship between the government and its public sector enterprises, so that they are now slightly distanced. It is clear from the media that privatization has made its way into public thinking quite rapidly. During the last three years it has become an issue receiving as much, if not more, media attention than deregulation of the financial sector in the mid-1980s. An increasing number of privatization proposals are being prepared by consultants for government enterprises thinking of privatizing. The volume of such reports and proposals increased significantly during 1990 and 1991. Opinion in the business community, and in government, is now reflected in public opinion. There is an increasing perception that corporatization in particular and, to a lesser extent privatization, has many benefits, and is worthwhile pursuing in many areas not previously considered. Natural monopolies such as electricity, water and telecommunications, are now subject to the thinking on privatization. Australasian perception of privatization The Australasian thinking on privatization has revolved around a gradual process of change toward the eventual transfer of ownership, in several stages. First, the need for change is identified, and the organization prepares itself for such change. Some enterprises have taken the step of commercialization, which is little more than a refocusing of goals and objectives toward those which would be adopted by a private sector enterprise. Management structures are often altered at this point, although real structural change is rare.

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The major step toward privatization is corporatization. This involves creating a legal structure for the enterprise in the form of a company, with the government being the shareholder (usually through a number of ministers). The enterprise is exposed to competition by having protective legislation and tied relationships removed (albeit often using a phased approach) and is subjected to the market forces in its industry. It is usually required to pay a dividend and Commonwealth income taxes, or tax equivalents in the case of State Government-owned corporations. All privatized New Zealand public enterprises went through this stage, and now many Australian enterprises are being corporatized. Privatization in New Zealand has concentrated on trade sales in an effort to maximize revenue. Australia is seeking a mixture of buyers; a typical approach is to involve strategic trade buyers, the general public, and employees. Proposed privatizations in Australia include several partial sales of equity, and not necessarily more than 50 per cent. In addition to the transfer of equity from governments to the private sector, the concept of private sector involvement in Australasia has encompassed other changes. This has included cases where a government enterprise held a monopoly, but is now faced with a private competitor. Other examples are the increased use of competitive tendering, and contracting-out, by government departments. Also included is the case where specific functional areas of defence or other government activities are being undertaken by private enterprise. There appears to be no clear trend by sector as to which styles, or interpretations, of privatization or private sector involvement are being pursued. The major difference in approach appears to be related to the government in question. New Zealand has utilized corporatization and trade sales. The Australian Federal Government has adopted the approach of privatization of several enterprises based on their need for funding. State Governments vary, but NSW has clearly led, and follows the principle of corporatization first, and then consideration of possible sale to the private sector. There appears to be no increase or decline in the use of one technique over another. There does appear to be a process by which enterprises are first corporatized, then considered for privatization on an individual basis. In those industries where only some areas are to be privatized, or where equity structures are inappropriate (such as in defence), change has often entailed the transfer of specific functions to private sector participants. Accumulated losses of public enterprises Australian GTEs generally operate on a cash-accounting basis, especially where they are statutory authorities or bodies which receive direct government funding. It is only recently that public enterprise has begun to adopt accrual accounting principles that explicitly record borrowings, and accounting losses. In the case of most GTEs, a shortfall in revenue from year to year will be met by a loan, or cash injection. Many losses are effectively written off in this way, rather than accumulated. Records of accumulated losses are not kept in a clearly identifiable form. It is clear that some government enterprises receive large capital injections from time to time. This is often a method of avoiding insolvency as working capital needs increase. This form of funding hides what would otherwise be losses, accumulating over time.

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Cash flows between public enterprises and treasuries Most public enterprises are exempt from paying taxes at either Federal or State level. In many cases, enterprises do not pay formal dividends in the same way as private enterprises. Typically, where a surplus exists, a remittance is made to government each year in the form of a dividend. Cashflows from public enterprises to governments are typically smaller than what is normal in the private sector. This is mainly due to the almost constant flow of cash into public enterprises to boost their working capital or to fund losses. Actual divestitures Australia is late by world standards in privatizing state-owned enterprises. The Commonwealth and several State Governments have been using ‘asset sales’ to help fund annual budgets for several years. To date this has involved the sale of land, buildings and other property. Neither Commonwealth or State Governments have yet sold business enterprises. The Commonwealth Government’s first divestiture is the Commonwealth Bank. This involves the sale of 30 per cent of its capital by flotation to the general public in the second half of 1991. Expected revenue is in the order of A$1.2–A$2.6 billion. This sale has been necessitated in order to fund the Commonwealth Bank’s purchase of the troubled State Bank of Victoria. Table 23.3 New Zealand: public enterprise Year

Corporation

Proceeds (NZ$m.)

1987 1988

NZ Steel Petro Corp (70% interest) DFC New Zealand Health Computing Service Postbank NZ Shipping Corporation Landcorp (partial asset sale) Air New Zealand Rural Bank National Film Unit Government Print Tourist Hotel Corporation State Insurance Office Telecom Corporation Forest Corporation (cutting rights)

327 785 111 4 665 35 50 660 4525 3 22 74 735 4,250 600

1989

1990

As part of a restructuring of Australia’s telecommunications industry, a merger of Telecom and OTC (the overseas telecommunications network provider) is planned, together with a 100 per cent sale of Aussat, the satellite communications provider. Aussat would be allowed to compete with the merged Telecom/OTC for the provision of domestic telephone and mobile phone services. State Governments also plan to sell enterprises in the 1991–2 financial year. The NSW State Government’s first divestiture will be a statutory grain-handling authority known as Grain Corp. The

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Government Insurance Office and the State Bank are large privatizations, expected to occur within the next three years. The New Zealand Government has sold a number of government enterprises. In each case the enterprise has been corporatized prior to being sold, according to a clear policy of corporatization. The government has used trade sales as the method of sale in each case. The advantage of this has been to maximize revenue, and to hand each enterprise over to purchasers with experience in the industry (see Table 23.3). THINKING ON PRIVATIZATION It is clear that some countries have led the world in privatization throughout the 1980s and that others have followed. Australasia has only recently started to embark on privatization. New Zealand is more advanced than Australia, having sold a number of enterprises and raised in the order of NZ $9 billion. New Zealand has a clear policy of corporatization which it has been implementing over a period of several years. A number of these corporations which were once government-owned enterprises have now been privatized. Australia differs from New Zealand in that it embarked on privatization later. Privatization is being undertaken with a different emphasis, and for different reasons, at different levels of government. At the Federal level there is a need for revenue to bolster the budgetary position, and a need for capital within the enterprises themselves, which has driven the push for privatization. There has been no strategy adopted by the Federal Labour Government but simply a case-by-case approach as entities have been identified, to some extent, as candidates for which sale is one of the few economic options available. At the state level there is a degree of variation in thinking. The New South Wales Conservative Government is clearly leading the other states. It has a clear corporatization programme which is promoted to business and the general public. This programme is headed by a Government Trading Enterprise (GTE) reform unit which identifies ways of improving GTEs. In this way, NSW is pursuing improved performance of its state-owned enterprises, and state development, as the reasons for corporatization and potential privatizations. The Queensland Labour Government recognizes the need for reform and is also pursuing improved performance, has a reform unit, and is largely following the example set by NSW. In contrast to New South Wales and Queensland is the State of Victoria. The Victorian Labour Government has no clear policy of corporatization or privatization, although it is planning to privatize a number of entities. The driving force behind this is the need for capital, and a desire to distance itself from several recent collapses of state-owned enterprises. Privatization in Victoria is very much an ad hoc and funding-driven affair. The remaining Australian states have not yet displayed a large degree of interest in privatization, except perhaps Western Australia, which is pursuing corporatization of several enterprises and considering some divestitures. It should be noted that Western Australia has experienced several notable corporate collapses and the government would like to distance itself somewhat from business. Common to many countries around the world, Australasian public enterprises have long been criticized for their low efficiency, poor customer service, and lack of good financial performance. This image of government enterprises is almost a cultural constant. The need to reform these enterprises into organizations as efficient and productive as private enterprise has been a major influence prompting thinking in favour of their corporatization and privatization. Continual public funding of many GTEs in the face of budgetary restraint in the late 1980s was another influence on privatization. As Australasian governments tightened fiscal policy during the 1980s, it became undesirable for governments continually to fund the increasing working capital requirements of public

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enterprises. The losses of some public enterprises were highlighted during this period, leading to a desire to instil private sector disciplines or to place them in the hands of the private sector. During the 1980s, the privatization programmes of the UK and much of Europe were at their peak. The Australasian political scene changed during this period. A Labour Government was elected to Federal Parliament in Australia in May 1983, and in New Zealand from July 1984. Both these governments became more ‘conservative’ than their conservative oppositions in many respects. Financial deregulation was embraced in the mid-1980s. A greater emphasis was placed on financial performance, and the degree of welfare support was restricted. As asset sales were pursued as a method of budget financing, privatization became a favourable option. At the state level, NSW has led the way. A Liberal Government was elected to office in 1988, and for some time has been the only Liberal State Government in office. It has clear policies to improve public sector efficiency, and reduce government sector involvement in the economy. Corporatization, and consideration of privatization on an individual entity basis, has been a major part of government policy to improve the state’s performance. A NSW election in May 1991 has resulted in a minority Liberal Government being formed. There is therefore a question as to how quickly the lead which NSW has established in the area of microeconomic reform might be eroded by other states, due to political frustrations with the handling of politically sensitive reform legislation. The need to reduce government debt in the face of a high degree of foreign debt in Australasia has also been a major force prompting consideration of privatization. The Sydney Water Board is currently in the process of inviting tenders from the private sector for the building and operation of major water treatment plants. This has generated interest from both Australian and foreign concerns, including European and English water companies and consortia. ACTIONS IN PRIVATIZATION Early denationalization Australasia followed the rest of the world in the trend to privatization. The political and social climate had not previously lent itself to selling state-owned assets to the private sector. Australasian governments and the general public had not considered the idea of certain areas, such as defence or electricity supply, being in the hands of enterprises without government control. Australasia was very much a follower of the world trend to privatization, and offered little to the development of the concept before it had already been clearly established. Recent denationalizations It is the larger enterprises which have been privatized first. New Zealand corporatized seventeen stateowned enterprises in three years and has moved on to privatize a number of them. Australia had not denationalized any public enterprises by June 1991. Some large privatizations are due to occur in 1991–2, including the sale of 30 per cent of the Commonwealth Bank, 49 per cent of Qantas, 100 per cent of Australasian Airlines, and Aussat. At a state level, the NSW government plans to eventually sell its Government Insurance Office (GIO), the State Bank, and Grain Corporation. In Queensland the government says that there will be no privatization, whilst in Victoria the government is keen to consider private sector involvement in state-owned businesses.

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There have been no Australian denationalizations to date; so it is impossible to establish a clear trend to denationalize any particular type of enterprise, but it is the larger ones which appear to have been targeted first. The reasons for sale in each case depend largely on the particular government involved—and each has its own agenda. The desire to maximize government revenue for budgetary purposes is a prominent goal. It is clear that many enterprises have been chosen for sale because they have a high net capital worth, or should be divested to avoid the drain which predicted future losses or necessary working capital funding will have on government finances. The Commonwealth Bank will be the first denationalization at a national level in Australia. The sale of 30 per cent of its equity to the general public is expected to raise A$1.2–A$1.6 billion. The primary factor for the partial sale is to raise sufficient capital to fund the absorption of the failed State Bank of Victoria. Also scheduled for sale in the near future are Australian Airlines, and 49 per cent of Qantas. The airline industry is subject to wide fluctuations in performance, and is presently in recession. Australian Airlines’ performance has been satisfactory despite this, and is likely to be sold in the 1991–2 financial year. Qantas is experiencing greater difficulties and is expected to make a significant loss in 1991. It is considered that 1991 will not be a good time for its 49 per cent sale. Privatization in telecommunications is intended to improve customer services. Privatization in this case involves merging Telecom with the Overseas Telecommunications Commission (OTC), and selling the Australian Satellite company ‘Aussat’ to a private enterprise. The purchaser of Aussat will become a competitor to Telecom in a similar way to Mercury competing against British Telecom in the UK. New South Wales’ first sale to the private sector is Grain Corp, a relatively small grain-handling authority. Tenders were sought in May 1991 for sale to the private sector. More ambitious sales being considered by the NSW State Government are GIO and the State Bank. GIO is a state insurance company capitalized at around AS 1.5 billion. Plans are being formed for a complete sale by public float within twelve months. The GIO is in sound financial condition, unlike some other states’ enterprises. The State Bank is another NSW Government enterprise available for sale in the foreseeable future. Its estimated worth is up to A$850 million. Although the banking industry is currently suffering a severe shakeout, the State Bank appears to have been resilient, and is an attractive opportunity for the private sector. No other states have yet indicated definite intentions to sell enterprises to the private sector. Privatization has manifested itself more in the form of creating new enterprises. Joint ventures and other forms of privatization A number of privatization initiatives have been undertaken in recent years by Australasian governments, that have not entailed sales of existing enterprises. At the Federal level in Australia, there are many plans involving significant private sector involvement. These include the provision of defence support services, such as aircraft maintenance and repair, by private sector enterprises. Individual Australian states have taken steps in the privatization of services or functions, as distinct from privatization of specific enterprises. Joint ventures have featured as a technique, along with the creation of new enterprises or consortiums to build entirely new projects. Provision of infrastructure is an area where private sector involvement is being encouraged, and many examples are emerging. The NSW government is building a road tunnel under Sydney Harbour. This is a joint venture between government and a private consortium, whereby it is privately financed and

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constructed, and paid off over thirty years with toll collections. Other typical examples of private sector involvement in NSW infrastructure include plans to build freeways financed by means of a toll. The Skitube Railway is an example of private sector provision of infrastructure. A private enterprise consortium financed and constructed this railway in the Snowy Mountains Skifields, and now operates the railway and a resort. In other states, the private sector has been involved in a variety of projects. These include the building of a township, and a transmission line in the Northern Territory, and the construction and management of a gaol in Queensland. There are plans for private sector participation in many other areas, including a high speed train between Sydney and Melbourne (a distance of around 1,000km), hydroelectric power generation, sewer provision, and housing developments. Operating environment of public enterprise In Australia, there have been some changes in the operating environment of public enterprises. There has, however, been no alteration to the public sector at a macro level. Changes to the rules under which public enterprises operate have been made at an individual, or micro, level. This has typically been by way of the process from commercialization, to corporatization, then privatization. The introduction of commercialization and corporatization have usually been the method by which government control is relaxed and public enterprises have become more independent. This is especially true of New Zealand. Preparations for privatization Initially, public enterprises usually become aware of a pressure to become more efficient, or that they are a candidate for eventual privatization. The typical first step is to restructure the management of the enterprise. New structures generally resemble the former ones, but are brought into line with the private sector. Often, charters or mission statements are created. The organization is exposed to the concepts of efficiency and profitability. These first steps are the basis of commercialization. Corporatization is the major step toward privatization. Corporatization brings real rather than cosmetic changes to the organization, its structure, and its principles. It seeks to improve performance by creating management incentives for efficiency, and a more neutral operating environment between public sector and private sector enterprises. The means by which this is achieved entails creating an equity structure that is fully government-owned, adopting accrual accounting and accounting standards applicable to private corporations, and structuring the management in a way where performance can be measured and appropriately rewarded. This usually involves physical changes, as underperforming divisions are liquidated, or different areas amalgamate to form an enterprise that is structured just like any private enterprise. The same profit motives and goals as in the private sector apply—the only difference is that the enterprise is fully government-owned. Capital markets should be able to compare the performance of corporatized public enterprises because the same accounting system are used to measure firms operating in the same environment, and they receive no special treatment or protection from government. Once an enterprise has been corporatized, it becomes more marketable and desirable to the private sector. It is a relatively simple concept to transfer ownership of an enterprise to the private sector once corporatization has occurred.

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Public agencies The sale price of public enterprises in Australasia is set by governments. This is due mainly to the political nature of privatization. There are plans for the use of agencies in the area of regulation. The telecommunications industry in Australia will be regulated by a body called Austel which will set some prices and charges between competitors. Existing bodies, such as those in control of airports, or banking and insurance, will continue to operate unchanged. Indeed, some public enterprises previously exempt from the requirements of statutory bodies will be subject to their regulations for the first time. PROBLEMS ENCOUNTERED Conceptual clarity on privatization Central to the thinking on privatization is the concept that market forces, including competition and capital market performance monitoring, will cause enterprises to operate most efficiently. Goods and services will be provided at the lowest economic cost, bringing benefits to consumers, employees, the corporation, and the macro-economy. New South Wales has a clear outline of its concept of privatization in accordance with these principles. These have been outlined in reports to the government and a number of promotional documents aimed at investors, business, and the public. A similar approach is now being developed in Queensland. Conceptual clarity is also sound in New Zealand, where a clear policy of corporatization has been successfully implemented, leading to the privatization of a number of enterprises. Privatization has consistently been by way of trade sale to the highest bidder, in an effort to maximize revenue to the government. The remainder of Australasia has lacked clear policies on privatization, and has approached the sale of enterprises on an individual basis. The impetus has usually been a need to raise capital or reduce government financing of poorly-performing enterprises—this contrasts with the objective of maximizing efficiency and bringing gains to a variety of disparate groups. The difference in approach by each government is likely to remain. Political support for privatization There is variety in the support for privatization that Australasian political parties display. The many financial, social, and political pressures that have encouraged privatization, ensure that all Australasian Governments are considering privatization. Yet each government has its own approach to it. The major differences arise in whether a case-by-case approach, or a clearly-defined conceptual approach, is being followed. Some governments appear to be strongly committed to achieving economic reform through increased efficiency, with the goal of bringing benefits to consumers, employees, and others. This is usually achieved through corporatization of enterprises and then privatization where this is suitable. The New Zealand Government, and the NSW State Government, are the most committed to these principles. The Australian Federal Government, and State Governments other than NSW, appear less committed to the principles of privatization, approaching it on a case-by-case basis.

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Opposition parties are somewhat enigmatic in their support. At times there has been strong support for privatization, and in other cases there has been strong resistance to it. However, the Commonwealth Opposition had a clear policy of privatization and had identified a list of candidates for privatization were they to win office at the elections in 1991; in the event they failed to gain power. This list includes: Telecom, OTC, Aussat, Qantas (100 per cent), Australian Airlines, Airport Terminals, Medibank Private (Health Fund), Commonwealth Serum Laboratories, Commonwealth Bank, AIDC (to 100 per cent), Australian National Lines (Shipping), The Pipeline Authority, and Snowy Mountains Engineering Corporation. Civil Service reactions The management and staff of enterprises subject to corporatization and privatization have been exposed to a variety of threats. The most obvious of these is that as enterprises are corporatized prior to privatization, there are usually significant job losses. A degree of retraining, and changes in job descriptions, usually face those that remain. There appears to have been little objection to privatization from the public service. Trade unions are prominent in Australasia, and the public service has a high level of unionism. Despite this, there appears to be no more industrial unrest which can be traced to privatization, compared to other issues facing unions, although there has been resistance to some specific proposals. Many, including top management, have chosen to leave public service positions when corporatization has occurred, because they seek job security and other benefits which privatization will diminish. Overall, the civil service is aware of the benefits that privatization can bring to the community, and has embraced the concept well. Sale issues The changes necessary to prepare public enterprises for privatization often involve significant change to the legal and management structure, and the culture of the organization. It can be quite difficult to alter the culture of an organization, but in the case of Australasia the pressure to privatize has encouraged rapid change. Typically, the process of change from public enterprise to privatized entity takes two or three years. There do not appear to have been any significant problems in bringing about the preparatory changes to allow privatization in Australasia. The choice of sale technique, and the price at which public enterprises are sold, are subject to political considerations. New Zealand has had no difficulty in pursuing revenue maximization as its primary goal in its choice of sale technique. Trade sales to the highest bidders have been the standard approach. Australian governments have taken a more complex approach, giving consideration to employees, offering the general public a stake, and also encouraging business sector participation. Buyers of privatized entities Foreign ownership is a contentious issue in Australia. There is considerable resistance to foreign ownership of land, share equity, and other investments. There are strict limitations being placed on the extent of foreign ownership of soon-to-be privatized enterprises. Commonwealth Bank Shares will not be available to foreign investors until after they are floated on the stock exchange. The maximum foreign equity in Australian Airlines and Qantas will be limited to defined percentages. New Zealand has concentrated on trade sales at the highest price, and seems less concerned about the foreign ownership issue.

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Social consequences Privatization is intended to bring benefits to many groups, especially consumers. A major concern of consumers is that where public enterprises with Community Service Obligations are privatized, consumers will suffer. This is especially the case in remote regional areas where the cost of providing many services is high. There is concern that those groups will be found with significantly greater costs after privatizaton, contrasting with the lower subsidized charges, prior to privatization. Privatization is designed to promote the provision of goods and services at their true economic cost, and this contrasts distinctly with the cross-subsidies which have applied in the case of many government enterprises. Australasian governments have made several commitments that consumers will not be disadvantaged by privatization. Distributional equity There is significant variation in wealth distribution in Australasia, just as in most western economies. Privatization is expected to bring about reductions in the cost to consumers of many goods and services. This should have a positive effect on consumers in the lower income ranges. Public flotations are expected to bring about wider share ownership. This is more the case in Australia than in New Zealand, as New Zealand has concentrated on trade sales to the business community. It is expected that a degree of speculative gain will be normal in the case of share issues, as share prices of listed entities are expected to show significant appreciation in the early stages. Public relations Privatization has been cautiously received in Australasia. There have been sufficient international privatizations, and discussion in the media, to have made the general public aware of many privatization issues. However, the general public remains to be convinced that privatization will bring real economic benefits. The 1990s are a time where greater productivity and output are vital to Australasia, and privatization is being cautiously considered by governments as a means of achieving this. Consumer groups are also wary of privatization on the basis that the benefits that are supposed to arise may not materialize. Sufficient discussion of this issue in the media has ensured that governments are aware of it. In response to this, various promises have been made that consumers will not be disadvantaged by privatization. Trade unions are renowned for the number of industrial disputes in respect of claims they wish to make. Privatization has been warily received by most unions. However, there has been no strike action to date attributable to privatization. The public reaction to privatization in Australasia has been mixed. The community is becoming increasingly aware of the issues involved —but people are still wary of the claimed benefits that the process can bring. However, it would be fair to say that a couple of successful privatizations which were seen to benefit consumers in particular, would increase public support for the process. CONCLUSIONS Australasia has developed public enterprises as part of public policy during the last century. As pressures such as funding have arisen, there has been increasing recognition of the benefits that corporatization and privatization can bring to all levels of government.

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The improvement of the financial performance of public enterprises is a major goal. They have typically not been as efficient or profitable as private enterprise. Governments have sought to emulate private enterprises through corporatization, and to convert some public enterprises to private sector ownership. Progression towards privatization in Australasia nearly always involves corporatization as the first step, then privatization if suitable. Australasia began this process later than most countries, and has privatized relatively few enterprises. The pressure for privatization is usually financial. Progress at the Australian Federal Government level is suffering from the ideological position of the Labour Government. Privatization proposals to date (Qantas, Australian Airlines, Commonwealth Bank, Aussat) are being dictated by funding constraints. At the Australian State level, privatization is in different stages, principally centring on corporatization. The NSW State Government has led the way to date, with proposals being discussed to privatize several major state-owned entities such as the State Bank, and the Government Insurance Office. New Zealand embraced privatization more quickly than Australia. Revenue raising has been the main goal for government, and has been maximized through trade sales. The concept of privatization has been cautiously accepted and introduced in Australasia. Political and public support exists but it is by no means universal. There has been a marked increase in the amount of media attention given to privatization during the last three years, and public awareness is increasing. Reforms other than the sale of public enterprises have been pursued in Australasia. These include contracting-out, and private sector participation in infrastructure provision. This has been encouraged by governments with tight budgetary constraints, aiming to aid the economic development of the region. Australia is increasingly becoming involved with the South East Asian Pacific region. Australasia’s privatization initiatives are evolving on a similar timescale to other Asian countries such as Malaysia, Singapore, and Indonesia.

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

PRIVATIZATION AND DEREGULATION IN JAPAN IN THE 1980s The meaning of privatization and deregulation Privatization in Japan is used with different meanings. In the reports of the Provisional Commission on Administrative Reform, the so-called Rincho reports, privatization is treated as the process of transfer of public enterprises into private companies, but it also means the partial introduction of private ownership, and/or private management to public enterprise and the increasing of its autonomy (Tamamura 1986:1). According to Kato, privatization can take three forms: the relaxation or abolition of government restrictions imposed on the market, the contracting-out of government undertakings to private companies, and the transfer of whole government enterprises to the private sector. He insists that privatization in Japan basically falls into the third category (Kato, 1987a:6). So we can distinguish two attitudes towards privatization; from the micro point of view privatization is concerned with the enterprise level, and from the macro point of view privatization refers to changes in the whole economy. Deregulation can be defined in two ways: first, as deregulatory measures directed to release the market or some segments of the market; and second, as the abolition of state regulation over public enterprises or decreasing the level of regulation concerning public enterprises. For example, the budget and wages of the enterprise Nippon Telegraph and Telephone Public Corporation (NTT), previously controlled by the Diet, are no longer controlled, due to the decreasing regulation of enterprise. So privatization and deregulation, as understood in Japan, are very closely joined and even mixed. Both processes are located in the common trend of reform in putting emphasis on the role of the private economy. The reform has put the emphasis on using and exerting the vitality of individuals and enterprises in the private sector. In line with deregulation of the market and the privatization of public enterprises, the Japanese government introduces the private sector to public work projects and emphasizes the supplementary function of the public sector in relation to the private sector: At the present time, projects with a high public character such as the Trans-Tokyo Bay Bridge and New Kansai International Airport are being developed by a private enterprise as a way of making use of private sector vitality. The ‘minkatsu project’ (private sector vitality project) approach is used for projects with both a high level of public character and high project risk. (Economic Survey 1987–1988:226–7)

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Both processes are concentrated on the same objective: improving the efficiency of government and Japanese companies through responding to the changes in domestic economy and in the world market. The laws concerning the privatization of public corporations and the laws concerning deregulation of the adequate segment of the market were enacted at the same time. For example, the Ministry of Posts and Telecommunications drafted three bills in 1983—one on privatization of the NTT, one on liberal regulation, and an omnibus law to modify some 100 other laws affected by structural changes. All three laws took effect on 1 April 1985 (Harris 1989:121). The reasons for privatization The official explanation is the following (Economic Survey of Japan 1987–1988:225–6). There are two kinds of internal reasons for privatization. One is connected with changes in social and technological conditions in which public enterprises function. The second is connected with some characteristic features of public enterprises. The first kind of reason can be explained as follows. The public sector fulfils some functions in the economy and covers some specific areas. Its involvement in the market is necessary because of: (a) the nature of the public goods usually defined in terms of ‘non-exclusivity’ (for example, in relation to the use of roads, parks, bridges, and so on) and/or ‘external effects’ that indicate ‘that public goods have significant impact upon the society as a whole above and beyond the benefits received by individual users’ (Economic Survey of Japan 1987–1988:225); (b) the ‘uncertainty’ of a project with a very high business risk and the ‘incubation period’; (c) high costs of entry, (for example, in industries which require a fixed plant and equipment such as railways, power, communications and gas); (d) securing fairness in distribution of income. Under market rules the supply of some goods and services concentrates on highly profitable (urban) areas, while in areas with low profitability either the services in question are not provided at all, or, if provided, they are higher-priced, since pricing will be carried out in accordance with a profitability criterion: ‘Because of the occurrence of the “cream skimming” phenomenon, the public sector must often become involved from the standpoint of fairness of income distribution’ (Economic Survey of Japan 1987–1988:225). But changes are occurring in the socio-economic situation. (a) There are areas where the costs of entry into the market (sunk cost) has gone sharply down because of technological progress’. So in this case the public sector is no longer needed (Economic Survey of Japan 1987–1988:226). (b) The level of income among people has gone up with economic progress and the growth of the private sector has been substantial as well. So the public sector is no longer necessary from the standpoint of income distribution. (c) There are areas where the public sector no longer has to provide services directly and where the purpose can be well served by the state assisting and guiding private sector activity. There is the case of Kobe City’s Port Island where the project is supported by the public as wells the private sector. In the light of all these reasons, privatization is fully justified and needed as official papers insist (Economic Survey of Japan 1987–1988:225–6).

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Besides public enterprises are featured by unclear location of managerial responsibility, low level of cost consciousness, and low motivation for improving productivity and profitability (Economic Survey of Japan 1987–1988:226). These features result from the need to secure Diet approval for annual budgets. Investment plans of public corporations tend to blur management responsibility and thwart adequate decisionmaking. Incentives and flexibility of public corporation are impeded by the fact that wage determination is unrelated to labour productivity and employment is assured by the government. Legally guaranteed monopolies sheltered these corporations from competition and weakened their effort to enhance efficiency (OECD Economic Survey 1987/1988:82). This argument will be analysed in detail with reference to the Nippon Telegraph and Telephone Public Corporation (NTT) and the Japan National Railways (JNR). The role of the state in the economy Deregulation and privatization in many western countries resulted not only in diminishing the public enterprise role, but also in diminishing the role of the state in the economy. But in Japan it is difficult to say that these processes of privatization and deregulation are resulting in the diminishing of the role of the state in the economy. Some authors insist that in some cases there is a tendency to strengthen the power (and role of the administrative apparatus) over the company—for example, in the telecommunication market (Hills 1986). There is no doubt that privatized enterprises in Japan are not free enterprises. Nearly all of them belong to the public utility area, and are regulated by the government. So, according to Tamamura, even if this kind of enterprise is privatized, it is not transformed into an entirely private enterprise. So neither the NTT nor the JNR is a completely private company. Even if fully privatized, the NTT continues to be a public utility enterprise (Tamamura, ‘Is NTT a private company or not?’: 2). Japanese official documents explain that deregulation and privatization mean stimulating competition wherever it is insufficient, and that in response to changes in economic, technical and social conditions the role of the state is changing (White Papers of Japan 1987–1988:155), but it does not mean diminishing. It is not assumed that the more the competition, the better the situation. So deregulation and privatization are a part of Japanese adjustment policies. Competition is not a goal, it is only a device to achieve some goals. Kato noticed that in Europe nationalization was undertaken with socialist thinking as the predominant factor. However, nationalization in Japan, especially before the Second World War, was motivated by a desire to make the state prosperous and powerful (Kato 1987a: iv). Although it might appear to be strange, privatization today, at least to some extent, is motivated by the same desire. Privatization and administrative reform The privatization of public corporations was implemented within the framework of the administrative reform in the 1980s. In March 1981 the Provisional Commission on Administrative Reform commenced work. Between 1981 and 1983 the Commission issued five reports. From the privatization point of view the following remarks in these reports are interesting. The first report drew attention to the very costly subsidies on Japanese National Railways (JNR). The second report recommended that the regulatory system should be simplified, and industry and the private sector should get more freedom. In the third report one of the most important recommendations was to reorganize and privatize three public corporations: the Japanese National Railways, the Tobacco and Salt Corporation and the Nippon Telegraph and Telephone Public Corporation. The fourth report was concerned

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with the machinery of reform implementation and the fifth related to government enterprises such as the postal and forestry services and national hospitals (The Administrative Management: 11–12). Japan has a history of the privatization of publicly-owned enterprises, including the steel industry, early in the Meiji era (1868– 1912), as well as division and privatization, just after the Second World War, of companies created in a wartime merger. But there was no experience with privatization of such gigantic national enterprises as the ‘Big Three’ or ‘San-Kosha’—the Nippon Telegraph and Telephone Public Corp. (NTTPC), the Japan Tobacco and Salt Public Corp. (JTSPC), and Japanese National Railways (JNR). These were ‘public’ for about hundred years. Since 1985 the NTTPC, JTSPC and the JNR have been privatized, while others such as Japan Air Lines, and Okinawa Electric Power Co. Ltd, of which the government owned most of the controlling shares, have been privatized completely. The others were consolidated. So we can speak of different scales of privatization (partial or complete), as well as different forms of privatization according to the ownership, organization and the mode of operations. JNR was privatized by privatization of management and restructuring (division). But it was not traded up to now; and from the ownership point of view this privatized company belongs to the government. NTT was not divided, though its management was privatized and it was traded. Now NTT shares partly belong to the government (about 60 per cent) and partly to individuals and different companies. Among the various enterprises, privatization of NTT and JNR have attracted the most interest and special attention of the public. These two corporations were privatized in different conditions and in different ways. However, the thinking in both reforms was the same. These two privatization processes—NTT and JNR— are described here in detail, because of the many important issues they raise. PRIVATIZATION OF THE NIPPON TELEGRAPH AND TELEPHONE PUBLIC CORPORATION The NTT—some information In Japan telegraph and telephone services began in 1869 and 1889 respectively as a part of the posts and telecommunication services provided by the government. However, because of the lack of sufficient investment these services did not spread widely among the general public. Half of the facilities were damaged during the Second World War. At that time only 2 per cent of Japanese residences had telephone services (in the US, 50 per cent). In 1952 the Ministry of Telecommunications was abolished and reorganized into the Nippon Telegraph and Telephone Public Corporation. Now, the system of telecom services created by NTT belongs to the best kind in the world. In 1986 more than 80 per cent of households subscribed to telephone service (versus 95 per cent in the US) (Harris 1989:117). The NTTPC was the industry’s single greatest investor. The Corporation invested 1,616 billion yen in 1985 and had a domestic inducement value of 3,797 billion yen. This investment ultimately resulted in the hiring of about 210,000 people in all industries nationwide (White Papers of Japan 1987–1988:155). On 1 April 1985, the NTTPC was privatized and NTT Corp. was created. In line, the deregulation of the telecommunications market was implemented. The main business of the NTT in domestic telecom services consists of telephone (subscriber, public telephone, cellular) services, telegraph, leased circuit, digital data exchange, radio paging services, facsimile network, videoconferencing, videotex and other services. In related business the NTT organizes sales of terminal equipment, information charge collection services, consulting on telecoms, operator information services, training and seminars. The number of employees as

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of December 1989 was 266,000. Total assets for the financial year 1989 reached 11,045.5 billion yen (NTT Procurement: 42, 45). The reasons for the NTT privatization In explaining the privatization of the NTT some remarks on the deregulation process in the world are useful. The trend to deregulation occurred at the time of recession when all the industrialized countries, especially the highly-developed, intensified competition with one another. Deregulation became one of the main means of increased competitiveness on the world market and, in effect, of accelerated economic growth. Fast communication, and particularly data communications, were seen as a means of increasing productivity and gaining comparative advantages. The US was among the first to liberalize policy towards telecommunications services and equipment. But a market ‘spillover’ effect occurs when the geographical scope of the market exceeds political boundaries (Harris 1989:114); so the US pressed its partners to deregulate the telecommunications market. Japan was in a special situation. The Japanese and the Americans held long negotiations on the ways and conditions to open the Japanese market. The most heated discussion took place over America’s request concerning the telecommunications market (Japan, US, 1985). In that context the concept of deregulation and privatization has been an American export to Japan; and US deregulation and privatization was used as a direct model for Japan to some extent (Hills 1986:1–18). Americans anticipated taking advantage of the opportunity to penetrate the Japanese market provided by privatization and deregulation of the NTT (see The Japan Economic Journal, 15 January, 2 April, 9 April, 1985). The general reason for deregulation of the telecommunications market in Japan from America’s point of view was its rapidly-growing trade deficit, when Japan got a trade surplus. In addition to this, Japan’s export of telecommunications equipment to the US is about twelve times larger than its telecommunications equipment import from the US. The adjustment of Japan to this pressure is expressed in official statements about globalization of the Japanese economy. Japan recognizes that its huge balance of payment surplus is a destabilizing factor for the world economy, and that it has to take steps to reduce this imbalance (Okita 1989:217–19). The way to this goal lies, among others, through liberalization and deregulation in many segments of the market, including telecommunications. The pressure from abroad was supported by strong interests inside Japan. The Ministry of International Trade and Industry (MITI) realized that Japan’s export-oriented policy ‘was looking for new domains, especially those with a high-growth future’ (Harris 1989:119). Telecommunications is such a domain. While the manufacturing sector in Japan is very competitive and innovative, the non-manufacturing sectors are by their nature less exposed to international competition and also subjected to various official regulations. To this sector belongs telecommunication or, more precisely, the NTT. So if the corporation was to achieve international competitiveness, it would be necessary to give the management more independence (Kato 1988:8). (Hiroshi Kato was the chairman of the Fourth Sub-Committee of the Second Provisional Commission for Administrative Reform.) MITI had a direct and growing part in telecommunications policy. Furthermore, this ministry had successfully initiated a nationwide discourse about convergence of computers and communication and the ‘informatization’ of Japanese society (Harris, 1989:119). In the concept of informatization of the society the Japanese situation is described as a transfer to the second or high information society which follows the two preceding stages of human society in terms of information—the pre-information society and the first information society in which commercialization of

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information began with printing. The second information society is characterized by electronic networks and enormous dissemination of information. This shifting to a new era of development is based on an economy oriented towards information processing (The Japan Economic Journal, 16 November 1985). This is going to be achieved through stressing more active utilization of the market mechanism and vitality of private companies. MITI became an institutional power supporting deregulation of the telecommunications market and NTT privatization. The Ministry of Finance was interested in the same process. At this time the government of Japan was facing growing fiscal deficits. By 1981 the era of high growth had passed but there were still growing demands for subsidies, social welfare and defence expenditure. It was not possible to cover this expenditure by tax increases because of the resistance of the electorate and business. By privatization of NTT the government could get revenues from the sale of NTT’s stock, from taxes and from dividends. The NTT was a company with great earnings and new markets that gave it a 14 per cent annual growth of revenues. It is not surprising that some large companies wanted to enter such a market. Industrial producers of computers and communications equipment, especially those denied preference in the NTT procurement (namely Toshiba and Mitsubishi Electric), were interested in deregulation and privatization of the NTT. Not only producers of telecommunications equipment but user companies as well were interested in this. Technological progress affected changes in the relative cost of providing various telecommunication services. The cost of long-distance transmission and value-added services declined relative to the costs of basic local services. But, changes in the telephone rates did not fully reflect the cost changes. In Japan rates were set by the Diet which promoted subsidizing residential phone services. As the demand for longdistance data processing and value-added services increased, the size and economic effects of the crosssubsidies from business to residence grew to proportions intolerable in industrial spheres (Harris 1989:119). In addition, large user companies operated their own telecommunications systems and wanted to sell spare capacity (Hills 1986:138). So producers and business users became advocates of NTT reform. In addition, even the president of the NTT supported the idea. Hisashi Shinto was brought in as president of the NTT in 1981. He was recruited by Keidanren (the powerful Federation of Economic Organizations) as a candidate for the NTT post in order to promote liberalization internally and to manage the process of privatization at NTT (Hills 1986:139). The opposition to NTT’s privatization from the socialist party and trade unions was not strong enough to stop the pro-privatization thinking. Further, Japan developed high telecommunications technology and by 1984 achieved technological equivalence to the US. This technological development was achieved in large part by the NTT family of suppliers, which obtained a sizeable advantage thanks to the NTT’s favourable procurement policy (Harris 1989:118–19). Now members of the NTT family can efficiently compete in components, computers and telecommunication technology on the global market. The NTT’s and its family members’ effort created sufficient basis for widening competition in the telecom market. They are strong enough to cope with an attack from foreign competitors in the Japanese market and gain better position in international markets. The European Community has set itself the goal of achieving an integrated economy by 1992. The emergence of an integrated economy means the emergence of a continental market that requires continental information—telecommunications infrastructure. Therefore both European and non-European multinationals have a vital interest in the development of an integrated European telecommunications system (Thimm 1989:54, 57). For Japan it is a new challenge. Integrated manufacturers and

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telecommunications users can become dangerous competitors. But on the other side an integrated European market opens up large opportunities for the development of the production of commodities and services. So, the real reasons for NTT privatization were the short- and long-term interests of big domestic and foreign capital that needed the abolition of restrictions on market entry, especially on some future prospective market segments. In global aspects it is the problem of dividing the new big market between different countries and multinationals. Changes caused by privatization of the NTT Changes in company operation The main differences between the old and the new situation of the NTT are as follows. Before the reform NTT was regulated by the Nippon Telegraph and Telephone Public Corporation Law and the Public Telecommunications Law. Now the Nippon Telegraph and Telephone Corporation Law and the Telecommunications Business Law are applicable to NTT, and the Commercial Code also. The Telecommunications Business Law belongs to so called ‘industry laws’ that have been established for each utility industry (electric, power, gas, railway, airline and road and sea transportation). As a public corporation, the NTT was controlled by the Japanese Diet and supervised by the Ministry of Posts and Telecommunications (MPT). Through privatization it was transformed into a special company, organized as a joint-stock company to which the Commercial Law applies. So it can operate as a private commercial firm. Now the NTT can widen the scope of business activity to different profit-oriented activities. Its investments are formally unregulated; before the reform they were approved by Diet in an annual budget. The government does not control the wages and the budget of the NTT. In the financing sphere, before the reform the borrowings and bond issues were subject to MPT approval and overseas bond issues were guaranteed by the Japanese government. Now they are not approved by MPT. The NTT Public Corporation’s total amount of borrowings and bond issues were limited by the Japanese Diet annually. The NTT Corporation’s total amount of bonds outstanding is permitted to equal four times its net worth. The Management Committee is now appointed, not by government, but by the general meeting of shareholders (Telecommunications Reform: 25). Privatization eased the restrictions of functioning of the NTT but it does not mean that the NTT is an independent company. The new NTT is still regulated by the government, mainly because it remains the dominant carrier of important public services. The NTT’s responsibility for the uniform provision of telecom services nationwide is maintained. The new status gave the NTT the possibility to expand into related fields and co-operate with other carriers and business firms; but profit-oriented business activities are subject to MPT approval. Most items in rates and charges are also approved by MPT (NTT Financial Fact Book 1985:4–5). The appointment and dismissal of executive officers and auditors requires approval from MPT. The NTT is obliged also to subject financial statements to the MPT and publish them (Telecommunications Reform: 26). According to the NTT Corporation Law the wages and retirement allowances for the employees of the new NTT are decided through autonomous collective bargaining. Their wage and allowance scales will greatly depend on the productivity and financial position of the new NTT. But the wage and allowance levels of other companies are also taken into account (Telecommunications Reform: 20). The old law totally prohibited strikes by employees. The new NT labour unions will have the right to strike; however, the Prime Minister may order an emergency adjustment measure applying to both the management and the labour union in case of a possible strike threat that would cause inconvenience to the

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public. This is stipulated by Labour Rotation Adjustment Law that concerns all public utilities (Telecommunications Reform: 21). Organizational changes of the NTT The Provisional Commission for Administrative Reform originally recommended to divest the NTT, both regionally and functionally. MPT opposed divestiture and the Diet did not want it. So, NTT was privatized without being broken up. Organizational changes might be implemented according to the judgement of the management of the new NTT. The NTT responded to privatization by reorganizing itself to address various problems including the management’s capacity for quick decision-making and strategic planning. The NTT’s reorganization is intended both to enhance revenues and to improve managerial performance. However, some efforts to modernize the NTT’s management were taken well before privatization. Prior to privatization the NTT was structured along functional lines with separate bureaus for planning, plant engineering, construction and installation, maintenance, commercial operation and service administration. After privatization the NTT organized itself into various profit centres including a telecommunications network, telephone service, customer premise equipment, telecommunications directory, integrated communications services, advanced telecommunications services and data communications services. Later the data communications service sector was spun off as a separate subsidiary. Operating within this profit-centre framework, the NTT has established various programmes to improve management and reduce costs. Since its privatization in 1985, the NTT has aggressively pursued a strategy of diversification and the creation of many subsidiaries. The subsidiaries are divided into four categories: companies organized to take advantage of opportunities in the various regions of Japan, companies organized to make full use of NTT technological expertise, companies to provide miscellaneous services, and companies to facilitate the utilization of NTT human resources. The NTT established foreign subsidiaries also (NTT Annual Report 1986:12–13). New subsidiaries include many lines of business like leasing, engineering services, travel services, telemarketing, market research, credit card systems, ‘intelligent building’ services, ticketing services, security services and even sports clubs. Some 12,000 of the NTT’s more than 25,000 employees have been assigned to these companies. Most affiliates in which NTT holds at least a 20 per cent share are performing favourably and two-thirds are making money. Now the NTT’s emerging strategy is not to establish new firms but rather to incorporate new ideas within existing companies. Some affiliates are likely to be integrated (Itoh 1990). Though the NTT was privatized without divestiture, according to law the government was obliged in 1990 to re-examine the corporate structure taking into account the competitive situation and changes in circumstances after privatization. Five years after the reform the MPT sent its Telecommunications Advisory Council to work on the NTT perspective. No decision has yet been made. Changes in the ownership As a public corporation the NTT was fully owned by the government. Privatization changed its status into a stock company; its assets and liabilities were transferred to the NTT Corporation. All the new shares of the public corporation were transferred to the Japanese government. The law specifies that government ownership may be reduced to one-third, and that aliens are not allowed to own NTT stock.

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At the beginning the government owned 15,600,000 shares of 50,000 yen per value unit. The sale of the NTT shares owned by the Japanese government is subject to approval by the Japanese Diet. Since the incorporation the Government of Japan has sold 5,400,000 shares of the company stock to the public. The major holder (on 30 September 1989) is the Finance Minister (66.8 per cent); financial institutions hold 8.1 per cent shares, individuals 19.9 per cent and employees 0.4 per cent. The number of shareholders (as of 31 March 1989) were as follows: government—3; financial institutions—1,136 (0.1 per cent of the total); other institutions—28,568 (1.9 per cent); individuals— 1,515,491 (98.0 per cent). But 98 per cent of the shareholders (individuals) held only 17.5 per cent of shares, 1 per cent of the shareholders (financial institutions) held 9.3 per cent of shares. This is because the size of individual shareholdings is low; 94.7 per cent of shareholdings has a size of 1–4 shares (NTT Annual Report 1989:17). Officially foreigners cannot buy shares. But Tamamura indicates that it is possible to check the foreign shareholdings only in the case of transfers. If foreigners buy NTT shares through the money trust or fund trust, the nominal owner is the Japanese trust. The MPT has permitted the foreign security corporation to treat NTT shares. In this case foreign companies can hold NTT shares for a short time. So there are some gaps in the law that allow foreigners to own NTT shares (Tamamura, The Telecommunications Industry: 2). The Finance Ministry recently revealed plans to amend the law that prohibits foreign ownership of NTT stock.This would be followed by the listing of NTT shares on the New York Stock Exchange before the end of the fiscal year March 1992 (‘Foreign ownership of NTT’, 1990). The Finance Ministry currently holds 10.2 million shares of NTT stock, but it plans to sell off 5 million shares. They will be sold at regular intervals over seven years beginning in the fiscal year 1991. The government plans to maintain its ownership of NTT stock at the fixed level of 5.2 million shares, down from its current level of one-third of all outstanding issues. Converting the government’s holding from a proportion of all stock to a fixed number of shares should make it Table 24.1 The number of new telecommunications carriers 1.4.85

1.4.86

1.4.87

1.4.88

Type I carriers 0 5 11 35 Type II carriers 85 209 356 530 Source: An Outline of the Telecommunications Business, October 1990:2

1.4.89

1.4.90

1.10.90

43 693

60 841

66 893

easier for the NTT to raise its capital either by issuing convertible bonds or by increasing its capitalization (‘Ministry plans net stock sale’, 1990). The results of NTT privatization It is very difficult to separate the results of the privatization of the NTT from the results of telecommunications market deregulation. In Japan privatization law (the NTT Corporation Law) was introduced in line with the law that demonopolizes and deregulates the telecom market (The Telecommunications Business Law). In addition, many changes in the relations between the state and the NTT, though called privatization, are, in fact, a kind of deregulation of enterprise operations. According to an official statement, ‘easing of regulations and privatization of Nippon Telegraph and Telephone Public Corporation has had very positive results’ (Economy Survey of Japan 1987–1988:141). One of the main aims of NTT privatization was to introduce competition in the telecommunication market. In fact there is serious competition now in some segments of this market. To be precise, the main force is

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deregulation, not privatization, though both these processes were mixed. In April 1985 the NTT’s monopolistic operation in telecom business was abolished and possibilities of entering the telecom market by different firms were created. After 1 April 1987 the telecommunications industry witnessed a robust growth in the number of new carriers (see Table 24.1). The Telecommunication Business Law classifies telecom carriers (TC) into Type I telecommunications carriers, that is, those with their own telecommunication circuit facilities, and Type II carriers, that is, those without their own telecommunications circuit facilities. They lease communications lines from Type I TC and resell them to customers. Type II TC are further classified as either Special or General Type II TC. Special Type II TC are those that provide a large-scale nation-wide communications system for communications Table 24.2 New common carriers (NCC) market share Car phones March 1989

May 1990

Pagers March 1989

NTT% 98.3 73.1 NCC% 1.7 26.8 Source: ‘Market share competition heats up’, 1990:38

May 1990 80.5 19.5

71.0 29.0

between Japan and points outside Japan. These carriers must obtain registration from the Ministry of Post and Telecommunications. General Type II TC are those other than the Special Type II TC and must submit a notification of intent to the MPT (Telecommunications Reform: 8). Yet competition is rather limited. First of all the newcomers try to enter new markets or some segments of the telecom market characterized by very high technology, new technology or new products—for example, market of car phones, pagers, DTA—and they are not interested so much in traditional telecom services (see Table 24.2). The second interesting point is that, as it was forecast by the government and the NTT, newcomers enter the very lucrative markets in the geographic sense; for example Tokyo—Nagoya—Osaka. This is the most business-oriented area where demand is strong enough to assure high business efficiency. At the same time the NTT is not permitted to discontinue its services in unprofitable rural areas without prior approval from the Ministry of Posts and Telecommunications (Outline of Telecommunications: 12). Newcomers try to offer new services and occupy the best market areas. For example IDO (Nippon Ido Tsuhin Corp.) announced that it will market the world’s smallest and lightest portable phones available to users in the Tokyo-Nagoya area (Hacene Boukaraoun 1990:6–7). The services undertaken by the NCC do not usually entail very high sunk costs, unlike the NTT which built highly-expensive infrastructures in the whole of Japan. So the NCC can omit big entry costs even where entry needs high capital. Newcomers have a way of overcoming this barrier. Newcomers are organized by big potent corporations like Toyota, Mitsubishi Corp., Mistui Co., Sumimoto Corp., Nissan Motor Co. and Kyocera Co. Many Type I carriers are owned by large trading companies that invest in several different NCCs simultaneously. The primary investors in the Type I are also often large telecom users. The big telephone users organize new carriers partly for their own use. The share of NTT in the telecom market is still very high; yet the most profitable segments of the market are attracting new companies. Though the NTT has taken many steps to increase its competitiveness, both its management and labour representatives say they remain worried (‘Morale, competition’, 1987).

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Not only competition, but also regulation by the MPT worries the NTT. The MPT implements tighter regulatory control on the NTT than on the newcomers. The ministry opinion is that ‘some sort of preferential treatment is necessary to allow the new carriers to catch their initial financial footing’ (‘Morale, competition’, 1987). MPT tariff policy and free access (there are no access charges in Japan) are favourable for NCC. For example, the MPT has maintained a sizeable difference between NTT and NCC rates (initially 25 per cent; later 20 per cent) to give the NCC a competitive edge. The NTT has not been allowed to de-average its long-distance rates nor raise its local rates, although it has expressed some interest in doing so (Harris 1989:125). MPT has an influence in diminishing the competition among new competitors. For example, MPT divided the more populous region of Japan into three markets and declared that only one competitor would be allowed to compete against the NTT in each of these markets. After the radio business deregulation, five groups expressed their willingness to enter the eastern market which, because it included Tokyo, is the largest and most profitable of the various paging markets. Under the postal ministry’s guidance, four of the five groups joined to establish a joint venture called Tokyo Telemessage Inc. (‘Telecom firms’ 1987). Also Keidanren tries to consolidate new carriers to make their competition stronger (Harris 1989:123). It is worth noticing that not all segments of the telecom market are regulated to the same extent. The market for offering value-added services—such as data communication, electric mail and dial-up computer information—is almost completely deregulated. But the business of providing the basic network over which these services run is still regulated (‘Redialling Japan’s telecoms’, 1987:59). Through this policy the government influences not only the economic situation of different firms but also the direction of development of this telecom industry. It seems that privatization and new deregulation of the market cut out the most profitable market segments for new enterprises. Under MPT’s policies the deregulated market is, virtually, not a free market. Instead of the NTT’s monopoly control, there is government control—formal and informal. Some authors insist that competition Table 24.3 Decrease in the rates for telecommunications services after the telecommunications reform (in yen) Telephone service Tokyo- Osaka 3 Leased circuit service Tokyo- Osaka Leased circuit service Tokyo- Mito min. daytime 1985 400 1,100,000 1986 – – 1987 – 915,000 1988 360 – 1989 330 805,000 1990 280 590,000 Source: An Outline of the Telecommunications Business, 1990:7

1,400,000 – 1,250,000 – 1,200,000 1,150,000

Table 24.4 The NTT’s growth of revenues and profits (in 100m. yen)

1984 1985 1986 1987 1988

Total revenue

Business profits

Profits of the year

47,562 50,914 53,545 56,620 56,526

– 6,843 7,277 8,206 7,047

– 1,406 1,480 2,432 2,306

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Total revenue

Business profits

1989 57,692 6,655 Source: Privatisation and Deregulation, 1990:51

Profits of the year 2,591

for the market is more severe than competition in the market (Sato and Stevenson 1989:36). With new carriers entering the market, price competition started between them and the NTT. Newcomers diminished their prices and pressed the NTT to do the same (see Table 24.3). It is pointed out that, due to privatization and competition, the NTT’s growth of revenues and profits is lower (see Table 24.4). To cope with competition, the NTT acts in two directions—reducing costs and increasing revenues. To reduce the costs the NTT has diminished its work-force. The NTT’s personnel costs account for 37 per cent of its total expenditure. As a private corporation the NTT started with 303,951 workers. The number was reduced to 268,500. To increase revenues the NTT developed new activities. So far the NTT has been diversified in a network of almost 200 subsidiaries (Boukaraoun 1990:13); and the NTT relocated its surplus workers. In 1989 the NTT retained its financial position as the most profitable corporation, though the rate reduction, due to the aggressive competition, decreased its profits by 14 per cent compared with FY 1988 (Boukaraoun 1990:8). But price competition cannot last too long. Probably it will be limited to competition in new products and other innovations. Privatization and deregulation in the areas of telecommunications have induced investment and employment in related business. Before privatization the NTT bought all equipment in Japan, and the telecommunications facilities construction and information equipment industries were the greatest beneficiaries; after privatization the NTT increased purchases from non-Japanese firms and established joint ventures with non-Japanese firms. In the fiscal year 1989 the total value of the NTT’s foreign procurement went up about 22 per cent over the previous year (NTT Procurement, 1990:5). The Japan Communications Industries Association very often noted the negative influence of that situation on Japanese producers. It also opposed NTT-IBM Japan partnership in the value-added network services (‘NTT and IBM’, 1985). Jill Hills insists that the main losers from telecom deregulation are the domestic manufacturers of equipment. But the policy of deregulation of the telecom market is a long-term policy; and in the future large advantages are expected. Some Japanese operators benefit from these processes at present too. For example, the accord between the US and Japan opened Japan’s VAN market to American operators in August 1990. Thanks to this, Fujitu is building a network connecting Japan-US private lines to public lines. The network will link Fujitsu to its 200 branches, plant affiliates and other offices, both in Japan and the US (‘Value-added networks’, 1990). NTT privatization and deregulation formally removed barriers to foreign capital entry into Japan, but the big obstacle is the very specific NTT standards. So foreign capital presses Japan to co-ordinate international and domestic standards. In Japan there are three well-known non-governmental organizations for standardization in the telecommunications field. One of them, the Telecommunication Technology Council, has issued a report on standardization, considering the matter from the medium and long term, and confirmed that an efficient means of standardization must be determined. Of course it is important not only for foreign capital, but also for Japanese expansion in international markets (White papers of Japan 1987– 1988:160). To open the market for foreign capital the NTT decided to disclose detailed information concerning the specifications of its machines (‘NTT to unveil’, 1990). The MPT insists that the Japanese telecommunications market ‘is one of the most open in the world’ (‘Open’ 1990: Preface).

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However ‘only a few foreign companies and equipment providers have become direct NCC investors… Foreign investment in Type I carriers is limited to one-third of the total capitalization’. But very often new domestic carriers had links with foreign capital. For example, the domestic satellite system, Space Communications Corp., is backed by American Ford Aerospace; the Japan Communications Satellite Co. is backed by Hughes Aircraft (Sato 1989:36–7). In September 1990 Japan and Canada agreed to conclude a bilateral pact quite similar to the pact with the US to open the Japanese market (‘Value-added network’, 1990). Step by step the scope of services covered by foreign capital is widening. As far as the consumers’ benefits are concerned, up to now local subscribers and local callers are protected from increase in charges. But some increase in short-distance calls is likely. Before privatization the NTT covered losses in some areas from its large revenues. But now the MPT is urging the NTT to introduce separate accounting for local and long-distance service operations starting from April 1992 to avoid cross-subsidies (Boukaraoun 1990:12). One-third of proceeds from the sales of the NTT is devoted to establishing a special fund aimed at financing development of research in high technologies in telecommunication. ‘MITI plans an important role in managing the Japan key Technology Center, which is founded in part by NTT dividend to the government’ (Harris 1989:122). The state promotes new and continuing communications projects and promotes experimental research in new media. A total of 1.04 billion yen was granted during the fiscal year 1987 to fifteen projects. These projects are mainly connected with telecommunications. Additionally 520 million yen was granted to eight other projects and loans in the amount of 375 million yen were issued for nineteen telecommunications projects (White Papers of Japan 1987–1988:161). PRIVATIZATION OF THE JAPANESE NATIONAL RAILWAYS (JNR) The JNR—some information The railway business in Japan started in 1872. In the early days both public and private railways were in operation, but in 1906 they were nationalized with the exception of urban railways. In 1949 the management of the nationalized railways was transferred to the new Japanese National Railways, a public corporation fully financed by the government. The JNR created a highly efficient and reliable system of transport with about 20,000 trains, 22,000 kilometres of nation-wide network and 45,000 stations. More than 2,012 kilometres is used by super express Shinkansen trains (Statistical Handbook of Japan, 1986:68). The Shinkansen line was opened in 1964 between Tokyo and Osaka. Its top speed of over 210 kilometres per hour was then the fastest in the world. Before privatization the nation-wide JNR network was important for freight and passenger transport, but it was far from a monopoly. In 1983 the share of private railways in total passenger transport (passengers carried) was 22.3 per cent, while JNR’s was 12.9 per cent. Automobile passenger transport share was 64.3 per cent. The share according to the passenger-kilometres carried was 23. 5 per cent JNR and 15.6 per cent private railways. In domestic freight transport the share of JNR was 1.5 per cent, private transport 0.6, motor vehicles 90.15 (Annual Report of Transport Economy, Fiscal 1984:33– 4). Since 1964, when the JNR recorded its first net loss, the deficit has increased year by year. Before privatization the total debt of the JNR was approximately 37 trillion 300 billion yen (Annual Report of Transport Economy, Fiscal 1985:6). The number of workers of the JNR was 277,020 at the start of the fiscal year 1986, the year just before the reform (Privatisation and Deregulation, 1990:13). On 1 April 1987 the JNR was split and privatized.

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The reasons for JNR privatization In the case of the JNR the detailed reasons for privatization are different from those in the case of the NTT privatization: 1 The immediate reason was the financial situation of JNR. By 1986 the JNR’s total debt exceeded 37 trillion yen. At the same time the state budget had found itself in deficit. In 1973 the government debt equalled 8. 1 per cent of gross national product (GNP); in 1986 it increased to 50 per cent of GNP (Kato 1988:5). In that situation the government looked for measures to solve the financial problem. One solution could be to increase the corporate tax, another to cut subsidies. These solutions were not introduced. Mitsuhide explains that business circles were against both of them. Business created the slogan of ‘saving the budget without tax increase’ (Mitsuhide 1988:12). To offset the recession of 1965 increased public investment was aimed at. But even though the economic situation improved, the government could not stop public investment, nor cut off subsidies meant to be used to stimulate the economy. The industry that got subsidies formed a voting organization to elect Diet members who protected those subsidies. Rincho, which had business representatives within it, could not propose cutting off those subsidies. Among the three major sources of deficits the three Ks (Kokutetsu—JNR, Kenpo—Health Care System, Kome—Food Management Law), the JNR was the most appealing subject because of its magnitude and public attitudes against its relatively expensive fares in comparison with private railroads (Mitsuhide 1988:11–13). So, the proposal from the Provisional Commission on Administrative Reform was the privatization of the JNR. What was the cause of the JNR’s large debt? (a) The intrinsic cause of the JNR’s debt resided with the increase of loans for investment which was far beyond the JNR’s ability. But in the 1970s according to government policy the JNR’s facility investments played a role in vitalizing the Japanese economy which had been sluggish with the oil crisis. The JNR was forced by the government to construct ‘political railway lines’. Many of these local lines were definitely unprofitable routes due to the small number of passengers (Abe 1990:5). (b) Private railway business is highly profitable in Japan. This is due especially for two reasons: (i) they operate first of all in highly-profitable areas like Tokyo and Osaka; and (ii) they shift their business into other activities and absorb profits from exploitation along its railway lines, for example, real estate, retailing, tourism, manufacture and even culture. It was impossible for JNR to diversify its business due to a number of legal restrictions imposed on public corporations and the strong pressure from private business circles claiming that public sector should not undermine the interest of private sector. As a result, a large part of the profits made from various business activities alongside JNR lines have been harvested by private firms. In addition, the JNR was obliged to maintain unprofitable lines. (A Comparative Study, 7) (c) The JNR had a system of uniform nationwide fares…that were about 50 per cent to 60 per cent higher than those of private railways, so it lost an increasing number of passengers. It lost passengers in rural areas as well due to the continued outflow of population and the wider dissemination of automobile use. (Economic Survey of Japan, 1987–1988:135)

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(d) The highest part of the long-term debt of JNR is due to the interest burden which exceeds, on average, a trillion yen per annum. The interest in FY 1984 totalled 1.52 trillion virtually the same as the deficit for that year’ (Akihiro 1986:27). (e) Another source of the fiscal troubles of JNR were pensions and retirement allowances. Older workers were a disproportionately large part of the staff. After the Second World War the government required the JNR to hire discharged soldiers and those who had worked on railroads in Japan’s colonies. This large group of employees have reached retirement age at about the same time. Before privatization the pension maturation rate at the JNR was 117.8 per cent, that is, 100 present employees had to support 117.8 retired employees (Akihiro 1986:27). 2 There were other reasons for the JNR’s difficulties. In recent years the overall growth of the JNR business has been stagnant. (a) Passengers shifted from railways to air transport and automobile transport—a world-wide phenomenon. (b) Cargo transport diminished due to changes in industrial structure—shift ‘from the traditional heavy’ industries dealing with large products to objects that are light and compact. At the same time processing and assembly-type plants began to be located away from ports and industrial centres. It gave advantages to air and truck transport (Economic Survey of Japan 1987–1988:135). (c) There has been great progress in the development of national networks of expressways and in the construction of local airports. This permitted expansion in air transport and trucking (Economic Survey of Japan 1987–1988:135). 3 The Provisional Commission on Administrative Reform stressed the need to privatize the JNR from another point of view. In its opinion the JNR, along with two other enterprises of the kosha type, was not quick enough to respond to changes. It was due to its dependence on the government and due to its large size. Its large size developed a bureaucracy and diminished the ability of the management to control the activity of enterprise. The JNR’s labour relations were bad and work morale distorted. These features of the JNR (excessive government involvement, unclear management responsibility, limitation of business activities, abnormal labour-management relations) were due to the style of a public corporation. So the conclusion of the Commission was to divide and privatize the JNR (Sasaki 1989:4). 4 The National Railway Worker’s Union (NRU) (before privatization the largest and strongest labour union in the JNR with 200,000 members) underlined, however, that the causes of privatization were political—to weaken NRU on the pretext of deficits (Abe 1990:6–7). Changes caused by privatization of the JNR Changes in company operation Changes were stipulated by the eight Acts of the JNR Restructuring. The JNR was a special corporation (tokushu hojin) established by the government to improve the welfare of the general public. It was defined as a public corporation, but it is treated in the literature (Mitsuhide 1988:1) as if it was the government itself, or its alter ego. The privatization and restructuring of the JNR abolished its peculiar character. It became formally a private corporation. New Japanese Railways (JR)

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companies are basically governed by the Railroad Business Act and Railroad Marketing Act which are applicable to the private railroads also. At the same time the JNR Act that defined the JNR as belonging to the government was repealed. In consequence, a national railroad system was abolished and governmental responsibility for constructing railroads and for fare levels was removed. Now, new JR companies aim to respond to market needs and to establish an effective management (Mitsuhide 1988:2). Before privatization the JNR was subjected to political intervention at central and local levels. Its president was summoned by parliamentary committees seventy to eighty times a year, leaving little time for managing the railway company (Ishizuka 1985). According to the public corporation law, the budget of the JNR, wages, fares, operating and investment programme were determined by the Diet. Now the Ministry of Transport approves its business plan. Earlier the Cabinet appointed the President of the JNR; the Transport Minister appointed the auditors. Now the Minister approves appointment and dismissal of senior directors and auditors. Previously the JNR was fully financed by the state; after privatization it has assumed selffinancing (Privatisation and Deregulation 1990:44–5). The JNR was under the strict guidelines of the National Railways Act, which regulated what business lines it could enter. JR companies have more freedom according to scope of activity. JR companies are able to engage in a variety of new businesses and can create new subsidiaries. They can, as well, abolish some unprofitable routes, but not all of them. They are obliged to maintain some of them. JR companies can seek profitability as independent private firms, although regulated by the government in service areas, charges and business activity. So, up to now the situation of the JR group is not exactly the same as that of the other private railways. First of all JR companies are not independent in the financial sphere. Three of them have to get resources from a special fund; but they also use some preferences from the state. The regulation by the state is not so strict as before privatization, but it is still very wide. The most important feature of JR companies, however, is the extensive possibility to manage themselves according to market rules and diversity the business activity. The JNR was not a monopoly. It competed with private railways and with other means of transport. After privatization the situation has not changed. The JR group faces competitive pressures, especially in urban places, but practically none in rural areas. As for labour relations in the JNR, these are now governed by three labour laws, in the same way as private enterprises are (Privatisation and Deregulation, 1990:45). Changes in the JNR organization The Ministry of Transport and the JNR have been discussing the following organizational measures: the division of the JNR, re-employment of its personnel, reform of local lines, revisions in train schedules and rates, restraint on investment in facilities and equipment, and changes in use of land. The most important are the division of the JNR and re-employment. (a) JNR was split into six passenger companies, one freight company, one Shinkansen holding corporation and other organizations. Three passenger companies were created according to geographi cal criteria: Hokkaido company (2,000 km, 13,000 employees), Shikoku company (900 km, 5,000 employees), and Kyushu company (2,200 km, 15,000 employees). Three companies are organized on Honshu Island— East Japan company (7,300 km, 89,000 employees), Central Japan (Tokai) company (1,900 km, 25,000 employees) and West Japan Company (5,200 km, 53,000 employees). According to Mitsuhide this is done ‘to maintain as much parity as possible in terms of profitability’. Transportation demands differ

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from one region to another. For example, the Tokaidou and Sanyou Shinkansen carried 35,200,000 passengers per kilometre in the fiscal year 1984, but Jouetsu Shinkansen carried only about one-fifth of that number. This difference influences the profitability of the railways (Mitsuhide 1988:15). The Three Islands Fund was established to help the railroad operation of Hokkaido JR, Shikoku JR, and Kyushu JR, which have markets with extreme difficulty in earning profit. ‘Local railways will be maintained with profits of main line railways after some of them were converted into bus service’ (Mitsuhide 1988: 16). Some opine that the boundaries have been arbitrarily sliced, especially two boundaries through the densely-populated Tokai Corridor (‘JNR to be dismembered’, 1985:649). The Japan Freight Railway Company is the only one for the whole country in respect of freight. The Shinkansen Holding Corporation holds Shinkansen lines and leases them to the three companies on Honshu Island. Shinkansen leasing means that the whole Shinkansen system is to be transferred to an independent special corporation from which all JR companies are going to lease the system. The aim is to offset the losses of unprofitable JR’s like Tohoku or Joetsu, with cash flow of profitable Tokaidou Shinkansen’(Mitsuhide 1988:16). Three additional organizations were also set up, namely the Railway Telecommunications Co. Ltd, the Railway Information System Co. Ltd, and the Railway Technical Research Institute (Foundation). The Railway Telecommunications Co. serves as a Type I telecommunications common carrier, which leases micro-wave circuits, and coaxial and optical fibre cables nation-wide to companies, while the Railway Information Systems Co. took over the JNR’s computer systems, including its computerized seat reservation system (‘Companies to be born from JNR’, 1987). The JNR Settlement Corporation (SC) is of a special nature. It is obvious that breaking up the JNR does not reduce the deficit by itself. So the long-term debt is inherited by the JNR SC. The debt is to be covered by JNR assets that now belong to the JNR SC. To minimize the burden the JNR SC is to make an effective use of land and increase the added value of its land, (b) Another serious issue of the JNR restructuring relates to employment. Before privatization the JNR’s employment was excessive. That was the opinion of the Provisional Commission. This opinion was repeated by the press. It was estimated that the surplus work-force was one-third of the total employment. In comparison to private railways about 90,000 workers of the JNR were considered unnecessary. On the average a JNR station was staffed by two to three times as many people as an average private railway station. A motorman on JNR trains in the Tokyo area was on duty for 2.5 hours a day, compared to 4 hours for the counterpart on private railways (Ishizuka 1985). According to Ministry of Transport information (Railways in Japan, 1990:16), the number of JNR employees at the beginning of the fiscal year 1986 was 277,020; the surplus work-force was 76,370. Some of them were taken by new JR companies, some were retired and some were transferred to the JNR Settlement Corporation. The aim was to help the unemployed find jobs. Some of the dismissed JNR workers found new jobs. The rest were dismissed in April 1990 when the re-employment promotion law expired. There was a difference between the solutions introduced for NTT and JNR. All the employees were directly transferred to newly-established companies in the case of the NTT and the Japan Tobacco and Salt Corporation. The JNR privatization features dismissal of all the personnel and selective re-employment of the staff by the individual companies (Abe 1990:8). The aim of the JNR privatization was to convert the JNR public corporation into purely privately-owned railway companies. Now the situation looks as below (Table 24.5).

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The government is going to sell all the shares of the seven JR group companies including JR East and JR Freight. JR East and JR Central are to be listed in the fiscal year 1991, whereas JR West is to be listed in the fiscal year 1992 (Abe 1990:7). The JR and Ministry of Transport officials are now engaged in discussion about how to avoid the NTT syndrome of inflated stock-price expectation (Choy 1990:20). Shinkansen Holding Corporation is a special organ which possesses systems and leases them to passenger railway companies. The profits Table 24.5 Changes in ownership Company

Type of enterprise

Hokkaido Railway* Stock company East Japan Railway* Stock company Central Japan Railway* Stock company West Japan Railway* Stock company Shikoku Railway* Stock company Kyushu Railway* Stock company Japan Freight Railway* Stock company Shinkansen Property Corporation Public corporation Railway Telecommunication** Stock company Railway Information System** Stock company Railway Technical Research Institute Incorporated Foundation JNR Settlement Corporation Public corporation Notes: *Presently all the stocks are held by the JNR Settlement Corporation **The shareholders of the two companies are six passenger companies and one freight company Table 24.6 Net profits of JR group companies (in 100 million yen) Company

1988*

1989

Hokkaido Railway East Japan Rai lway Central Japan Railway West Japan Railway Shikoku Railway Kyushu Railway Japan Freight Railway Source: Railways in Japan, 1990:8 Note: *Fiscal year ended 31 March

17 413 352 46 19 11 31

2 572 667 257 36 38 29

gained from the leasing operation are expected to be devoted to the redemption of the long-term debt of the JNR. The debt will be redeemed in thirty years. The ownership of Shinkansen after completion of redemption is to be decided by new legislation.

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Results of the JNR privatization The financial consequences of the JNR reform are officially described as a success. The same opinion is repeated in the literature (see, for example, Choy 1990:21). After privatization all companies got net profits (Table 24.6). Are the results really so positive and are they the results of privatization? (a) The restrictions that limited the JNR’s non-railway activities do not apply to the JR group. As a result, JR companies vigorously cultivate a wide range of new businesses. Each company started subsidiary businesses and affiliates, taking advantage of their location and facilities. This brought them additional revenues. (b) The gains are mostly attributable to the favourable operation environment characterized by an improvement of Japanese domestic economy that increased transport volumes sharply (Economic Survey 1987–1988:254). (c) The increase in earnings is also due to the opening of the Seikan Tunnel (that links the main island of Honshu with the northern island of Hokkaido) and the Seto-Ohashi Bridge. Thanks to these big projects, Japan’s four main islands are joined together. Thus the flow of people and freight has become more active between Honshu and Hokkaido, and Honshu and Shikoku. The opening of the Seikan Tunnel increased in 1988 the number of JR passengers by 121.4 per cent over the same period of 1987. Following the opening of the Seto-Ohashi Bridge, JR (Seto-Ohashi Line) carried three times more passengers than those who used the ferry services in 1987. As for freight movements, the JR container transport recorded a 284 per cent increase in 1988 in comparison with the same period in 1987 (Annual Report on the Transport Economy, 1988:9–10). Diminution in costs is due mainly to two factors: 1 Diminution in the number of employees. The number of JR workers is about 70 per cent of the number of the JNR workers. 2 Abolition by the JR of its particular equipment standard, seeking cheaper supplies elsewhere: purchases from the Asian NIEs were particularly important (OECD Economic Survey 1987/1988 Japan Paris. 1988:88). As Horuo Sasaki suggests, profits of six Passenger Railway companies and Freight Railway company became possible ‘partly because of the system by which most of the long term debt is now born by the JNR Settlement Corporation’ (Sasaki 1989:7). Three companies Hokkaido, Shikoku and Kyushu, apparently in the black, have, in fact, made losses (see Table 24.7). But there is a total of 1.3 trillion yen of the Management Stabiliza Table 24.7 Operating loss (in 100 million yen) Company

1988

1989

Hokkaido Shikoku Kyushu Source: Railways in Japan, 1990:8

521 165 315

530 177 326

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Table 24.8 Non-operating profit (in 100 million yen) Company

1988

1989

Hokkaido Shikoku Kyushu Source: Railways in Japan, 1990:8

498 151 283

495 151 282

tion Funds; and the profits of interest from these Funds are included in the non-operating profit of these companies (Table 24.8). That is how the overall balance of the three companies in question is kept in the black. JR Freight is ‘fictitiously’ in the black because the charges for the use of lines by JR Freight ‘paid to the passenger companies are politically settled to a rather low level, allowing the JR Freight to be balanced in the black’ (Abe 1990:9). At the same time the JNR Settlement Corporation that inherited all the financial obligations of the JNR and a large number of labourers from the JNR is in a worse situation year by year. Out of the total long-term debt at the prices of the fiscal year 1987 equal to 37.2 trillion, 11.6 trillion has passed to six JR companies (JR East, JR Central, JR West, JR Freight, Railway Telecommunications Company and Railway Information System Company). The remaining 25.6 trillion is to be handled by the JNR SC. It planned to adjust this debt by selling the land owned by the JNR, imposing the burden on the Shinkansen Property Corporation and selling the stocks to the individual JR companies. However, the JNR SC began to suffer from an income deficit partially due to failure in selling land. Land sale tendering has been frozen by the government, based on the argument that offering this land for sale through tender would raise urban land prices (Abe 1990:11). Table 24.9 JNR employees FY

Number

1949 490,727 1969 466,873 1979 420,815 1980 413,594 Source: Railways in Japan, 1990:11

FY

Number

1981 1983 1985 1986

401,362 358,045 276,774 223,947

So, the first conclusion from the above facts is that the financial results of the JR Group cannot be interpreted as unmistakably positive. The second one is as follows. It is hard to assume all positive results that appear after privatization as the consequence of privatization. They seem rather to be the results of different financial, formal and organizational treatments which were introduced in line with privatization, but which were possible to introduce without privatization also, for example, widening of the activity of the JR companies, easing the state restrictions and even division of corporation. Also reduction of the labour force cannot be treated as the sole result of privatization because the JNR was diminishing employment step by step for many years, as official data show (Table 24.9). The big change after privatization is that the emphasis of railway business has been placed upon profit rather than upon public welfare. Thanks to profit-oriented activity, in megalopolis and city areas where

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traffic demand is vigorous, JR improves passenger traffic by the improvement of coaches, maintenance of cleanliness in stations and increase in train schedules. But in provincial areas services are cut down and unprofitable lines are limited. The number of lines abolished after privatization amount to 29 (1,412 kilometres). This has a negative influence on regional society and local economy (Abe 1990:12–13). Many experts express anxiety that profit-oriented JR might not ensure proper safety. ‘Abnormal accidents that have never been seen while JNR was engaged in the railway operation have been frequently brought about. This might be because of the negligence in investment in securing the safety and extremely advanced rationalisation of labor’. In Hokkaido in fiscal year 1987 there were 679 accidents, in 1988–712, in 1989–1, 073 (Abe 1990:12). In connection with privatization, all the employees of the JNR were dismissed and selectively reemployed by the individual JR companies. The re-employment of JNR Settlement Corporation personnel has been carried out in accordance with the re-employment promotion basic plan decided in June 1987. In March 1986 the JNR employed 276,774 workers. It was assumed that JR would employ 215,000, but in fact they employed 205,586. It was assumed that 20,000 of the JNR workers will retire, 40,000 would join JNR Settlement Corporation and would wait for new jobs. After reorganization there were 9,414 workers without jobs. Employment was refused to 6,793. Many (70.8 per cent—4,810) were trade union (Kokuro) members opposed to privatization (Akira Ando information). On 1 April 1987 workers who had not been rehired by new companies became employees of the JNR SC. In April 1990 re-employment promotion law expired. The 1,047 workers that did not find jobs were dismissed and 966 of them were Kokuro members (92.2 per cent). Nearly all the unemployed are residents in Hokkaido (49.8 per cent) and Kyushu (46.7 per cent) islands (Akira Ando information). After privatization Kokuro has been degraded from its level of a major union to a minor union (20 per cent) in the JR group. According to Seiji Abe (Abe 1990:13), before privatization the JNR authorities stated that Kokuro members would not be employed unless they retired from Kokuro. In that situation large numbers of Kokuro members dropped out from the union. According to the Ministry of Transport (Railways in Japan, 1990:13) employees have changed their ideological attitude derived from the national railway organization and become eager to develop their business and their company. From Kokuro’s information it appears that labourers’ working conditions deteriorated. Working hours are elongated (for example, in Osaka for the electric train operator on duty the travelling distance is lengthened from 153.1 kilometres to 236.2 kilometres and duty time is elongated from 3 hours 5 minutes to 4 hours 24 minutes). Paid vacations are shortened. Labourers are urged to work overtime. They are compelled to be engaged in sales promotion activities before they get to work and after they have completed their day’s job. This work is unpaid. If the workers protest they suffer punishment such as payment reduction. They are evaluated in the negative by their supervisors (Abe 1990:13). The privatization of the JNR was more complicated than that of the NTT and the results are more intricate. SOME CONCLUSION When analysing the process of privatization and deregulation of public enterprises and the results of these processes, it would be interesting to look at them from the more general point of view of the national economy and the adjustment to new conditions. From the first half of the 1970s to the first half of the 1980s Japan witnessed slow growth, due in large part to the two oil crises. With the start of the 1980s Japan’s export conditions deteriorated as a result of growing economic frictions, growing competition with the newly industrialized economies (NIEs) and appreciating

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value of the yen. Japan reacted by changing its strategy of growth and management at micro and macro levels. At the macro level, it was orientation of the economy towards a high information society, service industries, investments abroad, especially in the Pacific region, and administrative reforms tending to a ‘smaller government’, as well as changes in the public sector. At the micro level, it was moving Japanese companies towards competition, mainly on the basis of innovation, rapid automation shifts in employment, multibusiness forms and product diversification. In this context the privatization of public enterprises and changes in the employment and business activity of privatized enterprises appear as a part of the adjustment policy to be more flexible and competitive. Japan privatized many enterprises. In each case the idea was the same —to create an enterprise more profitoriented and more competitive, though in each case the detailed procedure was different according to its specific conditions. The JNR and NTT rationalization of employment, restructuring, creating new subsidiaries and entering new activities are in line with changes in private companies’ efforts to be more economical. The profit-oriented activity of privatized enterprises has had positive results in lowering costs, accelerating technical progress, creating or strengthening competition; but there are negative results of privatization also. So the problem is how to minimize such unintended effects. In Japan the time to prepare for privatization was long enough to analyse the situation of the enterprises, the sequence of privatizations and the procedures. It was not casual that the NTT was privatized before the JNR. There is a view that the NTT privatization prepared the way for the privatization of JNR, which was more complicated. The new situations of privatized enterprises create some difficulties. To help them in this initial period some measures were taken by the state: for example, special funds for financial support, special solutions to employ dismissed workers, the cautious opening of the market and limiting competition so as to preempt bankruptcy of newly-created enterprises in deregulated markets. REFERENCES Abe, Seiji (1990) Privatisation and Division of Japanese National Railways and Its Consequences, National Railway Workers’ Union (NRU), August. The Administrative Management and Reform in Japan, The Institute of Administrative Management, March 1990. Akihiro, Kamitsuka (1986) ‘Reform of the red-ink railroad’, Japan Quarterly, XXXIII(1). Ando, Akira (1990) Saitama University, verbal information, December. Annual Report of Transport Economy, Summary, Fiscal 1984, Ministry of Transport, Japan, March, 1985. Annual Report of Transport Economy, Summary, Fiscal 1985, Ministry of Transport, April 1986. Annual Report on the Transport Economy, Summary, Fiscal 1987, Ministry of Transport, Tokyo, 1988. Annual Report on the Transport Economy, Summary, Fiscal 1988, April 1989. Boukaraoun, Hacene (1990) ‘Competition in Japan’s liberalized telecommunications industry’, text prepared for publication, December. Choy, Jon (1990) Former Japanese Public Corporations: Post-Privatisation Update, Japan Economic Institute Report, no. 32A, 17 August, Washington DC. ‘Companies to be born from JNR poised for diversifation, profit’, The Japan Economic Journal, 1 April 1987. A Comparative Study of State Railways and Private Railways, The 8th International Trade Union Seminar 1986, National Railway Workers’ Union (Kokuro). ‘Diversification fight track for JNR profitability’, The Japan Economic Journal, 7 March 1987. Economic Survey of Japan 1987–1988. Enderwick, Peter (1990) The international competitiveness of Japanese service industries: a cause for concern?’, California Management Review, 32(4).

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‘Foreign ownership of NTT stock looks likely’, The Japan Economic Journal, 10 November 1990. Fujigane, Yasuo (1990) ‘A lesson from NTT’s privatisation’, Tokyo Business Today, 58(11). Harris, Robert G. (1989) Telecommunications policy in Japan: lessons for the U.S.’, California Management Review. Hills, Jill (1986) Deregulating Telecoms, Competition and Control in the United States, Japan and Britain, London. Ishizuka, Masahiko (1985) ‘Plight of national railway symbolizes Japanese deficiency’, The Japan Economic Journal, 6 August. Itoh, Kyoko (1990) ‘NTT retranches from era of rapid diversification’, The Japan Economic Journal, 3 November. Japan Company Handbook, Toyo Keiozai Inc., Tokyo, autumn 1990. Japan Economic Institute Report, Washington DC. ‘Japan. U.S end telecom talks without reaching agreement’, The Japan Economic Journal, 19 March 1985. ‘JNR to be dismembered in April 1987’, Railway Gazette International, September 1985, 649 Kato, Hiroshi (1987a) ‘Discussions on reform of the JNR’, The Annual of Japan Economic Policy Association, 35. Kato, Hiroshi (1987b) ‘For sale’, Look Japan, March. Kato, Hiroshi (1988) ‘Administrative reform’, Nippon Steel News, January/ February. ‘Leaders grapple with slippery reform issues’, The Japan Economic Journal, 24 November 1990. ‘Market share competition heats up’, Toyo Keiozai original data, Tokyo Business Today 58(10). ‘Ministry plans NTT stock sale’, The Japan Economic Journal, 1 December 1990. Mitsuhide, Imashiro (1988) ‘Restructuring of JNR and its problems’, Institute of Business Research, Daitoi Bunka University, Research paper no. 5. ‘Morale, competition woes tarnish NTT gilt’, The Japan Economic Journal, 25 April 1987. Mroczkowski, Tomasz and Hanaoka, Masao (1989) ‘Continuity and change in Japanese management’, California Management Review 31(2). ‘NTT and IBM Japan will set up joint VAN service company’, The Japan Economic Journal, 5 October 1985. NTT Annual Report (1986), (1989), (1990). NTT Financial Fact Book (1985). NTT Procurement Activities (1990). ‘NTT to unveil trade secrets in move to open up industry’, The Japan Economic Journal, 25 August 1990. OECD Economic Survey 1987/1988, Japan, Paris, 1988. Okita, Saburo (1989) The 80s: a decade of uneven growth’, Japan and the World Economy 1(2). Open, Telecommunications Market of Japan, Ministry of Posts and Telecommunications, August 1990. An Outline of the Telecommunications Business, Telecommunications Bureau, Ministry of Posts and Telecommunications, unofficial translation, October 1990. Outline of Telecommunications Reform in Japan, Publication G-l 14, Nippon Telegraph and Telephone Public Corporations, Tokyo, Japan. Privatisation and Deregulation—The Japanese Experience, Administrative Inspection Bureau Management and Coordination Agency Government of Japan, June 1990. Railways in Japan, National Railways Restructuring Promotion Department, Ministry of Transport, 1990. ‘Redialling Japan’s telecoms’, The Economist, September 1987. Sasaki, Haruo (1989) ‘Experiences of privatisation in Japan—cases of JNR, NTT and JTS’, March. Statistical Handbook of Japan, 1986. Tamamura, Hiromi ‘Is NTT a private company or not?’, unpublished text. Tamamura, Hiromi (1986) The privatised enterprises and public utilities regulation’ English summary of article published in Ritsumeikan Keieigaku 25. Tamamura, Hiromi The Telecommunications Industry and Foreign Companies, unpublished text. Telecom firms push for open pager market’, The Japan Economic Journal, 14 March 1987. Telecommunications Reform and NTT Privatisation, NTT Publication, G-115. Thimm, Alfred L. (1989) ‘Europe 1992—opportunity or threat for U.S. business: the case of telecommunications’, California Management Review 31(2). ‘Value-added networks look set to expand’, The Japan Economic Journal, 17 November 1990.

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White Papers of Japan 1987–1988. Wright, Deil, S. and Sakurai, Yasuyochi (1987) ‘Administrative reform in Japan’, Public Administration Review, March/ April.

25 Concluding review V.V.Ramanadham

The aim of this chapter is to offer some concluding comments on privatization, first, with reference to the individual countries covered by the preceding chapters, along with comments on Eastern Europe as a region, and second, with reference to the major issues which the country studies throw up. UK The book commences with a paper on the UK, which is generally acclaimed as perhaps the earliest initiator of privatization, with a relentlessly far-reaching programme touching most parts of the nationalized industries. Matthew Bishop and David Thompson give brief space in their paper to the narration of events as they occurred and concentrate on what has been happening ever since the ‘day after’. Their analysis should be of value in the context of evaluation of privatization programmes; for what is of importance is not the fact of privatization, but the objectives and the results. It would be useful to look critically at a few facts of the UK privatization processes, so that the precise context of what happened there as well as the extent of their applicability to other countries may be discerningly appreciated. The basic setting of the public enterprise sector prior to privatization calls for a careful understanding. Nationalized industries had no doubt been very important in the national economy, as may be gathered from the observations of the National Economic Development Office in the course of its authoritative study in 1976.1 However, they were relatively few in number, concentrated in the public utility sector. From the mid-1970s they were brought under fairly strict and effective monitoring and achievementoriented performance, thanks to the gradually refined financial and physical targets, including stringent external financing limits. These limits induced the management to be penny conscious all along; and rather exclusive attention was paid to financial results. Investments were starved in several cases. By the time privatization became an active proposition most of the nationalized industries were profitable and adopted what could be claimed as the private sector model of behaviour. Financial profitability clearly became the dominant driving force of the enterprises; and meagre emphasis, if at all, was laid on the socialreturns aspect of its operations. Though there was no categorical statement to that effect, the operational ethos of the nationalized industries would easily permit such a generalization. Over-staffing, a common feature of many enterprises—for example, British Airways, British Steel and British Coal—was subjected to drastic programmes of retrenchment and retraining for many years before the first major privatization took place in the UK. Further, the enterprises slated for divestiture were put through effective restructuring —organizationally and operationally—in many ways and a gradual change in management culture or enterprise culture was targeted. Add to these the political factor, the most crucial in privatization: the Conservatives enjoyed undisputed Parliamentary and public support—to the point of nicknaming their free-

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market policies as Thatcherism. (It was only in the recent context of water privatization that Labour’s threatening voice of prospective renationalization was audible.) In all these respects there are not many countries which can claim similarity of circumstances. Herein lies a basic limit to the transportability of the UK experience elsewhere. There is another important factor which can have an overriding influence on privatization decisions and modalities in many countries. Unlike in the UK or in other advanced market economies like Canada, Japan and France, they do not enjoy an efficient private enterprise sector, either in the managerial or in the technological sense. In many developing countries, as well as Eastern Europe, efficient private enterprise has to be created even as privatization is sought to be implemented. The UK’s privatization history is a rich repertoire of modalities and techniques, to some of which Bishop and Thompson referred. Private sales, employee buy-outs, public flotation and varied techniques of such flotation constitute a mine of information which it would be rewarding to study. Let us refer, in particular, to the concessions offered to employees during flotation. In the case of British Airways, in 1987, employees got seventy-six free shares each; matching shares at the rate of two for one up to 120 per employee were offered; and a discount of 10 per cent was given under the priority offer scheme up to 1,600 shares per employee.2 One of the unstated motives of such concessions was to win the employees over towards privatization. The practice of offering concessions to employees has spread to other countries as well. In France, for example, they could benefit from a special allocation (up to 10 per cent of the shares, limited to five times the annual ceiling of social security contributions); price rebates up to 20 per cent (the employees should retain the shares for two years where rebates above 5 per cent are offered); deferred payments (shares cannot be transferred until all payments due are made); and one free share for every, say, ten purchased. When one thinks of adopting similar measures in developing countries, one encounters problems on distributional grounds. The employees of public enterprises are only a small part of the labour in the country; and they are not among the lowest income brackets. Further, there is no intrinsic reason why employees working in enterprises, which, in general, are making losses or low profits, should be singled out for being rewarded in these ways. One could argue that the right solution would consist of a rigorous decision to scale down employment to suit the degree of viability of the enterprise or to liquidate it, if necessary. If, instead, the enterprise is privatized, there is no reason ipso facto for the incumbent employees to be offered such gifts as were granted under the UK techniques of privatization. The comment can be extended further. It is most likely that many of the public enterprises will remain in the public sector for quite a while, while some get divested. It would be invidious that the employees of the latter should benefit from free and concessional share offerings, while the majority of public sector employees are denied such a benefit. This is a case of illogical redistribution through open public action. It would be clear from the critical account of the regulatory mechanism provided by Bishop and Thompson that privatization is not an end in itself. It has to be followed by reasonable assurance that competition prevails in a given sector. Where it cannot—as in the case of natural monopolies—effective regulation has to be introduced so as to realize the benefits expected of privatization and market disciplines to the extent possible. The need for post-privatization regulation is bound to be far greater in countries where the market conditions are far from propitious for the emergence of competition in many sectors of activity. (Observations on Zambia, which follow later in this review, offer some evidence). For various reasons the scope for competition is likely to be constrained in many countries. Whether one openly admits it or not, some kind of investment planning is likely to remain in countries continuing to formulate five-year plans, which will have legacies of monopoly or restricted competition in several sectors. Great skill is required in exorcising the anti-market consequences of such governmental policies. This observation is

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valid whether we have privatization or not. The point to note is that privatization does not automatically make life easier from this angle. A word on the RPI minus X technique of regulation adopted in the UK in preference to the profits control theme of the US regulation of public utilities. On the face of it there is a merit; it looks as if one does not have to go into the tortuous intricacies of investment evaluation and of decisions on the profit levels to be permitted. In reality the matter is not so simple.3 Apparently the price level is auto-regulated by the retail price index. This is an over-simplification. Implicit in the determination of the X factor, which specifies the extent to which the enterprise should go below the retail price index, is the hidden determination that the enterprise is permitted to aim at a profit that corresponds to the permitted price level. True, the permitted price level can open up possibilities of different levels of profit, depending on ‘efficiency’ and the interaction of demand and supply factors. However, if the profits actually realized during a given five-year period are considered by the investors as too low in relation to their investments, they are bound to exert irresistible pressure on the regulators at the next review for a lower value of X, almost certainly to compensate for past underearnings as well. In the opposite circumstances the regulator is bound to keep his eyes wide open and adopt a two-fold strategy. In the immediate run, he would urge on the enterprises not to declare high dividends; and in the longer run he would definitely inflate the X. The former strategy at least ensures reinvestments, while the latter nearly explicitly recognizes the social interest in enterprise regulation on distributional grounds. One might assume that there would be no need for such external regulation of the profit potential of an enterprise if it were fully exposed to competition; but where it is not, the task has to be assumed by the regulator. Once again in countries where income and wealth disparities are extremely skewed, the profits of privatized enterprises—the more so in sectors where competition is nominal or absent —are almost certain to complicate regulatory concern. Bishop and Thompson observe perceptively that ownership change cannot easily be linked to changes in performance. The state of the economy and the conditions of the sector and the enterprise—for example, its sunk investments, starting degree of utilization and rates of growth in demand—are even more important. There is another factor which warrants emphasis in connection with many developing countries such as Uganda, Tanzania and Eastern Europe. Their immediate needs of technological rehabilitation are so severe that without it efficiency gains will be improbable, whether we privatize their enterprises or not. Privatization by itself, in the sense of divestiture, will not produce efficiency gains unless adequate funds as well as technological resources are found at once for the required rehabilitation. The invention of the special share or the golden share in the context of privatization in the UK is worth notice. The government keeps one share with special rights—not to interfere with management, but to activate its concern in the case of violations on limits to shareholding on the part of an individual, changes in voting rights, and voluntary winding up. In particular cases it provides the government with powers to ensure that the directors are British citizens—for example, in British Aerospace plc. It is to be noted, however, that the special share is not intended as a vehicle of control or regulation which privatization might occasion. That has to be conceived as a task in itself, independently of the special share. GREECE Lioukas’s paper on Greece brings out the elements of state control over enterprises, in a situation where high percentages of output in many sectors happen to be in the public sector, competition is weak, fears of foreign control over corporate ownership are genuine and strong, and needs of governmental subsidy to enterprises seem to continue, despite a general policy of reducing them. (Subsidies to utilities, nationalized industries, social insurance agencies and local govenment organizations were estimated at 6.8 per cent of

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gross domestic products (GDP) in 1989, expected to fall to 5.8 per cent in 1990 but were actually 7.4 per cent, and projected to equal about 6.1 per cent of forecast GDP in 1991.)4 To reconcile the programmes and sequencing of privatization in its multifarious senses with the overall compulsions of continued state intervention is one of the serious problems that Greece faces, not alone in the relatively low-income part of the world. The Greek experience in privatization efforts reveals how materially the factor of legal complications has been underestimated. The European Court assumes a place of prominence in this context. It questions the socialists’ interface with public enterprises, pursued through the compulsory increase of share capital—a method which runs contrary to the European Community directives, by not having consulted the shareholders. Heracles, the largest single exporter of cement in Europe, is a case in point. The commission disapproved the process of write-off of debt as a violation of competition rules. There can be a surge in law suits by former owners claiming repossession of their properties or satisfactory compensation.5 Respect for the commission’s rules and genuine promotion of competition in the privatization processes will be a particular requirement in the case of Greece. Workers’ protests at privatization are a major problem in Greece where the rates of unemployment are high, and GDP per head was about 51.1 per cent of the figure for EC 12 in 1989. (It fell from 58.4 per cent in 1980).6 However, there has been a relieving development in the shape of a special fund established with the European Community’s assistance to provide a years retraining to the workers on full pay or, alternatively, to offer an equivalent amount by way of a redundancy payment for those who lose their jobs.7 There is an institutional element in Greek privatization which merits highlighting. An inter-ministerial denationalization committee has been set up with the Minister of National Economy as chairman; and a special secretariat has been set up in that ministry. The primacy of role thus rests with the ministry responsible for economic development as a whole, rather than with any other ministry, however important, like Finance. True, what matters more is how the apex agency functions in substantive terms; yet the organizational location of it is not without significance. The Greek method can offer a good opportunity of approaching the issues of privatization, not in terms of micro or financial transactions, but in terms of the long-term interest of the economy as a whole. This is all the more purposeful as long as non-divestiture options are and have to be in place, and even divestiture may fall short of being complete. It has to be noted, however, that the implementation of privatization transactions is rightly decentralized to the ministries and holding companies concerned. While noting this good point, one has to comment that the government has not come up with a formal plan yet. For example, emphasis on competition, the prospect of effective operational changes and the basic objective of marketization warrant being outlined in an overall policy document, leaving flexible the actual techniques and details of privatization consistent with overall guidelines. The UNDP document, Guidelines on Privatisation, develops this idea at some length. TURKEY Bulent Gultekin’s paper on Turkey is essentially a study in the management of the privatization process. It delineates an element of ‘planned ambiguity’ in the privatization programme. If this signifies flexibility as regards detail, it can be a virtue no doubt, especially in a situation of political fluidity. But if it spreads an umbrella over all kinds of disparate policy decisions and implementational techniques, it would be selfdefeating. Hence the need for a clear statement of policy, touching all the essential parameters of privatization at an early stage itself. It provokes a debate, no doubt. It is better that way; for, out of active

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discussions, sufficient consensus can emerge for the government to go ahead with its declared policies in a transparent manner, without having to face criticism on fundamentals from time to time. The lack of policy emerges as one reads between the lines of Gultekin’s paper. There have been some divestitures; but the most important objective of improving the efficiency of public enterprises has not been realized. Besides, the programme has had its ebb and tide under exigencies of the political wave. It looks as if the very party that vowed to make public enterprises efficient by marketizing their operating conditions has begun to exploit the enterprises for political purposes. As observed in an Organization for Economic Cooperation and Development (OECD) report, ‘government intervention has not been cut back as much as expected’.8 In an economy where full divestiture of all public enterprises is likely to be a long-drawn-out process, there is great need for substantial change in this respect. Important policy issues surround the use of divestiture funds. Apparently there is no clarity on this yet. Proceeds amounting to about T.L. 1,000 bn. were channelled by the Public Participation Fund into infrastructural works such as housing. This might be a good sector activity in itself. But the overall context of the expenditures should not be lost sight of. What happened, in effect, was that the public debt of Turkey, which is not small by any means, stayed unrelieved by divestitures; and the liquid resources of the country were transferred to housing. Whether this was clearly an agreed parliamentary determination, we do not know. The point to be emphasized here is that there has to be some broad indication of how the government would put to use divestiture incomes—for example, for repayment of public debt, for restructuring of enterprises, for meeting labour and other incidental costs of privatization, and for general purposes of the government. In its absence the decision tends to be ad hoc from time to time; and politics can easily overtake wisdom at the point of decision. Some of the divestitures are haunted by legal complications. An administrative court upheld a suit filed by opposition members of Parliament and ruled that a controversial block sale of five cement companies to a French group contravened the 1987 decree on privatization which gave priority to domestic buyers.9 Whatever may happen in individual court cases on such an issue, it is clear from the recent developments in Turkey’s economic administration that the government is retracing its steps to some extent from its liberalization policies in the field of foreign capital. Even private enterprises are asked to consult the Treasury before going in for foreign loans.10 USSR There is no more Soviet Union. Ekaterina A. Kouprianova’s paper refers to the USSR before its break-up and has the value of presenting the complexities of privatization—she rather terms it ‘de-etatization’— faced there. The general tenor of the problem remains nearly the same with reference to the CIS states which rose out of the disintegrated USSR—more acutely in some than in others. The problem of the interRepublic redistribution of ownership and management roles will not be there in the new set-up, though the issue of decentralization to the lower levels of government within each of the CIS states persists. Kouprianova’s observations on the complexities of privatization in what used to be called the USSR as well as the comments in this section have adequate validity to the successor states; for, although the political context has changed, the substantive nature of the problems has not. The most acute need in this region from the standpoint of national economic efficiency is for a total restructuring of its production and distribution base. Ownership changes are welcome, wherever easy; but the basic emphasis—even in the case of divested enterprises—has to be on revamping the enterprises in such a way that each of them is no larger than necessary on grounds of economies of size, and that the maximum possible competition prevails among units producing or marketing a given product. Underlying

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these aims there is a host of requisites, for example, appropriate technology, high productivity, low cost structures, non-administered price patterns, and consumer satisfaction. While it is easy to accept this proposition, there are colossal difficulties in implementing it, as the fifth section of Kouprianova’s study brings out. Revisions in enterprise sizes, however desirable, might be far from easy, considering that in most sectors the entire output is produced by a single unit or enterprise or by a very small number of enterprises. The following table is illustrative (Table 25.1).11 Finance is one of the most obvious bottle-necks in the process of economic transformation. The frantic search for western funds and the refrain of response from the west remind us of the chicken-and-egg syndrome. The country’s economic indices since the break-up of the USSR into the CIS are disastrously unfavourable, as evidenced by the following figures of change (in relation to the former Soviet Union): during 1990–1, contained in its Report to the G-7 Meeting in Bangkok in October 1991:12 Gross national product Industrial output Agriculture output Capital investments Retail prices

−13% −9% −11% −20% +96%

While the needs of foreign capital are immense, equally immense are the uncertainties facing western investors, including joint venture partners, in the political and business-environmental circumstances of the country. At this point it may be interesting to refer to a suggestion aired recently in favour of a ‘deferred exchange rate guarantee’ to be offered by western governments on western private-sector investment, on a moderate fee for the facility. This scheme aims at protecting the investor from foreign exchange risks only, while he will himself bear all other risks, which are not few at all. Technical details apart, the proponents of the scheme, Tony Merrett and Allen Sykes, argue that it is no ‘hand-out’. At the end of the day the West will own real assets and the Soviet people will have received a productive investment. Contrast this with loans to the Soviet government, which might simply vanish into the ruins of the system they had, inevitably, helped to perpetuate.13 A device such as this, surely, is but one of the many modalities that lending countries might consider in order that the mighty mass of a dilapidated economy can find early traces of market economy and private enterprise. The CIS states are extemely keen on speedy privatization. The latest give-away scheme of mass privatization in Russia illustrates this. Table 25.1 Who makes what in the USSR Simple monopolies Product

Producer

% of total production

Consumer goods Sewing machines Automatic washing machines Transport

Shveinaya Association, Podolsk Elektrobytpribor Factory, Kirov

100 90

V.V.RAMANADHAM

Simple monopolies Product

Producer

389

% of total production

Trolley buses Uritsky Factory, Engels Forklift trucks Autopogruzhchik Association, Kharkov Diesel locomotives Industrial Association, Voroshilovgrad Electric locomotives Electric Locomotive Plant, Novocherkassk & trains Tram rails Integrated Steel Works, Kuznetsk Metals Reinforced steel Krivoy-Rog-stal, Krivoy Rog Construction equipment Concrete mixers Integrated Mill, Tuva Works Road-building cranes Sverdlovsk Plant, Sverdlovsk Locomotive cranes Engineering Plant, Kirov Oil, chemicals and chemical engineering Polypropylene Neftchimichesky Combine, Perm Deep-oil-well sucker rods Ochesk Engineering Plant, Ochesk Sucker-rod pumps Dzerzkinsky Engineering Plant, Baku Hoists for coal-mines City Coal Machinery Plant, Donetsk Coking equipment Kopeisk Engineering Plant, Chelyabinsk

97 87 95 70 100 55 93 75 100 73 87 100 100 100

Products produced by two or more factories run by the same ministry Power engineering Hydraulic turbines Steam turbines Metals Electrolytic tin plate Rolled stainless-steel pipes Consumer goods Colour photography Paper Freezers

Metallurgical Works, Leningrad; Turbines Plant, Kharkov; Pipe Building 100 Factory, Syzran Metallurgical Works, Leningrad Turbines Plant, Kharkov; Turbo-motor Plant, 95 Sverdlovsk Magnitogorsk and Karaganda Pipe Factories, Nikopol and Pervouralsk

100 96

Positive Film, Leningrad and Positive Film, pereslavl Freezers Association and Plants, Kishinev and Krasnoyarsk

100 100

Under this every citizen can acquire Rbs 10,000 worth of shares in 6 to 7,000 medium and large enterprises. The ‘popular privatization’ further envisages preferences to employees, including free shares (Financial Times, London, 22 August 1992. See also ‘Free for All’, The Economist, 18 July 1992, p. 78). POLAND This section contains comments specific to Poland. Comments applicable to Eastern Europe in general will appear in a later section, though some overlaps are inevitable. (This will be the plan in respect of comments on the other Eastern European countries as well.)

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It would be interesting, at the outset, to look at the following encapsulated statistical picture of Poland’s economy (Table 25.2). There have been unfavourable movements in respect of output, employment and real standards of living. Unemployment is ‘a shocking (for Poland) 8.4%’; after almost vanishing in 1990, the budget deficit in 1991 ‘is headed towards towards 25% of GNP’; last year’s near US $4 billion hard-currency trade surplus ‘is melting into an expected deficit for 1991 of around $ 1 billion’,14 and ‘inflation is likely to be 80% instead of the hoped-for 36%’.15 The estimates of unemployment at the level of 1.4 million in May 1991 are in the nature of an understatement; for many enterprises kept their staff on half or even a quarter of the regular wages instead of firing them, as they ought to, and forcing themselves into incurring heavy redundancy payments. The decline in employment is lagging behind the decline in production very much. These developments are rationalized as short-term effects of the government’s policies; but there they are; and how short the short term would be is anybody’s guess. In the consulting firm Planecon’s view, ‘it may take Poland another five to seven years to get back to where it was in 1989’.16 Figures 25.1 and 25.2 annotate the most precarious situation of Poland among some of the East European countries in respect of external debt, in absolute and relative terms. They signify that, subject to any writeoffs and effective rescheduling that Poland may succeed in bargaining, it has to watch for every technique of implementing privatization from the angle of its impact on foreign debt-servicing and export potentiality. (The April 1991 agreement of western governments to write off 50 per cent of Poland’s government-togovernment debt of US $33 billion offers some relief.)17 While on basic data, we may introduce another recent fact, namely, that with the collapse of the CMEA and USSR two chaotic hardships Table 25.2 Key facts about Poland Area Population Head of state Currency ECONOMY Total GDP (bn. zlotys) Real GDP growth (%) Industrial production (% pa) Unemployment (000s) Employment (000s) Nominal wages growth (% pa)1 Real wages growth (% pa)1 Consumer prices (% pa)1 Consumer prices (mom % change Dec/Nov) Nominal money income growth (% pa)1 Real money income growth (% pa)1 Interest on bank deposits over one year2 Interest rate on NBP current accounts2 TRADE

31 2,883 sq km 37.85m. Lech Walesa 100 groszy=1 zloty 1980 118,319 0.2 3.0 9.6 5,705.3 474.8 35.8 839.6 17.7 475.5 22.1 180–180 0

1990 n.a. 12.0 24.7 1,583.2 5,587.0 159.0 22.4 349.3 5.9 352.7 1.0 56–72 9.0

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Balance of payments in convertible currencies 1980 1990 Current account balance ($m.) 1,586 668 Exports ($m.) 8,297 10,863 Imports ($m.) 5,411 8,649 Trade balance ($m.) 114 2,214 Overall balance ($m.) 3,315 6,650 Balance of payments in transferable roubles Current Account balance (TRm.) 1,104 7,121 Exports (TRm.) 11,320 13,493 Imports (TRm.) 10,342 8,885 Trade Balance (TRm.) 978 6,608 Main trading partners (1989 % by value) Exports Imports USSR 24.8 18.1 West Gemany 14.2 15.7 Czechoslovakia 5.5 5.7 Austria 3.5 6.0 DEBT 1980 1990 Gross external debt ($m.) 43,324 n.a. Debt service paid as % of exports 9.4 n.a. Interest arrears ($m.) 7,330 n.a. Total reserves minus gold ($m.) 2,314.3 4,492.1 CURRENCY 1980 1990 2 Official exchange rate (zlotys/ US $) 6,500 9,500 Free market exchange rate4 (zlotys/ US $) 7,454 9,690 Real effective exchange rate (1985=100) 58.5 48.0 Source: National Government Sources, PlanEcon, Economist Intelligence Unit. Datastream; Financial Times, 2 May 1991:ii. Notes: 1is the percentage change in the December figure over the corresponding period in the previous year. 2Interest rates apply only to December of the appropriate year. 3Yearly average. 4December average.

descended on Poland, namely, that certain essential inputs for industrial production have been in deficit and the extent of ready markets for the outputs shrank cruelly. No wonder, there have been serious impacts on enterprise viability in many sectors, followed by unemployment and reduced standards of living (see Figures 25.3, 25.4). Gregory Jedrzejczak observes that privatization is considered in Poland as a means of creating ‘an effective and flexible market economy’, ‘with a well-functioning capital market’. At what speed has this been happening?

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Figure 25.1 Eastern European debt Source: World Bank; Financial Times, London, 2 May 1991:v–vi

Figure 25.2 Polish debt Source: World Bank; Financial Times, London, 2 May 1991:v–vi

Figure 25.3 Polish trade Source: Economic Commission for Europe; Financial Times, London, 2 May 1991:v–vi V.V.RAMANADHAM 393

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CONCLUDING REVIEW

Figure 25.4 Hard currency trade and payments balances in Poland Source: Economic Commission for Europe

There is a general feeling that the first five flotations of major enterprises have entailed too long a preparatory time and consumed up to US $4 million, mainly in payments to foreign consultants in one way or another; besides, several millions of dollars were involved in success bonuses. And the results have not been too convincing, either. Not every issue was fully subscribed; and one company experienced serious financial problems immediately after the flotation. There was undersubscription in some cases. (The five consisted of Exbud (construction), Slaska Fabryka Kabli (cable), Krosnienskie Huty Szkla (glass), Prochnick (clothing), and Tonsil (audio equipment).) Liquidation, followed by employee buy-outs or ‘lease-purchase’ agreements, has been an important method of privatization in the case of some relatively small enterprises. In many cases the buying group comes up with an offer of about 20 per cent of the value, which generally represents the book value; and derives a loan from the government towards the rest of the purchase price, to be redeemed over a period. Apart from this, employees have certain privileges under the Privatization Law. They can buy up to 20 per cent of the shares of the enterprise at a price concession of 50 per cent, within a ceiling related to its annual wage bill. Considering the importance attached to employees as an ownership group in the future, let us look at some facts of the issue. We will not repeat the distribution-oriented analysis, made in connection with the UK paper, except for adding that in Poland’s case periodic revaluations of assets, resulting in varying percentage deviations from book values in different cases, correspondingly tend to place the concessional recipients of shares in different enterprises at varying degrees of advantage—for no particular reason traceable to their distributional merits. (For instance, the revaluations were above book values by between 45 per cent and 94 per cent among the big five floated recently.) Dominant employee ownership can produce certain dubious consequences, apart from the claimed enhancement in motivation leading to improved productivity. Their interests as wage-earners can conflict with the long-term interests of the enterprise, for example, when decisions have to be reached on wage settlements and dividend declarations. This is nearly certain where employees have a minority share in the equity.18 In the situation of a complete employee buy-out, several other complexities present themselves. Management tends to be too inbred, as the directors are all from insiders. The breadth of vision necessary for growth and risk choice would not be so obvious as in the case of a board which significantly includes nonemployee directors. A minimum quota allotted to workers (as distinct from managers) reinforces risk aversion and short-termism, apart from strengthening wage-profit conflicts. Such buy-outs, usually

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accompanied by, if not resulting from, considerable concession to employees in the matter of purchase price, terms of payment towards it, debts transferred, and rates of interest on any credits provided under public commendation, are characterized by restraints on share transfers. No outsider can come in, and an incumbent shareholder may not be able to take his share money out. An ‘internal share market’ can no doubt be created with periodic ‘expert’ valuations of shares; but there is no guarantee that equilibrium always exists between sellers and buyers. Thus entry and exit in respect of both capital and management as well as labour become limited—the antithesis of free market philosophy. And opportunities of take-over bids are likely to be few; thus one of the most effective challenges to management inertia rarely exists. Creditors intervene in extreme circumstances, but not as long as debt-servicing is uninterrupted and its chances, in the foreseeable future, are not in doubt. This factor, along with those mentioned above, suggests that employee buy-outs have good chances of success where the enterprise is labour-intensive, the scale of business is relatively small— for example, shops, the demand for the products or service in question is fairly stable—for example, road transport, and there is a regular and sizeable cash flow—for example, restaurants. All these constitute the most propitious setting for a successful employee buy-out. Poland has adopted a non-traditional technique of privatization by introducing mass privatization through the medium of vouchers. Full details are yet to emerge. Broadly the programme is on the lines of Appendix 1 to Jedrzejczak’s paper. The equity in about 200 enterprises will be transferred to between five and twenty National Wealth Management Funds (NWMFs), which are yet to be set up. Though their boards will be essentially Polish, their management will be entrusted to western banks and fund management firms. The government will retain 30 per cent of the shares and employees get 10 per cent. About 27 million Polish adults will get participation certificates in each NWMF (in 1993). In other words, they own the NWMFs which own the shares in enterprises. From 1993 the shares of the funds will be freely tradable. Many questions of logistics need resolution. But the critical points concerning the scheme are as follows. The funds will be under western management. It is not as if an individual enterprise is placed under a management contract. Some 200 enterprises are subject to concentrated management decision by the fund managers. It is easy enough to stress that the boards of the funds will be predominantly Polish. But they have serious limitations in decision-making in a free market environment and in the face of the stipulated managerial obligations of the western fund managers. It will not be difficult at all for the fund managers to lead them on leash. The fund managers, it is planned, will have performance-related contracts. It is difficult to predict what these will lead to, in terms of the efficiency of the enterprises from the long-term point of view. They might be induced to act in the short-run interest of profit for the fund as a whole; they can act as portfolio operators or as holding company apexes; they would place high priority on operational changes with an eye on economy, including lay-offs, closures and changes in product mix; choices between export and domestic markets will be guided primarily by profit considerations; and so on, not to speak of the possibilities of questionable collusions between them on the one hand and regulators of various kinds on the other (dealing with monopoly control, foreign exchange, credit, labour and consumer interest) and foreign investors with whom they deal. With a little ill luck the whole operation, at one extreme, can have the potential of creating serious social tensions on grounds of concentrated economic power—in foreign hands at that. There is an implicit merit in the design of the voucher system in Poland. It attempts to balance between a very wide spread of ownership interests—among adult citizens—and the prospect of efficiency through managerial concentration in the Funds. How the system ends up in practice, in the face of problems mentioned above, is what time alone can unravel.

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HUNGARY Zoltán Román runs through the reforms effected in Hungary towards the market since 1968 and concludes that they have been inadequate. He is rightly cautious, though, in drawing inferences on the purposiveness of non-divestiture options. The point at issue is really the way in which these were implemented rather than the substance itself. They took place within the framework of a command economy; and while enterprise dependence on the supervisory ministries weakened, dependence on what Román terms as ‘functional’ agencies in government did not. What is more, the Enterprise Council technique introduced during 1984–5 tended to weaken management efficiency and entrepreneurial behaviour on the part of those charged with top direction and management policies. That it would be futile to place total reliance on divestiture to the neglect of non-divestiture options— for example, restructuring, a widely-accepted need in Hungary—can also be deduced on another ground. The list of enterprises which the government prefers to retain under its total or majority ownership and/or control is still extensive—for example, energy, public utilities, and key manufacturing industries such as vehicles and engineering, aluminium and pharmaceuticals. Some allege that this ‘runs against earlier official policy on privatization’.19 Whether one agrees with this allegation or not, the fact remains that the size and range of the continuing public enterprise sector will be large enough to warrant scrupulous attention to non-divestiture options as well. Even the first package of 20 ‘flagship’ privatizations has been running behind schedule20 (see Table 25.3 for details of the package). The data in Table 25.4 on the extent to which Hungarian public enterprises are likely to be privatized are useful in this context. Enterprises which are likely to stay in the government sector for a long time are estimated to be about 37 per cent of the total government enterprise sector, by value of production. The government is contemplating the establishment of an agency, probably autonomous in nature but linked to the Ministry of Finance, to be in charge of such continuing public enterprise properties. Depending on the precise role and rules of such an institution, one could expect some conflicts to arise between it and the State Property Agency whose remit is to sell. Table 25.3 The first privatization programme

1 2 3 4 5 6 7 8 9 10 11 12

Enterprise

Total assets (Ft.m.)

Profit before tax (Ft.m.)

Centrum Department Stores Danubius Hotel and Spa Co. Forest Machinery Producing Co. Gamma Works Hollohazi Porcelain Works Hungar Hotels Hungarian Trade Fair and Advertising Co. Ibusz plc (tourism, financial services, foreign exchange) Idex plc (foreign trade) Kner Printing Co. Kunep Co. (housing) Meh Scrap Processing Trust

5,219 6,640 146

401 568 1

1,754 484 10,936 1,654

51 39 932 118

2,144

1,139

4,400 1,566 515 3,769

89 168 12 831

V.V.RAMANADHAM

Enterprise

Total assets (Ft.m.)

397

Profit before tax (Ft.m.)

13

Pannonia Hotel and Catering 6,201 589 Co. 14 Pannonplast Co. (industrial 4,122 413 and household materials) 15 Pietra Building Ceramic Co. 974 56 16 Richter Gedeon Chemicals 17,481 935 plc. 17 Salgotarjan Plate Glass 1,724 155 Factory 18 Tritex Trading Jt.St.Co. 694 86 19 Volantefu Co. 2,405 161 20 Interglob Co. (Transport) 1,062 21 Source: State Property Agency, Budapest, First Privatization Programme, 1990. Note: The enterprises belong to quite different sectors. They are of different sizes in terms of total assets. Their profitability is quite diverse, in terms of profit before tax as a proportion of total assets.

There is yet no adequately clear policy on privatization. As commented elsewhere in this chapter, this is not unique to Hungary. Zoltán Román’s comments implicitly raise two crucial questions. One concerns the pre-eminence that ought to be attached to competition and market disciplines as the basic purpose of economic policies. The other relates to the very size and wide-ranging responsibilities vested in the State Property Agency (SPA). (It is in the company of Treuhand of Germany in this respect. Except with luck one might notice traces of the former evils of decisional centralization). At this point we may refer to the enterprises which have suffered drastic damage through loss of the Soviet markets. What option will Table 25.4 Scope of privatization (%) Action

No. of companies

Sales

Staff

Total assets

Profits

Expected income from privatization

To remain 51% 13 43 18 39 63 25 state owned To be 51% state-or 4 8 5 8 8 5 Hungarian-owned To be privatized 83 49 77 53 29 70 with no restrictions Total 100 100 100 100 100 100 Source: Dr Istvan J.Friedrich, ‘Privatization in Hungary’, paper submitted at United nations Center on Transnational Corporations Meeting in Geneva in September 1991. Note: The importance of the remaining state-ownership is far higher in terms of output and profit potential than in numbers.

be the best in such cases? Restructuring them into a more viable product-mix is an obvious option; where this is not possible immediately, subsidizing them over the short run will be another; and, of course, liquidation and sale of assets will be a third option. Choice among such courses of action borders on the concept of a judicious consideration of all possible options, including divestiture.

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We may add to Zoltán Román’s analysis of Hungarian privatization on four lines an emerging fifth direction, based on the direct initiative of investors, local or foreign, as well as the employees of enterprises, including managers. Under the procedures governing it, the SPA tries to promote investor competition and obtain counter-offers.21 The state enterprise sector is now opened to ‘hostile bids’ from anyone who thinks he can put the assets of an enterprise to better use.22 Hungary represents a very liberal regime vis-à-vis foreign capital. Yet it amounts to no more than some 4 per cent of the corporate sector, as compared with the target of 25 per cent the government has set for the medium term. It enters a wide range of activities—for example, pharmaceuticals, lighting, glass, vehicles, paper, refrigerators, food, sugar and newspapers. There seems to be some plurality in the source of foreign capital, with France, USA, Austria, Sweden, Switzerland and Japan among the leaders. There is a genuine feeling of unease in some quarters that privatization was ‘no more than pure foreign capital involvement.’23 A few years from now will reveal what proportion of the more profitable segment of the economy is under foreign ownership induced under extensive concessions, beginning with low divestiture prices. This is no argument against the search for foreign funds; for they have the merit of leading to technological upgrading, market exploration, and investment expansions. What is needed is caution, which policy statement on privatization ought to reflect in concrete terms. A word on the urgency of promoting entrepreneurship. Hungary like the rest of East Europe, is in need of effective action in this regard. Zoltán Román mentions the financial ‘softness’ reflected in several recent measures the government has taken in order to develop small units. There is an important two-fold caveat here: first, that such measures might introduce elements of governmental or public watchfulness bordering on control in disguise; and second, that they might degenerate into ‘spoon feeding’, which could be both costly in macroeconomic terms and far from easily reversible. The experience of countries like India which have longer traditions of entrepreneurship as well as experience of governmental paternalism in this area would be worth a discerning study. The aim should be for the government not to commit itself to policies that are certain to run counter to the two caveats cited above. CZECHOSLOVAKIA Czechoslovakia has a lower foreign debt burden than some other Eastern European countries. However, the need for foreign capital is obvious, partly to rehabilitate the technology and explore markets in the west in the wake of an almost total collapse of the USSR market. A variety of concessions are being offered to foreign investors. They can own equity up to 100 per cent; enterprises whose foreign ownership exceed 30 per cent pay 40 per cent flat rate profits tax as against the 55 per cent applicable to companies with less equity proportion; full repatriation of profits is permitted; a two-year tax holiday is available in certain cases; and importantly, surplus labour can be laid off without restrictions.24 How welcome the last concession is to foreign investors can be seen from the fact that there is, in general, a 30 per cent excess staffing. Foreign investment has been flowing in—estimated at about £3 billion, as against lower amounts to several other East European countries. But most of it is from Germany. The Czechoslovaks prefer a reasonable degree of plurality in the source of foreign capital to the ‘terrible pressure from West Germany’ to quote the Premier of the Czech region.25 Partly for this reason ‘the prevailing mood of Czechoslovakia is an understandable fear of selling out the country’, to cite from his observations further. Michal Mejstrik himself adduces one particular reason for the fear, namely, that the foreign owners might indulge in asset-stripping in several cases.

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There is another aspect to the influx of foreign capital: the direction. It is not clear if Slovakia, the lessdeveloped region, which has a high concentration of arms factories and is heavily geared to the Soviet market, will attract large amounts of foreign investment. In any case, there is an underlying problem of a macro nature, namely, that the government will be obliged to take some initiative in narrowing the levels of disparity in development in the Czech and Slovak regions. (There is some similarity here with the East German problem.) Of course, the break up of the country changes the nature of the problem. Citizens above 18 years of age can buy vouchers for a nominal price of 1,000 koruna, which equals about a week’s salary or US $32. There will be an auction for some 1,000–1,500 companies, and voucher holders can bid for shares in any company. Prices of shares will be expressed in terms of investment points. A coupon holder can spend up to 1,000 points—probably at 12 points per share. If the demand for shares is too high or too low, the prices of the shares will be correspondingly adjusted and the shares sold at the subsequent auctions. If a few companies attract highly-concentrated attention from potential voucherholders, the companies may be removed from coupon sale and sold at an auction. Investment funds approved by the government can also acquire vouchers to be used for buying shares on behalf of their shareholders. A major difference from the Polish scheme is that this scheme is not linked with foreignmanaged funds. Individual enterprises can propose the proportion of their shares to be allotted for distribution through the voucher system. (This can go up to 97 per cent; 3 per cent must be reserved for the National Restitution Funds.) The voucher system is expected to be a potential means of privatization in 2,530 projects in the Czech Republic and in 736 in the Slovak Republic. (For full details, see Privatization Newsletter of Czechoslovakia, Prague, No. 3 January 1992). The bidders in possession of vouchers are an uninformed crowd, unsophisticated in deciding what to bid for and many may come to grief with the likely failure of enterprises in which they acquire shares. For there is a general assumption that about 70 to 80 per cent of the enterprises are ‘technically bankrupt’.26 (It may be remembered that the better ones are likely to be taken by foreign investors.) The results of the first round of the first wave of voucher privatization suggest a success story. Out of 1,491 firms, 469 were over- or fully-subscribed; while 1,022 were under-subscribed. The orders placed by individuals were 60.5 million shares; the number for Investment Privatization Funds was 195.2 million and 69.9. (See Privatization Newsletter of Czechoslovakia. No. 7; June 1992, Prague, pp. 1–2.) EAST GERMANY Volkhart Vincentz’s study shows how the initial expectation that East Germany would be at an advantage over the rest of Eastern Europe in privatization because of the existence of all requisite infrastructural conditions, is belied by the facts as they are shaping. Productivity is low but wage rates are shooting up—by 50 to 80 per cent in different sectors; capital equipment is obsolete and heavy investments are needed for East German enterprises to reach the productivity levels of West Germany. (These are estimated at US $1 trillion over ten years.)27 Denied the convenience of devaluing its currency, unlike the East European countries. Germany presents the nation with a serious problem of regional disparities in development. In order to remove them, or minimize them to a significant extent, large doses of capital have to move from West Germany. Transfers from West Germany are estimated at about 70 per cent of the GDP of East Germany.28 Subsidies, unemployment compensations and investments in rehabilitating the infrastructure, have entailed a transfer of US$95 billion in 1991.29 Wages in East Germany have to be subsidized in some way by the federal exchequer. Unfortunately the budget deficit is approaching about 5 per cent of the country’s GDP, partly due to the high costs of unemployment benefits offered in East Germany.

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Treuhand is thus forced by circumstances into sliding into the role of a regional-policy agency from the original intention of being an agency for profit-oriented privatization. Liquidations are not easy to effect, if for no other reason than the labour implications. About 12.1 per cent of the workers are unemployed; and many are working shortened hours.30 It is said that Treuhand’s East Berlin headquarters attracts banners proclaiming: ‘Here are the hangmen of Germany’.31 A recent understanding with the state government in East Germany gives them a say in Treuhand’s decisions. This can effectively limit closures.32 The decisional matrix which Vincentz has explained, with the aid of a numerical example, will attract an unpredictable infusion of social-policy criteria. With progressive stress on restructuring, which calls for huge investments, and the annual-deficit situation of Treuhand itself, the processes of divestiture and other forms of privatization are unlikely to gain quick speed in the very near future. It is estimated that Treuhand has taken in some DM 5.5 billion through privatizations but disbursed five times that figure in credits for restructuring, many of which are unlikely to be recovered. The view is gaining that it is substituting ‘subsidised restructuring’ for ‘managed liquidations’.33 Add to this the criticism that it is too soft to West German buyers of enterprises and the recent publicity about scandals in dealings which, it is claimed, meant a loss of at least 500 million DM through illicit property sales.34 Two other aspects of Treuhand are worth notice in conclusion. Its location in the finance ministry may prove somewhat incompatible with its changing approach to the whole question of privatization; sooner or later it may be advisable, if not necessary, to accord it a more suitable affiliation in the government organization chart. Second, Treuhand is too big. There is something in favour of privatizing the privatizing activity in the sense of decentralizing it, but within set principles of basic policy. However, there is justification for such a monolith as Treuhand once we accept that social policies or regional and industrial policies enter the matrix of decision and implementation. There is a view that East Germany merits both public investments in infrastructure and employment subsidies. These can be properly conceived with a strong Treuhand as the privatizing agency.35 BULGARIA Christo Dalkalachev’s paper shows how Bulgaria contrasts itself with the rest of Eastern Europe in that it is still in the very initial stages of consolidating its thinking on the practical aspects of privatization. Laws have yet to be created and infrastructural institutions promoted; equally importantly the complications associated with the return of properties to past owners have to be faced squarely and pragmatic answers found soon enough to provide incentive to future owners of divested enterprises. It is feared that unemployment will rise to half a million in the near future as a result of the various measures on the road to a market economy. It will be essential to develop opportunities of employment absorption in small-scale industrial and business units. This is not as easy as it sounds. Apart from the intrinsic risks of not necessarily being economical in every case, such a development presupposes serious attempts at promoting entrepreneurship in the first place, a faculty which was rare indeed for over forty years. Further, unprecedented patterns of relationships have to be devised and successfully achieved between small units and large industrial establishments, so that the small ones can function as helpful ancillaries of the large units and wasteful competition, usually to the detriment of the small units, is eliminated as far as possible. In an organizational pattern used to the consolidation, under one roof or apex unit, of all production activities incidental to the supply of a given end product, this will be a novelty; and conscious effort will be needed to institutionalize such a development. The government has a role in ensuring this.

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Strangely, the government has a role in several other directions— most importantly in restructuring. The argument in favour of restructuring after divestiture rather than before it, is now well known; and Dalkalachev sides with it too. There are at least two reasons, on grounds of macroeconomy, why the argument warrants rigorous review. First, restructuring by individual (new) owners of enterprises will naturally focus on the financial benefits accruing to those units; but there will be no guarantee that the enterprises and sectors which attract restructuring, thanks to the availability of funds, are necessarily those that have the highest priority of restructuring from the standpoint of benefits to the national economy as a whole—for example, in improving export prospects and diminishing expenditures on imports, or in improving competitiveness in the industrial sector. If our basic assumption is that the aggregate quantum of funds available for restructuring are given and are relatively limited, there should be some kind of a gentle influence on the prioritization of restructuring investments, enterprisewise or at least sectorwise. A similar argument can be developed in the context of breaking up large industrial enterprises, of which there are many in Bulgaria (as in Hungary, Poland and the USSR). To do so would offer a clear message that what is wanted is a demonopolized play of market forces. Even the achievable breakup might not be a sufficient condition, but it undoubtedly is a necessary condition. It is doubtful if the new owners enthusiastically jump into such organizational changes. The government has therefore two phases of policy action here, even if it does not actively implement the restructuring by itself. It may, in co-operation with the new owners, work out the broad outlines of desirable restructuring, especially where it involves measures of demonopolization and—to recall an earlier point—ancillary relationships with other (small) units. And it may be necessary to monitor whether the agreed results materialize in practice, postprivatization. Thus there is a role for the government—a point which will be further commented upon in the section on Eastern Europe. One of the crucial determinants of the pace and coverage of privatization in Bulgaria will be its political sustainability. The immediate consequences of the collapse of trade with the USSR and of the COMECON arrangements, Iraq’s inability to supply oil, the steep fall in industrial output and exports by about 25 per cent last year, price increases by 250 per cent in some cases, and rising unemployment, are a matter of serious concern. Many ordinary people suffer from a decline in their standard of living; and income and wealth differentials will begin to mount. Dalkalachev’s observation that ‘social justice is much more important than the creation of a private sector’ is pregnant with meaning. There is, however, a strong political condition that can keep people’s discontent from exploding. There is a popular belief that the communist nomenklatura are dangerous and demonopolization of power and privatization are viewed as a means of breaking the communist monopoly of power.36 Unfortunately Bulgarian political life is not yet clearly on the steady path of agreed economic policy. A strong government wedded to the early introduction of the market economy is an important condition for the successful pursuit of privatization policies. It would be interesting to add, in conclusion, that some progress has been made in privatization law. It envisages the establishment of a privatization agency, transformation of municipal enterprises into joint stock companies for partial or full sale, placing privatization proceeds into a special bank account to cover part of the privatization expenses, allocation of 20 per cent of shares of privatized enterprises and another 20 per cent of the privatization proceeds to a mutual fund established by the government for financing transfers to social security funds and for compensating former owners, and offer to employees of up to 20 per cent of shares on preferential terms (half price). No voucher type give-away is planned.

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YUGOSLAVIA This paper was written before the political and boundary changes concerning Yugoslavia. Matija Skof’s contribution is designed to provide the background for the privatization problem and deals with certain relevant basic changes in the enterprise structure and foreign trade/exchange area in what used to be Yugoslavia, aimed at creating situations resembling those in western or market economies. And Branko Vukmir discusses recent legislation on privatization and provides the gist of illustrative republic laws from Croatia. There are certain points of common interest to all republics in the Federal law. ‘Internal shares’—to which employees are eligible under fairly liberal terms—are one such. Republic Funds into which sales proceeds have to be turned are another. These virtually have the character of public enterprises with decisional powers on the investment of such resources. Their original powers have been scaled down by the 1990 legislation; and it is agencies for Restructuring and Development that are responsible for supervising privatizations and helping in valuation through expert involvement. The role of the workers in privatization decisions remains significant on the whole. It is claimed that the privatization programme will be carried out, in Slovenia for example, in a decentralized manner, the employees initiating the plan. Differences exist in the approaches of the republics, of which many have become independent countries now. For instance, Croatia has converted many enterprises into public enterprises and placed them under government control. This might be a transitory measure. And Slovenian legislation has provided for a specific scheme of leveraged buy-out under which employees should create an ESOP (employee stock ownership plan)—like programme, provide an initial 10 per cent of the purchase price, and are entitled to a 30 per cent discount on the price of shares within set limits. At least a third of the work force have to join the programme. The employees will be receiving, free, new shares out of the pre-tax earnings of the enterprise in proportion to their salaries or their initial investment. There will be a repurchase scheme within the enterprise in respect of employees’ shares which are not otherwise transferable. The greatest need of Yugoslavia and the new countries like Slovenia and Croatia lies in creating strong managerial strata dovetailed into an effective expression of ownership concerns which preserve the long term excellence of the enterprises—not a small goal to achieve in a country where in the name of selfmanagement these desiderata fell into neglect for several decades. There have been rapid developments in the legal framework relevant to privatization in the recent months. In illustration we may refer to the elaborate Slovene Denationalization Law which deals with ‘restitution’ to previous owners in kind or through compensation and the Law on Transformation of Company Ownership which deals with the transformation of companies with social capital assets into companies and with the role of the Agency of the Republic of Slovenia for Privatization and the Funds of the Republic of Slovenia for Development in such transformation. Reference may also be made to the role contemplated for private investment companies in the transformation process. (See David P. Ellerman, Uros Korze and Marko Simoneti (1991) ‘Decentralized Privatization: the Slovene ESOP Program’, Public Enterprise, 11, (2–3) International Center for Public Enterprises, 180– 81.) EASTERN EUROPE Privatization in Eastern Europe is a major part of its effort to replace the former centrally-planned economy with a market economy. The different country papers bring out the short-term costs of the programmes of stabilization and privatization undertaken so far. These have been mounting, as shown below in Table 25.5. Particular reference may be made to unemployment, a new phenomenon in these countries. The rates are dissimilar, but progressively rising in every one of them. The foreign trade situation has been under the

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disastrous impact of the collapse of the Soviet market, the new requirement that imports should be paid for in hard currency, and the steep price rises on oil imports from the Soviet Union. Add to these the difficulty of finding compensating market prospects in western Europe and elsewhere. Let us look at seven aspects of the privatization problem in Eastern Europe in general: A. The speed; B. The government’s role; C. Valuation; D. The vouchers technique; E. The creation of ‘owners’; F. Enterprise culture; G. Foreign investment; A. The speed The winning argument in this region has, on the whole, been in favour of speedy privatization. The reasons may be expressed in the following terms: (a) It is exceedingly important to render the recent political transformation irreversible, by speeding up the ‘de-estatization’ of economic ownership. This would be the most forceful means of destroying central planning. (b) A ‘shock therapy’ might be sustainable in terms of people’s tolerance of the implicit suffering caused by unemployment and reduced standards of living, assuming—as constantly argued—that this produces the hoped-for turn around in a short period. Thus Eastern European countries can improve in competitiveness and expect to occupy their coveted place in the European community, (c) A ‘third way’ does not work. That is, reforms, taking the place of speedy privatization, would not be effective. Among the arguments in support of this view are (i) that the government, which owns an enterprise, has its own non-profit maximization objectives: (ii) that government supervision of managerial behaviour is difficult, in the absence of constant Stock Exchange evaluations; (iii) that the minimal risk of bankruptcy operates as an incentive-depressing factor; (iv) it is unlikely that a public enterprise will be exposed to effective competition; and (v) experience of reforms has not been encouraging.38 Each of these arguments is partly right and partly question-begging, as this section, along with the papers themselves, suggest. A few points on the other side may be mentioned at this stage. First, speed results in enriching the ‘nomenclatura’, who are the ones with money and the necessary smartness at this stage. Second, many of the privatization techniques place the managers and workers of an enterprise in such a strong position as to be able to carve out a ‘disproportionate share of the benefit’ for themselves.39 It is said that managers ‘literally stole the firms from the state’ in Hungary; and that, though the government has taken steps to curb this possibility, ‘the theft of state assets through joint ventures and other deals continues, albeit at a much slower pace’.40 Third, speed in divestiture could lead to distress sales, especially to foreigners; and this results in serious losses to the public exchequer as well as the national economy. Fourth, the ownership changes which speedy divestitures bring about are not necessarily followed by sustaining causes of efficiency gains and free market forces. Finally, it would be too simplistic to condemn non-divestiture options of marketization as sterile today. That some similar attempts in some countries did not succeed in the former periods has to be evaluated in the right perspective under the current scenario of radically shaken government perceptions. Today governments are bound to take market-oriented public enterprise reforms extremely seriously, thanks—if nothing else—to the International Monetary Fund (IMF) and World Bank conditionally syndrome; and they would be acutely conscious that the reforms are not an escapist show but a calculated option to divestiture, whose replacement by the divestiture option will

Source: The Economist, London, 21 September 1991, Business in Eastern Europe Survey, 5; Plan Econ, Organization for Economic Co-operation and Development. Note: * Forecast 1 August 1991.

Table 25.5 Some economic indices

404 CONCLUDING REVIEW

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easily be triggered by serious failures in the non-divestiture policies.41 In any case, the need for governments taking the non-divestiture options seriously can be most simply derived from the fact that even the speediest policies of divestiture will leave many enterprises in the public sector for a long time, if not almost indefinitely. B. The Government’s role Paradoxically governments in Eastern Europe will have a significant role to play in the course of economic transformation. Active initiative on their part will be necessary (i) in the conduct of privatization transactions; (ii) in administering unorthodox techniques such as the vouchers; (iii) in monitoring spontaneous privatizations; (iv) in curbing the evils of self-privatization and dealing with complaints of corruption, theft and grab; (v) in creating new institutions required for the smooth functioning of privatized and private enterprise; (vi) in establishing safety nets for those who suffer in the course of privatization— for example, the workers; (vii) in introducing anti-monopoly regulations and promoting competition appropriate to each sector of activity; (viii) in balancing policies of liberalization—especially tarriff policies —and deregulation with the basic aims of free markets; (ix) in devising suitable changes in the budget structure consequent on the phasing out of the former financial links between public finances and public enterprises; and (x) in dealing with the ripple effects of post-privatization occurrences such as managerial over-concentrations, take-overs, insider-trading, and business failures, so common everywhere but fairly new in Eastern Europe. However, there will have to be a difference in the quality of the government’s role, as compared with the command pattern of earlier times. That would be a basic pillar of success in achieving a market economy through privatization. Whether, how soon, and without lapsing into old methods of control per se, a qualitatively distinctive role will be imbibed by the government is a determinative consideration. C. Valuation The valuation of an enterprise under divestiture presents particular problems in Eastern Europe, where the balance sheets hardly constitute a reasonable starting point, unlike in the western or even many developing countries. In most cases asset values stand at historical cost; and any revaluations made from time to time do not reflect interenterprise comparabilities. The real problem stems from the fact that the most correct basis of valuation while setting a divestiture price is to be derived from the future earning power of the enterprise; and it is precisely this that is most uncertain to conjecture. We face several imponderables. Assume that a foreign investor wishes to come in. What is to be his understanding as to whether in the name of liberalization the government lets imports come in freely? If they are, his viability is under serious threat; if some protection is granted, his incentive to come in is enhanced. Likewise, if his investment is not in an enterprise fully owned by him but in a joint venture, the government which continues to enjoy some owner-manager rights can intervene at several points of directorial/ managerial decision, not necessarily in the interest of micro-efficiency of the enterprise. The quality of management assumed at the time of privatization might not manifest itself in practice. How does one proceed with valuation in the face of this uncertainty? The advantage of low wages, attributed to the Eastern European countries at the moment, might not stay intact in course of time, as wages cease to be ‘administered’ and labour attains negotiating strength. One

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cannot be clear on whether conditions of unemployment and free mobility of labour will keep wages down or tie them to local or plant situations as against national negotiation. Most enterprises in Eastern Europe—to a far greater extent than in certain developing countries—provide social services such as housing, and maintain hospitals, schools and recreation facilities for the workers.42 These involve recurring costs which need to be taken into account while valuing the enterprise. If there are ways in which they can be hived off without provoking the government against such action, the relief that such devices can offer in future has also to be kept in view. Finally, fixing the divestiture price is not a unilateral affair. The buyer has his own scales of valuation and the level to which he beats down the price during negotiation depends on the competition among potential buyers. By and large, the latter is not likely to be significant, except for a few highly profitable and renowned enterprises. Thus the power of monopsony enjoyed by the potential buyer is a material factor in determining an acceptable valuation. D. Vouchers A system of free distribution of ownership to some extent has been contemplated in Poland and Czechoslovakia, and might spread to other countries in some form. Lithuania, for example, announced — before attaining independence—free vouchers worth 5,000 roubles for each Lithuanian above 35. A sliding scale is conceived, with those under 18 years getting vouchers worth 1,000 roubles. While differences of detail exist among the countries, there are several commonalities. Free vouchers represent giving away state property, that is, the property of the people, to the people. In theory this would be an ideal method of transferring ownership, other things being equal. (Unfortunately, other things are not equal.) In countries where extreme skewness in property ownership was supposed to be uncommon, this kind of privatization helps preserve—at least to start with—the egalitarian character of society; and it will be some time before the weakness of the capitalist system, namely, wealth and income disparities, raises its ugly head in an ugly manner. In principle, the free voucher method might be the only method by which state property could be transferred into private ownership when people do not have money enough to buy it by paying cash. That the traditional ‘cash sales’ method would take 300 years to complete privatization is the refrain of the argument for vouchers. Besides, divestiture for cash would place the moneyed ‘nomenclature’, blackmarketeers, and foreigners at an advantage. In practice, it is but a small segment of public enterprise that is thrown open to privatization through the voucher system even in Poland and Czechoslovakia; and none in Hungary. Being a handy tool in speed, it can be wielded, no doubt, in an enlarged manner if circumstances demand. It is, therefore, important for the governments concerned to take serious note of certain basic implications of the vouchers approach. The managerial obverse of the extremely wide (and egalitarian) spread of ownership is most likely to be disadvantageous. The large populace holding shares in an enterprise (or in a fund which owns shares in various enterprises) cannot take a meaningful interest in management or exercise effective control over the management team. The latter enjoys concentrated powers of management, including avenues of personal gain. If one starts with the argument for privatization from the efficiency orientation of the private owner, that would be missing here. Of course ameliorative devices can be formulated, as in Poland through the funds. They have their own pros and cons, as seen elsewhere in this chapter. Free vouchers place property and, gradually, incomes in the hands of people who never had them. There is bound to be some impetus to increased consumption expenditures. Two results could follow: inflation,

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and inadequate saving for investment purposes. Where people begin to sell their shares (or vouchers) to foreigners, the setting for these results is all the more certain, since new funds come into the economy, with no necessarily parallel increase in the output flows. An alarming consequence for the public exchequer unfolds itself. As it is relieved of assets, unrequited by divestiture incomes, it loses the incomes that the assets used to provide to the budget. In Eastern Europe enterprise transfers to the exchequer—not just in the nature of a tax on profits but as a share in the profits themselves, whatever the name given to the transfer—have been very important. When these are lost, it will be necessary for the government to devise new patterns of taxation to capture enough resources for the expenditures financed earlier by enterprise transfers. The latter include not only the general expenditures of the government but compensation for the non-commercial outputs, if any, required of privatized enterprises. Here we do not go into the several questions of tax policy that arise in this context, apart from suggesting a few: Should the new tax incomes be raised exactly from the same enterprises as once were making given amounts of financial transfers to the government? Should they be commodity taxes or raised from general schemes of personal taxation? In what proportion should the profits of privatized enterprises be captured, so as not to affect the owner’s incentives? Should the tax clauses be the same or different for enterprises privatized through the voucher system and those privatized in other ways? And what about enterprises which are partly privatized through the voucher system? If the voucher recipient is, in any way, to be reached by a tax measure, how does the measure work as vouchers are traded in? There are two misconceptions about the vouchers method in some quarters. The first is that it creates a large mass of shareholders. In fact every adult (or citizen) is one, to start with. But as soon as trading is permitted vouchers, like shares, tend to come within the laws of capitalist markets, in that they find their way into the hands of the more affluent or of investment funds of one kind or another. The first day of trading itself is a great temptation, for the seller receives a sum of money for which he made no initial investment himself. In any case, the proportion of capital held by the large numbers is bound to be small, as against their very high proportion as shareholders. The other misconception is that the vouchers system avoids the need for valuation. Hence, it is thought, a tortuous bottle-neck in privatization is avoided. The simplest situation that supports this line of thinking is when all state enterprises are given away equally to the voucher recipients without consideration of what value in terms of money is passed on to each one of them. But this is hardly the real situation. Even here the moment voucher-trading is allowed, different holders of vouchers begin to enjoy different values of assets in terms of money as established by the trading transactions. How equitable this is, is another question. In the more practical situations where only a part of an enterprise is available for free distribution through vouchers, the need for the valuation exercise remains unabated. In reality, every voucher represents in effect a part of the net assets of an enterprise. Though the recipient does not know or have to know what the value of his part of the enterprise is, the moment he wishes to use the voucher for alternative share purchase, a value implicitly attaches to it. This section may be concluded with an illustrative statement of the variety of schemes of free distribution. (Table 25.6) E. The creation of ‘owners’ It is widely believed that ‘owners’ are the kingpin in the transformation of Eastern Europe into a market economy, and that property rights are a crucial element in the process. Since this category of persons has not existed there for the last forty years, ‘owners’ have to be created. Transferring state enterprises to

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individuals amounts to a creation of owners—but only in the structural sense. It does not necessarily guarantee efficiency in enterprise operations. The latter depends on certain basic factors: entrepreneurialcum-managerial ability, technological excellence, financial resources, effectiveness of market disciplines, and institutional infrastructure including the government’s interface with the private sector. While the truth of this proposition is not denied, East European countries seem to be excessively absorbed in concentrating on rapid ownership changes. In respect of every one of the basic factors, difficulties loom large. For instance, entrepreneurial ability has a long learning curve, though certain short cuts are contemplated in the shape of inflow of foreign investors, joint ventures with foreigners, and foreign fund managers. They can have a catalytic force; and over time local abilities will flourish. There is a problem, however. In many cases involving foreign entrepreneurial or investment inputs the government is likely to have a place on the board of directors, by virtue of being a shareholder. Will the government act as a passive or non-voting shareholder and director? It is difficult to generalize on this question. There may be situations or enterprises in which the government —either as part owner or as government—deserves to take a part in the directorial function; but by and large it may be useful to apply the concept of the Table 25.6 Comparison of distributive privatization proposals Proposal

Structure of ownership Percentage ownership

Vouchers (proposed Private shareholders in Czechslovakia, Romania, etc.)

100

Citizens (Feige)

Citizens

50

Central governments Republics Private and foreign Citizen-owned mutual funds

10 20 20 100

Citizen-owned mutual funds

20

shares

Financial intermediaries (Frydman/ Rapaczynski)

Financial intermediaries (Lipton and Sachs)

of Management supervision Supervision shareholders

Mechanism privatization

of

by

Free distribution of ‘Vouchers’ exchangeable for enterprise equity Mainly by private and Citizen shares sold at foreign owners undervalued prices; private shares auctioned with right of first refusal to workers and managers

By private intermediaries that bid for the enterprises they would like to acquire

Free distribution of vouchers to the public; intermediaries funds sell stock to the public in exchange for vouchers used to bid for enterprises in a series of auctions By competing mutual Free distribution funds that overlap in except for sale to the same firms, by private investors at a banks, and eventually later stage by a ‘stable core’ of private investors that

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Proposal

Privatization companies (Blanchard others)

Structure of ownership Percentage ownership

Pension funds Banks Workers Managers Government for later privatization Citizen-owned holding companies

of Management supervision will acquire shares from the government

Mechanism privatization

409

of

20 10 10 5 35 100

By holding Free distribution of companies, shares in holding and themselves companies to all controlled by citizens competition, government supervision, and the use of performancebased compensation Self-management Workers and 100 Current employees Legal structure in managers acquire rights to Hungary and Poland profits and assets of allowed some enterprises; ‘spontaneous’ ownership rights non- privatizations by transferable current management Source: Eduardo Borensztein and Manmohan S.Kumar (1991) Proposals for privatization in Eastern Europe’, IMF Staff Papers 38(2), 306–7.

‘golden share’ in this context. Let the government limit its intervention to certain (minimal) stipulated points of need: for example, where the board takes decisions which damage competition, cause labour troubles, close major activities or plants, invite a take-over, or affect some well-defined national interest. The requirements of technological excellence and financial resources are indeed basic to improve performance of these economies. Existing technologies are, on the whole, obsolete vis-à-vis future markets; and financial resources for restructuring are too scanty for achieving efficiency in production and marketing at a fast pace. These issues warrant being addressed per se, divestiture or none. Where divestiture alone ensures these requirements, there can be no option; but where divestiture is neutral to them or positively hurts them, the emphasis has to shift from heroic experiments in ownership change to efficiency improvement. In this selective process it is possible that labour layoffs are smaller than under divestiture which could be neutral to restructuring for efficiency (though it focuses on profit). If market economy is the goal, effectiveness of market disciplines is the proof of the pudding. It is not certain that these will accompany every divestiture—especially where a divested enterprise retains its monopoly status or succeeds in attracting tariff protections. And it is not impossible to ensure market disciplines in varying degrees, through operational and organizational measures even in the case of undivested enterprises. The last factor of institutional structures ranging over the creation of capital markets, appropriate legal instruments, financial mechanisms, basic communication and information services, and improved but active governmental interface with the privatized sector, also implies a learning curve, perhaps the most difficult to

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shorten. Here our point overlaps an earlier-mentioned one concerning the government’s role. The government has to walk on a tight rope, ensuring that it does not operate as a noose round the neck of enterprise. Discerning restraint would be necessary, in particular, in the exercise of regulations against monopoly, choice of product mix, closure of plants, layoff of employees, dividend declarations, and incentive payments to employees and directors. The conclusion is certainly not that ownership changes are unimportant or postponeable but that they are not a sufficient condition for efficiency, either at the micro level or at the macro level. Serious attention is necessary for the five basic factors mentioned above, in tandem with, or even independently of, ownership changes. The real goal of an efficient market economy has to be constantly kept in mind and ownership changes treated as a major means. F. Enterprise culture The success of privatization in Eastern Europe, whatever the modality or technique, depends on the development of enterprise culture compatible with an efficient market economy. There are at least four major actors in this context: the owner, the manager, the worker, and the regulator. The owner is in fact a new concept here. The former owner, that is, the person who filled that role, never acted on criteria of market-oriented efficiency. The new owner has to imbibe qualities of entrepreneurship, risk choice and risk-bearing, success through being the fittest in the market and exposure to bankruptcy in the event of competitive unviablity. The manager has to act in an unprecedented manner. His major concern for forty years had been to satisfy an external command, without reference to the market efficiency of his operations; and his success lay in meeting set output targets rather than making a profit through competitive success. He needs to acclimatize himself to the pressures of the market now. The worker was used to job permanence irrespective of productivity considerations of profitability of the enterprise and in general exhibited poor discipline at the workplace. In the new circumstances he is exposed to market forces as regards his job, wage and incentives. His is not the same dominating voice that it used to be in the employee-controlled public enterprise regime. The regulator in the former days had the limited task of making sure that the commands set by a governmental agency were scrupulously translated into practice at the enterprise level. Neither the cost structures nor the consumer’s interest mattered significantly. There has to be an attitudinal change in all these actors, so that their actions converge in upholding the tenets of a market economy in practice. What is more, a fusion of attitudes is necessary, so that one understands the rationale of another’s thinking and actions and all begin to appreciate that their corporate function is eventually meant for the consumer who provides the reason for their activity. There is a plethora of schemes of managerial entrepreneurship training in Eastern Europe, many through external stewardship. While training in skills is good in itself, efforts at building up an enterprise culture which brings the four categories of actors together to mutual

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Table 25.7 Long-term financing prospects for Eastern Europe Long-term financing prospects (US $bn.)* under rapid reforms 1991

1992

1993

1994

Distribution in 1995 of medium and long-term financing %

1995

Long-term debt financing 12.6 11.0 12.6 14.7 17.4 87.8 Multilateral 8.9 5.4 5.3 5.9 6.8 34.1 Bilateral 2.0 3.1 4.1 4.8 5.7 28.9 Private 1.7 2.5 3.2 4.1 4.9 24.7 Equity financing 0.9 1.6 1.9 2.2 2.4 12.2 Total 13.5 12.5 14.5 16.9 19.8 100.0 Source: Richard Debs, Harvey Shapiro and Charles Taylor (1991) Financing Eastern Europe, Group of Thirty, Washington DC. Note: *For Poland, Czechoslovakia, Hungary, Bulgaria, Romania and Yugoslavia.

understanding and mutually-supporting attitudes are very important— a need which many developing countries outside the formerly centrally-planned economies might not present in equal measure. If we recall that the government continues to have a role in the transformation process, the dovetailing of it in the attitudes of the other actors will call for special care. G. Foreign investment Eastern Europe is in great need of foreign investment. It can bring not only financial resources but technology, marketing and managerial skills. The flow has yet been a trickle, compared to the requirement, as per one estimate, of about US $420 billion a year in order that it catches up with the average incomes in the European Community in the next ten years.43 The actual prospects are expected to be a fraction of the requirement, as shown below in Table 25.7. East European countries are, no doubt, passing laws that are most attractive to foreign investment. But the aggregate demand for foreign capital presented not only by these countries but by other developing countries and the developed countries themselves is so large that it would be unrealistic for each Eastern European country to expect to derive all that it hopes for. (A recent survey of direct foreign investments conducted by the UN Center on Transnational Corporations provides supportive data.)44 What would clearly happen is that the most attractive divestitures will be grabbed by foreign capital; and the many other enterprises will fall to the lot of the nationals themselves—some of them to voucher-holders—or remain in the lap of the government for a long time in the foreseeable future. A time will come when the plums of privatization might be seen by the common man as having been disproportionately appropriated by foreign investors. The perception can become emotive as large profits and capital gains begin to be repatriated. CANADA The Canadian presentation commences with an interesting point of general interest, namely, that far from meaning divestiture, privatization has a positive connotation, focusing on the competitive advantage of the enterprise, in the quest for an improved strategic fit between it and its changing environment. In this sense one has to keep an eye on the structural and operating situation of individual private enterprises themselves,

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including the privatized ones. The privatization of POLYSAR-CDC actually increased the degree of concentration in the industry in favour of Nova Corporation, a giant in the sector, which won control of it. Similar has been the market advantage that Bell Canada secured in the course of telecommunications deregulation and privatization; it acquired a controlling interest in TELEGOBE CANADA (through Memotec) and bought up CN’s regional telecommunications subsidiaries. Canadian experience at the federal and the provincial level throw up two closely-allied isues. The first concerns the extent to which the privatization processes may be decentralized below the level of, or distanced from, the government itself. This has, for its obverse, the crucial importance of treating implementation as an offshoot of relevant policy consideration, in a given case. Or else, privatization might be equated with sale as an end in itself. It is difficult to conclude that the best answer has been found in Canada. At the federal level an attempt was made initially to entrust implementation to the parent organizations concerned, such as the Canada Development Corporation and Canadian National. But having discovered that ‘industry-policy’ problems were important and had to be resolved before buyers agreed to take over, privatization processes went under the joint auspices of the government department concerned and the decentralized agency. In the Province of Quebec developments took a somewhat different pattern. The role for ‘continued Quebec presence in key sectors’ was emphasized as against merely maximizing divestiture proceeds; and a Ministry of Privatization was created within the Finance Ministry. It is useful to note that Quebec has a powerful tool in its hands in the shape of its financial giant, the Caisse de dépôt. A distinctive feature of the Canadian paper is the importance it gives to privatization at the provincial level; for public enterprise, in terms of assets, is at least twice as important at the provincial-cum-local level as that at the federal level. And one can expect diversity in the objectives, pace, options, and techniques of privatization. The paper on Australasia also brings out such a point. CHILE Chile presents a success story of privatization. There are unique reasons. The majority of the large number of privatizations that occurred immediately after 1974 represented enterprises which were drawn into the public sector in the three years 1970–73; in several cases the transactions consisted of returning them to past owners not much later than the original expropriation; and severe problems usually connected with the return of properties to past owners did not figure prominently in this case. The party in power enjoyed enormous political support in the pursuit of its ideological programmes. And the divestiture transactions clearly constituted, and were seen as, a conspicuous part of a national effort to roll back the state from the extreme point of intervention reached during the Allende regime. Chile’s experience raises a few interesting issues of general interest concerning the case for divestiture. First, many of its public enterprises were so well managed—‘save in the early 1970s’—that the justification for divestiture on grounds of prevailing inefficiency in the public enterprise sector was not conclusive.45 Second, during the recession of 1982–4 the government somewhat retraced its steps in privatization and brought back more than fifty enterprises, including banks, into its direct control. This certifies to the existence of certain overall economic compulsions that tend to move a discerning government back and forth on the track of privatization and public enterprise of one kind or another. Third, many major enterprises including the profitable, mineral-research-based Corporación National del Cobre de Chile (CODELCO) remain in the public sector. These are treated as strategic or core enterprises. Their definition might vary from country to country and from time to time in the same country. The fact remains that such a reservation turns out to be an important limit to the extent of divestiture that a government chooses to accomplish.

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Cristian Larroulet Vignau rightly concludes that it is too early to opine on the distributional effects of divestiture undertaken in Chile; but it is possible to raise some analytical issues. To argue that, if ‘exceedingly low’ sale prices meant a loss to the Treasury, they were offset by gains for the private sector is rather question-begging. The loss to the Treasury signifies a loss to the average taxpayer; and in economies where regressive elements permeate the tax system, the disadvantage is particularly serious for the lower-income brackets in the population. Apart from this, the many concessions offered to the employees who bought shares strictly constitute a source of two kinds of distributional inequity. For one thing, they are not the poorest in the community—an argument developed at some length in my comments on the UK paper; and quite a few of the first buyers sold off their shares and amassed instant capital gains. For another, the degree of concessional treatment received by employee—owned shareholding varies from enterprise to enterprise, with the result that one can construe cost distortions among enterprises—the antithesis of market forces. Where the concessions induced a high proportion of employee share ownership, there could be an easy opportunity for hiking wage rewards; and if the enterprises concerned possess some degree of monopoly power, there could be a net disadvantage for the consumers. Careful review is necessary in order to establish to what extent any of these effects materializes in practice, case by case. GUYANA Carl Greenidge’s study on Guyana throws up many points of practical interest to developing countries—for example, in the matter of producing a prospectus which is truthful and yet attractive—and alerts them to dangers incidental to foreign buying of a divested enterprise such as powerful lobbying, persuasive demands for excessive concessions, possibilities of collusion among potential bidders, and insistence on conferment of a management contract prior to offer of the enterprise in sale. We come across several subtle or brief observations, which it might be rewarding to comment upon. First, there is great need to evaluate a potential buyer, especially when a private sale takes place, not only for his financial worth but, more importantly for his technical competence, interest in technology development and R & D, intentions that have implications for asset stripping or closure of activities, attitude to labour in both qualitative and quantitative aspects, nature of ownership control likely to be exercised over management, inclination towards short-term maximization versus long-term maximiza tion, and reliable prospect of accounting for foreign exchange earnings. If privatization is meant to improve the efficiency of the operations of the enterprise and transform it into a desirable fit in national economic well-being, these criteria have to be kept in mind, or else, the transaction might end up as a mere sale; and distributional disadvantages might flow, rather than efficiency gains. There are limitations, of course, in working on this caveat, particularly with reference to foreign capital: the government may not have enough reliable data to go by, and the urgency of some technological inputs might render the evaluation a luxury. But some protection from possible disadvantages can be built into the terms of the sale agreement, gently, lest the potential buyer should lose interest in the transaction. This brings us to the second point, arising from Carl Greenidge’s observation that all protective legislation and regulatory agencies should be in place prior to the completion of the sale transaction. As I argued in my comments on the UK paper, it would not be for any ‘golden share’ to act as a substitute. In the case of Guyana, the smallness of the markets serving a population of less than a million offers itself as an excellent condition for the emergence of monopoly power in many sectors of activity in open or disguised ways. Adequate and effective regulation has to be devised in the interest of the consumer, both by blocking all avoidable threats to competition and by regulating price, quality of output, conditions of supply, and possibly profits. The UK lends us an interesting lesson, namely, that a privatized monopoly can have in its

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arsenal a variety of devices disadvantageous to the consumer and that the regulator’s vigil has to be progressively smart and expansive. For example, the water regulator is warning the privatized water companies not to declare high dividends—under a system of Retail Price Index (RPI) minus X which is claimed to be free from the complications of profit control! Where a condition seems necessary from the national angle of investment planning or interindustry relations, it has to be explicitly inserted in the sale agreement itself, for example, that the enterprise has to invest in expansions at a certain rate over the following five or ten years, or that any or some specified plants ought not be closed during a stipulated period after the divestiture, or that there should be no major retrenchment for a certain number of years from the date of transfer of the enterprise into private ownership. The cost of such conditions, as perceived by the potential buyer, will be reflected in the price he agrees, no doubt; but it is better that way than trying to chase the horse after it leaves the stable. Third, Carl Greenidge’s concluding observation calling for well-defined guidelines on the financial aspects of privatization lends itself to substantive annotation. We have to go beyond pricing rules and techniques of sale. Divestiture involves the transfer of government (that is, public) property which has a certain value, to a private party who begins to monopolize its earning power and appreciation. The transaction keeps the government from the profits or losses of the enterprise concerned from the time of sale. The divestiture proceeds can flow into the consolidated fund of the government, unless they are retained by a decentralized privatizing agency for use in its discretion, and can either help reduce the public debt or offer the government several opportunities of new investment or current expenditure and tax reduction decisions. They can be used for restructuring the continuing public enterprise sector or meeting redundancy costs; here while there is no chance of the public debt diminishing, there is a future enhancement in divestiture incomes to look forward to. The time-discount factor has to be brought in, of course, along with the consequences of likely rates of inflation. We should not overlook the point that, as time goes by, the proportion of the less viable group of enterprises staying in the public sector is likely to rise; and there might be some indirect costs to be met by the budget in connection with the social or noncommercial segments of service which privatized enterprises would be requested by the government to produce. A meticulous matrix on these lines—indicative, though not exhaustive— ought to be worked out and refined from time to time, so that the net long-term fiscal benefits of privatization can be understood clearly. That privatization will improve the fiscal position is a blunt generalization. The precise truth of it, which varies from country to country, has to be tested through such a matrix. No wonder such a need struck the Minister of Finance in Carl Greenidge. The fourth issue relates to Guyana’s lack of skills needed for efficient privatization. This, again, applies to many developing countries. The lesson is that cost-effective methods of promoting the skills have to be devised rapidly, in the interest of the host country and not to the convenience of the collaborating foreigner. In this connection reference may be made to the document entitled Training Needs and Facilities in Privatisation, prepared by the Interregional Network on Privatisation, UNDP. It contains many details of the problem, what training signifies, what kind of training developing countries need, what facilities of training are available in or from developed countries, and what role international and national agencies should play in this connection. Another lack, to which Carl Greenidge refers, is of guidelines on privatization. Guyana, he observes, has had to grope its way in the absence of such documents. It is hoped that the comprehensive document, Guidelines on Privatisation, recently issued by the UNDP after a great deal of consultation with national experts and international agencies, will be useful to privatizing countries. One last point about divestitures in Guyana. It concerns an ethnic problem which is somewhat special to that country. If the new owners, other than foreigners, happen to belong predominantly to a certain ethnic

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group and if future employment—especially at the white-collar and managerial level—is influenced by that factor, there will be a drastic change in the ethnic composition of corporate employment in the country. Whether the former pattern was right or the future one might be wrong, is not our question. Our interest lies in pointing out that the issue has a high potential for social tension, unless desired regulatory guidelines are laid down ex ante. MOROCCO Alfred Saulniers’s paper on Morocco brings out the importance of clear objectives in undertaking a privatization programme. The King ruled out budget deficit as the motive for privatization; nor was it meant to abandon the state’s role as promoter of national development. He was in favour of only privatizing those sectors that were earning a profit. He wanted the wealth of Morocco to benefit all parts of Morocco. A vocal minister stressed the need to safeguard employment, promote regional development and avoid concentration of wealth. The Minister of Privatization emphasized that the reasons for privatization were more social than economic. The private sector, while obviously happy with privatization as a policy, was against strengthening the powers of foreign capital in the national economy. The government has actually been opening up many sectors to foreign capital and offering incentives to it. The Leftist elements have taken the view that privatization signified opportunities for the ‘very greedy wealthy’. There is wide belief that the divestiture programmes would intensify the already existing concentration of wealth and economic power. Diverse views such as the above are a characteristic feature of the reactions to privatization in many developing countries. One should not be surprised at it. However, since many of the more important benefits sought to be gained from privatization are mutually conflicting and since social criteria might run counter to narrow financial criteria, there ought to be a conscious attempt at formulating a statement of objectives which shows the public what gains are expected from divestitures. Where many public enterprises have been doing well, as in Morocco, and the capability of local private enterprise to take them over is not too obvious, the need for such a clear statement is very great indeed. And it should also cover, almost as an integral next step, the question of sequencing privatization. Morocco seems to have taken many measures of non-divestiture successfully—for example, demonopolization, management contracts and leasing. The role of portfolio restructuring by holding companies in the public sector in the context of divestiture has to be explicitly explained in the policy statement, rather than overlooked as if an internal managerial practice on the part of the companies concerned. It may well be so, but it has the impact of a divestiture; and when pursued on a large scale, or consistently over time, it has the character of being a part of the national divestiture programme in disguise. ALGERIA Hocine’s analysis of privatization in Algeria brings out the difficulties in steering a command economy towards market disciplines. Many elements of liberalization have been introduced, several emanating from the bunch of six fundamental Acts passed in 1988; their full impact, however, awaits further political changes away from centralized socialist planning. Divestiture or denationalization has not yet been zealously pursued. Yet many directions of privatization in other ways have been adopted for a few years now. These include organizational restructuring and privatizing the management systems which, in a highly-centralized economy, should be among the first conditions for the smooth advent of a market economy.

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The establishment of eight shareholding funds (fonds de participation) in 1988 should be reckoned as a propitious development in Algeria’s efforts at marketization. Each of them holds shares in more than 120 public enterprises (EPEs) and is broadly, though not rigidly, concerned with a given sector. It has seats on the EPEs boards of directors and can play a role in marketizing the EPEs decisional behaviour and operations, favouring subcontracting techniques where possible. The funds can help reduce government control over the EPEs and, in due course, act as a decentralized agency to implement divestitures, sector by sector, given the basic principles of decision and action. Meantime they can, in the justified name of portfolio manage ment, effect changes in shareholding structures, biased in favour of private acquisition of some shares in EPEs.46 It is interesting to notice that the latest law relating to foreign capital opens up many sectors to it and, in principle, allows it to own up to 100 per cent of the capital in an enterprise in Algeria. The need to encourage the inflow of foreign funds is obvious, considering its heavy foreign debt burdens. Of course, for a stable solution, the enterprises, exposed to foreign involvement or triggered by competition through that channel, should find themselves in a position to develop markets for their products abroad. Equally meriting notice is the practice of the Algerian government to award major contracts to local firms who might, if necessary, offer difficult parts of those to foreigners. This helps develop local initiative and skills and underlines the virtue of self-reliance, by no means ruling out foreign technical inputs but by working them into a localized project management pattern.47 EGYPT Hassan El-Hayawan and Denis J.Sullivan make pointed reference to the ‘moderate’ approach of President Mubarak towards privatization. There seems to be great interest in encouraging the growth of the private sector, as against concentration on selling-off public enterprises. If the former is achieved, there comes into being a progressively rising proportion of private enterprises in the national economy over a period of time. However, several other measures would be very desirable concurrently, to offer the economy the benefits of marketization. The most important of these would be effectively to raise the levels of performance of public enterprises themselves. There are far too many at the moment and occupy almost all sectors of activity. Their impact on the government budget and responsibility for the heavy debt-sevicing burdens of Egypt are considerable. The scope for improvement is extremely large. Changes in organizational structures will be necessary, so as to introduce elements of (even simulated) competitive behaviour among individual units and decentralized decision-making. Managers should be given autonomy, even if within specified limits, in respect of hiring and firing, wages and productivity bonus schemes, acquisition of inputs, marketing, and utilization of net earnings. The most promising direction of reform obviously concerns the specification of hard financial constraints which will have the effect of inducing enterprises to respect market disciplines in pricing, in acquiring funds for short-term as well as long-term requirements, and in searching for changes in product mix, contractions, expansions and diversification. All this does not mean that the government gives enterprise managers a blank cheque in the matters referred to. In a situation such as the Egyptian this is unlikely to be realistic; yet there ought to be a conscious realization by the government as well as the enterprises that the essence of the new direction of operations is what may be termed as the ‘private sector model’, and that the broad approach would be to demonstrate reasons why exceptions ought to be made in following it. No doubt there are many social reasons for exceptions. The subsidies presently available to consumers of a variety of products—for example, foods, tea and energy—are partly explicit through the budget and partly implicit (for example, through the exchange rate situation). One can go further and argue

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that, if we adopt ‘economic costing’ of the outputs in question, particularly under the head of capital costs using the opportunity cost criterion, the real level of subsidies enjoyed by consumers is far higher than appears at first sight. It would be necessary to review the merits of the subsidies rigorously, case by case, and continue only those that reach the target groups of needy consumers. The groups are not necessarily the same in respect of all commodities and services. The location of the groups has also to be identified, even if roughly, so that the really deserving— mainly the rural poor and occupants in agriculture—alone obtain the benefit of subsidies. While it is not easy to ensure this without a trace of leakage in every case, welldesigned techniques can be attempted conveniently in respect of some products and services. Changes in the rules of the economy such as the foregoing are a necessary pre-condition for the very promotion of the private sector; for they offer an incentive to the latter by providing it with fair conditions of competition with the public sector. And by minimizing price distortions in the economy, which eventually reduce distortions in investment priorities, the economy as a whole finds itself properly geared to marketization. The speed and range of the changes will be under the impact of not only political circumstances but the very competence of the administration in assuming a technocratic stance in practice. El-Hayawan and Sullivan offer insights into the internal heterogeneity within the administration and the cabinet, which suggests that the degree of consensus for piloting the changes favouring the creation of a market economy might be inadequate and uncertain. The views of the ruling National Democratic Party that a debate on privatization should be avoided, and that legislative changes should be postponed, sound rather curious; for these are precisely the steps that can abort privatization. The need is for clarity, transparency and reasonable consensus on the basics. Reflecting these, the government ought to come out with a policy statement, flexible as it may be. For any time gained through neglect of these requisites the nation will have to pay heavy retribution through mistakes, inconsistencies, and social tensions. The public sector corporations, which are few in number, can be used as a buffer between the government and individual enterprises and assigned the important role of monitoring the working of marketizing changes introduced in the working of the enterprises. As we suggested with reference to the fondes in Algeria, these corporations can also function as a decentralized level of implementation in privatization. The total number of public enterprises is so large that such a step in decentralization, within an outline of policy, will be meaningful; and each corporation can take a comprehensive look at all available options of privatization in a given case or sector. In the case of the many enterprises that will long remain in the public sector, the corporations can be used as management-oriented agencies, while the government may consider itself as just the owner. To the extent that such a dichotomy is effective, the primacy of good management over the question of who owns establishes itself; and when the time comes a transfer of ownership can be effected in a situation of managerial efficiency. ZAMBIA E.C.Kaunga’s presentation on Zambia has indeed a wider significance in that it reflects the situation of several other African countries including the neighbouring Tanzania, Zimbabwe and Kenya. Reliance on public enterprise has been very substantial in Zambia, as in a large group of African countries; and the rationale was expressed by Presidents of countries in such statements as the following: Julius K.Nyerere of Tanzania: ‘The pragmatist in Africa…will find that the choice is between foreign private ownership on the one hand and collective ownership on the other’.48 Kenneth Kaunda of Zambia: ‘In our industrial development we have no choice but to make use of monopolies… In relation to some products it simply cannot sustain more than one factory’.49

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Monopoly enterprises ‘must give government a controlling interest so that their affairs are closely watched and their policies are adopted to run in line with the national interest’.50 True, these statements referred to 1968–70. Things may have changed. Have they, sufficiently, for radical departures of national economic strategy? The Uganda paper triggers further comments in this line. While, as Kaunga says, the ‘stigma’ attached to the ‘concept of privatization’ has begun to evaporate, there is positive need for a realistic statement of policy, taking into account the conflicting pulls of development strategy and privatization as applied to Zambia. The aspects listed towards the end of his paper commend themselves for consideration. (Incidentally such thinking constitutes empirical evidence for the theme presented in the first part of the recent document of the UNDP, Guidelines on Privatization.) From this angle, the constitution of an over-all ‘basic co-ordinating’ Steering Committee of the Restructuring of the Parastatal Sector, with a Technical Committee on Privatization subordinate to it, is a potentially fruitful step. (Mark the exact designation of the first (apex) body and the use of the term ‘privatization’ in the second case.) Rightly, the apex body can and ought to approach the question in its entirety, focusing on efficiency gains as against mere divestiture transactions. Zambian experience in nondivestiture measures of marketization has been impressive in many ways— both financially and managerially. It is to be hoped that full use is made of such steps which disturb least the distributional ethos of the nation and, equally pragmatically, smooth the sequencing of divestiture. After all, it ought not to be overlooked that an important condition for the success of divestitures, in the long-term interest of the economy, lies in the receptivity and efficiency of private enterprise. Experimenting with different ownership patterns other than 100 per cent government ownership is useful, no doubt; but eulogistic emulation of the Yugoslav model of self-management should be exposed to rigorous review, both on theoretical grounds and in the light of what has happened in the mother of self-management, Yugoslavia, itself. UGANDA The opening sentence of Samuel B.Rutega’s paper on Uganda, defining the concept of privatization in terms of bringing the operations of enterprises within the discipline of market forces, implictly suggests how difficult the path is in Uganda’s circumstances, either in terms of a broad cross-section of individual enterprises or in terms of the economy as a whole. The basic scenario of public enterprise in Uganda resembles that in many other African countries. For example, the government holds majority equity, directly or indirectly, in some 138 out of 146 public enterprises, in ten out of joint ventures with foreign capital and in all nine enterprises under management contracts with foreigners. Public enterprise accounts for about 37 per cent of all recorded employment in manufacturing, 67 per cent in trade and hotels, 34 per cent in electricity and water, and 92 per cent in transport and communications. The net flow of funds from the government to public enterprise has been high —at about 10 per cent of total government expenditure in 1987; and a heavy contingent liability hangs over the government in respect of loans guaranteed by it, apart from probable losses through non-payment of its loans to the enterprises. About two-thirds of the industrial public enterprises made losses (in 1988); and the net worth is negative in many cases. The most alarming physical fact consists of the extremely low capacity utilization in the generality of manufacturing enterprises. The Corporate Plan 1988–91 of The Uganda Development Corporation Ltd (UDC), the industrial holding company in the public sector, makes sad reading: ‘the financial capital base of UDC has been eroded up to this day… (Its) group of enterprises… technically and financially near paralysis…. [They are] heavily under-capitalized’.51 And many public

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enterprises are over-staffed, as evidenced by recent studies recommending reductions in employees by between 20 and 77 per cent within three years, working out to about a third of the total in a select number of enterprises. Redundancy and compensation costs could amount to about U.Sh. 900 million; and the total requirements rise to some U.Sh. 27 billion, if full provision is made for working capital and to remedy ubiquitous under-capitalization. These figures represent estimates, which in all probability will only be exceeded, partly because the situation has been worsening all the time, and the component of inputs entailing foreign exchange is progressively becoming costlier. The basic problem that Uganda faces concerns capacity utilization and financial injection promotive of it. Infusion of both finance and technological improvement is urgently called for. And let us not overlook an apparently thin underlying characteristic of the whole process of national rehabilitation which ought to be Uganda’s prominent goal today and in the near future, namely, some governmental initiative and involvement in the whole process. Privatization does not remove this, though the approach has to be oriented towards market disciplines, under governmental influence over investment priorities and the use of foreign exchange resources. Here is a brief explanation. While an enterprise like the Coffee Marketing Board Ltd is expected to be privatized, one should not be surprised if it will only be ‘somewhat’privatized. The obvious reason is twofold: it is the earner of about 90 to 95 per cent of Uganda’s foreign exchange; and making sure that the foreign exchange earnings of such a giant come back to the country, up to the last shilling, is very important. Likewise let us look at the question of investments. The day might well be far in the future when investors and companies enjoy absolute freedom of investment decision and when the financing function will be totally deregulated. Funds received from abroad, probably as loans rather than as grants in most cases, for the successful working of the Privatization Investment Funds and the Rehabilitation Fund, will involve the government in some material way, since it cannot escape bearing the residual responsibility for paying them back to the foreigners or for rotating the funds from one sector or enterprise to another. To assume that the funds will themselves achieve these functions satisfactorily to the national economy, is likely to end up as an unrealistic hope. Add to this the fact that Uganda has had no experience at all of investment funds; and stories of how fund managers act vis-à-vis their share portfolios and the monitoring of the managements concerned in the western countries— quite different actually as between the UK on the one hand and Germany and Japan on the other—do not at once prompt us to think that the day has yet arrived when the Government of Uganda can leave things to the so-called market forces. If institutional investors begin to be effective as owners, a new danger can unfold itself, namely, concentration in ownership control over corporate management, whose benefits are dubious and do not necessarily represent market forces. This is not to argue for continued government impacts on the market. The ideal should no doubt be to promote market forces; but in doing so the government has a positive role for quite some time in Uganda. The role has to be played with improved skills and without suffocating the orderly emergence of market forces. On grounds such as the above-mentioned, the government should do some hard thinking and formulate the outlines of an overall policy of privatization which takes full cognizance of the limits to marketization implicit in the socio-economic situation of Uganda and then work out the optimal modalities of materializing them. Or else the government will find itself working at cross purposes, trying to please international agencies as well as national circumstances.52 There is some evidence of the point under discussion in the categorization of public enterprises into three groups. In the first listing attempted in 1987 the clearest cases of enterprises meant for total divestiture were only eight, with twenty-one more belonging to the Departed Asian Property category full of legal and other complications; the number of enterprises to be retained in the public sector but as joint ventures with private capital was forty-three; and as many as

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thirty-seven enterprises were not expected to be moved from the public sector. Twenty-seven were left unclassified. In course of time changes seem to have occurred; for example, the Coffee Marketing Board— originally placed in the to-be-retained category—is down- (or up-) graded to the joint venture category. These data suggest that the precise choice of a privatization option to be adopted in a given case ought to be a function of an effort to balance the market forces likely to materialize and the basic macroeconomic compulsions of the national economy. There are two issues most specific to Uganda, which policy framers and implementers of privatization in Uganda must particularly be concerned about. One relates to foreign capital. The need for it is in no need of an argument. Unfortunately the prospect of it is far too discouraging yet; and when it trickles down, it might be more in the shape of loans than of equity. ‘Asian’ foreign capital can be hoped for; but it has unfortunate lessons of history: once bitten, twice shy. The other issue, a closely-related one, refers to the enterprises coming within the category of the Departed Asians’ Property. (Incidentally, several of the already identified divestiture candidates belong to this category.) A few of them were given back; but it appears that the terms are not clearly settled. Reprivatizing them by return to past owners raises questions of terms, compensations and valuations; while sale to new buyers has to be accompanied by guarantees against legal complications arising from past owners’ claims. Above all, the matter in reality is not limited to the letter of the law; the government has to reckon with popular public reaction critical of the Asians coming back, and the locals being evicted from the properties, particularly houses in many towns.53 It will be sagacious of the government to take a composite look at all such issues and frame a policy that not only works in the first instance but does not have to be amended every now and then in practice. In the latter case public confidence in government policy will be a casualty —just the wrong condition for successful privatization. ISRAEL Shlomo Eckstein’s analysis in the course of his study on Israel raises several interesting issues. To start with, Israel falls in the small group of countries where privatization has been fairly swift, extensive and successful. The reasons range over the relatively profitable state of most of its public enterprises, run on the constitutional basis that they are essentially business concerns subject to specified governmental interventions, the attractiveness of its divestitures predominantly as private sales to foreign capital, and the general support among the public for privatization as a means of meeting the challenges of growth in the face of a likely 25 per cent increase in its population through immigration from the USSR in the near future. However, problems do exist. First, there is no guarantee that the divestiture techniques adopted by the government, with a bias in favour of private sales and undisturbed monopolistic (or oligopolistic) structures, will make possible enough competition to bring in expected efficiency gains, not to speak of distributional consequences. While freedom from bureaucratic ties is claimed to be an intrinsic advantage of divestiture, one cannot be certain, in the economic scenario of Israel, that the interface of the government with the private sector itself will feature adequate freedom from bureaucratic interventions. What will be needed is privatization in the the area of government-business relationships so as to maximize the freedom of the market while balancing it with macro compulsions. Easier said, this will be a real test to the administration post-divestiture. Incidentally, Eckstein refers to the desire of politicians and bureaucrats ‘to maximize the output of an exhaustible political resource’ vis-à-vis public enterprises under or awaiting privatization. These groups usually have a high propensity for discovering ways of intervening in privatized enterprises too over the long run, on grounds of co-ordinated national development, exchequer constraints, regulation in the interest of consumers, and national security. None of these is questionable in principle; it is the way in

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which these are implemented that conditions the actual elements of marketized behaviour on the part of enterprises. This point can be far weightier with reference to many other developing countries, particularly in the low-income range, where belief prevails that certain activities—including financing—should be subject to government monitoring, if not control. Second, the dichotomy between portfolio and strategic investors from abroad is interesting. The latter are supposed to possess a long-term and industrial interest in their equity holding (in a privatized enterprise), whereas the former do not mind shifting their funds on short-run criteria of profit maximization. While, therefore, strategic investors seem to be preferable, the long chain of unfavourable points connected with foreign capital remains intact. There can only be one solution, namely, that the government should have the technical skill to regulate foreign investment practices and minimize malpractices. In select cases clauses permitting or stipulating transfer of foreign equity to local owners may be negotiated. But the regulatory framework attaching to the influx of foreign capital should not be derived from the ‘golden share’. Its purpose is different and best kept so. Instead, the government has to depend on two sets of instruments. The first is the investment code applicable to foreign capital—whether it comes as an investment in divested enterprises or as a fresh investment in an enterprise. The second is the divestiture agreement itself, which ought to spell out the contemplated conditions regarding the future behaviour of the foreign investor—as regards dividends, ploughing back, investment additions, transfer pricing, closures, upgrading use of local raw materials, accounting for foreign exchange earnings and expenditures, and so on. In this way the foreign investor comes in with eyes wide open on the regulatory risks he would be exposed to; and the government will not be constrained to invent ad hoc devices of intervention under the umbrella of the golden share to realize such purposes as are mentioned in the penultimate paragraph of Eckstein’s paper. Finally, Eckstein says that the top echelons in the private or privatized sectors, who have had initial experience in civil service and then in public enterprise, will be in an advantageous position when faced with their young successors in government offices. This can have material consequences in the area of regulation post-privatization. It can lead to a situation of regulatory capture by the regulated. It will, therefore, be necessary for the government of Israel to devise an orientation of civil servants in the art of effective regulation either departmentally or through regulatory agencies, such as OFTEL and OFGAS in the UK. In sectors where elements of monopoly power are prominent and/or where foreign capital is strongly entrenched, this is particularly necessary. BANGLADESH Abulmaal A.Muhith outlines the successive stages of privatization in Bangladesh, which essentially was a step in reversal of the mass nationalizations of 1972. Emphasis has rightly been placed, besides, on liberalization and the development of the private sector. Two issues raised by Muhith deserve particular notice. The first relates to the poor preparation that characterized several privatizations, resulting in the sacrifice of the country’s long-term interests for the sake of speedy divestitures. The second concerns efficiency. This has not yet been found to have definitely improved as a result of privatization. Allied to this is the fact that the private sector ethos in Bangladesh leaves much to be desired. In other words, the benefits of privatization are a function of the behaviour of the owners and managers of the privatized sector.

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VIETNAM The year 1989 was a clear dividing line in respect of government economic policies. The process of ‘marketization’, the real essence of privatization, commenced in that year. Earlier the general approach, derived from the tenets of national planning, was in favour of setting targets of output for each enterprise and evaluating its performance by comparing production to estimates. Enterprises began to breathe an air of freedom from 1989 in production planning, raising funds, determining prices, fixing wages subject to the minimum wages stipulated by the government, and marketing through their own institutional mechanisms. Subsidies were, by and large, suspended. Any capital provided by the government would now be in the form of loans. Thus the government’s role has shifted from being a detailed planner and provider of funds, to acting as a regulator and monitor. The balance sheet of the ‘western’ type was hard to find; and no analysis or evaluation was possible of the financial status of an enterprise. Significant changes in accounting and reporting techniques are urgent. They seem to be under way. The changes in the direction of marketization, short of total divestiture, are yet subject to government stipulations in some cases as regards the production of outputs reaching specified targets. Further, the enterprise plans should closely agree with the national plan parameters and preferences. These no doubt constitute an important limit to the degree of market forces allowed to impact on enterprises. It would be too much to expect more far-reaching relaxations of government concerns for national economic development at once. Andrew Cao seems to compliments this approach of moderation and caution as typical of the Asian culture. It is probably necessary that major changes should occur in the management systems of the enterprises. Many of them have the ‘general union’ form, signifying that the day-to-day management is entrusted to the trade union, whose functions include the provision of administrative, financial, audit and supervision services to the production units and of advice to the government on policy matters. It can also sign contracts on behalf of the production units and carry out agency business. This form, very common in respect of major enterprises other than public utilities, which have the company or corporation form, needs to evolve somewhat differently so that management behaviour will be market-disciplined as against being unionoriented. An interesting aspect of the resource potential in support of divestitures concerns foreign capital. Joint ventures already exist, both at central and provincial levels. Rather few yet, they represent a fairly wide spread in source of foreign partnership, for example, France, USSR, Canada, Czechoslovakia, Germany, Australia, Hong Kong, South Korea and Singapore. And the search is for widely-dispersed joint ventures, so that there can be little fear of excessive control over Vietnam’s corporate life by the business interests of one or a few foreign countries. The existence of many enterprising expatriates interested in the country’s private sector development is, in Poland’s case, an important favourable point. AUSTRALASIA Anthony Brown’s study suggests that the processes of privatization in Australasia have been gradual and that utmost emphasis has been given to corporatization as a first step. This term is used in the paper to signify much more than the formal structuring of an enterprise as a company; it covers organizational and operational measures that expose the enterprise to concepts of efficiency and profit or to market disciplines. In quite a few cases corporatization is not necessarily or immediately followed by total divestiture. The major motivation for divestitures seems to have been derived from the governments’ anxiety to raise revenues, in a situation of budget problems and excessive public debt. New Zealand has in fact opted for trade sales in the main which are calculated to maximize the divestiture proceeds. A clear policy or strategy

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in the area of privatization has been lacking, particularly in Australia; and there is ample evidence of ad hocism in the measures taken. An interesting point comes out of this study. If the ultimate objective is to enhance the relative role of private ownership or initiative in the national economy, there has been a clear movement in that direction through the impetus derived by private investment in its own right, and not necessarily as a sequel to divestitures. The Skitube Railway project is an example. Besides, joint ventures between the government and private capital, which have been nearly absent all along, are making a debut, as illustrated by the Road Tunnel under Sydney Harbour. To analyse the issue in its basics: assuming that the investible funds in the private sector are given at a given unit of time— assuming away the influx of foreign capital, it might appear to be a matter of indifference whether they went into new private projects or were used in buying up existing public enterprises. But in the latter case, new investments by the government are possible. Thus there can be investment rotation in the public sector which can make a real difference in overall economic performance if the divested enterprises attain higher efficiency than while in the public sector and if the new projects are such as to warrant governmental involvement at least in the initial stages. A proper combination of divestitures and new private investment projects would be ideal in many countries, especially in the developing world. There are issues of distributional justice which the paper just touches in the end. Can the large-sized Australia, with differences in occupational and developmental indices, be indifferent to some minimal needs of cross-subsidy, in whatever shape? If the answer is in the negative, there arises the need, in the wake of divestiture, for appropriate budget arrangements for meeting such needs, even if through compensations to privately conducted operations. Likewise there ensue consequences of wealth distribution as divestitures aimed at maximizing revenues take the shape of trade sales and intensify economic concentration of one kind or another, as in New Zealand. JAPAN Marianna Strzyzewska-Kaminska’s paper provides two interesting case studies of privatization in Japan, ranging over the precise objectives, modalities and results. She emphasizes that privatization and deregulation have proceeded simultaneously; hence it is not easy to attribute discovered results to just one of these occurrences. There is an echo here of the Bishop-Thompson conclusion, with reference to the UK, that the post-privatization results of enterprises cannot be totally attributed to the single event of privatization. Privatization has not meant total equity transfer to the private sector in the two cases of the NTT and JNR. In the former case, law obliges the government to hold on to a specified segment of capital. (And foreigners are not allowed to be shareholders.) The share capital of the JNR will be sold gradually to the private sector. As of now, organizational reform, beginning with the replacement of the former JNR by several JR companies, meant to promote market disciplines has been the main aim in this case. The paper shows how competition works in the two cases and how the government still plays a role in qualifying it. It also attempts to link privatization tendencies with changes in the socio-economic situation, for example, decline in costs of entry, reduced importance of distributional considerations, and extended availability of private sector initiative. Factors such as these have diluted the reasons for which Japan took to public enterprise in many sectors in former times. The total number of public corporations in Japan, which stood around 111 during 1967–79 gradually came down to 92 by 1988. Structural reforms were effected in the case of three major Kosha enterprises—the NTT, JNR, and Japan Tobacco and Salt Public Corporation (in which the government still owns shares).

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Dissolution and integration were applied to eighteen corporations; nineteen were privatized; and there was rationalization of thirty-four corporations by 1990.54 THE CRUCIAL ISSUES 1 While the country experiences indicate differences in the way in which privatization is conceived and implemented, there is, analytically, a difference between countries in which the public enterprise sector is relatively large in the national economy and those in which it is not. The macro implications of privatization assume far greater prominence in the former category than in the latter and correspondingly complicate both policy formulation and implementation. Eastern Europe is a special case of the former type, in that privatization concerns the total transformation of a government-owned and government-directed/managed economy into a market economy. No wonder one has to be mindful of the impacts of individual measures of privatization on various distinct parameters of the national economy. 2 Many developing countries and East European countries have the concept of ‘core’ sectors of enterprises, over which the government wishes to retain significant, if not total, ownership. The demarcation of enterprises into different categories of equity unloading, to which many chapters refer, illustrate this point. The ‘core’ is flexible in application; but it signifies basically that, in a given situation of national development, investment and operating policies of certain enterprises have implications for the rest of the economy, which the government fights shy of leaving totally to market forces. Besides, public interventions deemed necessary in the working of such enterprises, if left to the private sector, might prove to be difficult, cumbersome or ineffective. 3 Where a country has a development plan—and many developing countries do—there are in-built limits to privatization, especially to divestiture. The plan ordinarily implies a deliberate ordering of investment priorities, as well as certain enterprise operations, differently from what market forces by themselves lead to. To the extent that the plan transcends being merely indicative and postulates definitive lines of development in different sectors, limits to privatization tend to be implicit and wholesale divestitures might not appear to be desirable. Even in such a situation it would be useful to take a rigorous look at the planning approach itself so as to introduce the maximum possible elements of liberalization and impetus to market forces, without sacrificing crucial social goals. It would then be possible to undertake, not only effective non-divestiture measures, but divestitures themselves in a well-sequenced manner. 4 Country experiences clearly suggest that in the developing countries —and certainly in the leastdeveloped countries—the government has a continuing role in making privatization effective both as a process and in results. Paradoxically the market forces are too weak to operate as a dynamic engine for privatization, whatever its option or technique; and in several cases divestitures, if left totally to private initiative, could present certain ugly facets which the government can ill afford to ignore. Large-scale unemployment, underpriced transfers of property, and corruption are examples. The need for continuing government initiative subsequent to privatization is likely to be substantial in most countries, through regulation of enterprise activities, creation of safety nets for the affected groups, and structural changes in government budgeting. The UK experience amply evidences the ‘regulation’ need; but countries standing at lower levels of development—for example, Eastern Europe and Africa—clearly need governmental attention to ‘safety nets’ and ‘budgeting’ as well. We cannot overlook that the capacity of the government to cope with these requirements, while showing effective respect to market

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disciplines, is a precondition for the success of privatization. No wonder, the pace of privatization is rather slow and unimpressive in countries where this requisite is not in full evidence. 5 A difficult issue limiting implementation of privatization in many countries—other than, say, in the UK. France or Canada—concerns the transferee: to whom are the public enterprises likely to be transferred? There are three broad possibilities: (i) to locals; (ii) to foreigners; and (iii) to joint ventures between locals (including the government) and foreigners. The first category itself is not as innocuous as it looks. There is an unmistakable distinction in the minds of government officials and the general public between indigenous locals and other citizens—particularly in African countries such as Uganda, Kenya and Tanzania. And then there is the more material question, which cuts across this distinction, as to the relative status of opulence of the cross-section (or the important section) of those who manage to get the enterprises into their hands. The divestitures might be responsible for aggravating the wealth and income skewness in the divestiture techniques themselves, the input/ output policies of privatized enterprises, and the employment consequences.55 6 There is an allied question concerning the efficiency orientation of the parties in whose favour divestitures are effected. In several developing countries, efficiency of private enterprise cannot just be assumed, unlike in developed market economies. Even where profits are being made by private enterprises and are likely to be made by privatized enterprises, it is not certain that they result from technical and managerial efficiency; monopoly markets, business-government connections, and irregular practices in the conduct of business are a major reason. Whether free markets will promptly develop and private entrepreneurs begin to earn through efficiency is a hard question. It is complicated by the proposition that ‘enterprise efficiency’ has to be understood in terms of micro as well as social efficiency; and the latter is, conceptually, very important in most developing countries, as paragraphs 2 and 3 above suggest. 7 Foreign capital is, no doubt, considered to be a powerful factor in making a success of divestiture programmes in many countries. However, public attitudes seem to be mixed because of perceived dangers, namely, that the best of the divested enterprises might end up in the foreigner’s lap, and that there might be an unacceptable degree of foreign control over the national economy. Governmental vigilance can help prévent this, in theory; in practice many host governments turn out to be too weak or unskilled to exert the necessary safety mechanisms. Global experience also suggests that, while every country is racing to ease hindrances to the influx of foreign capital and offer incentives and concessions, the total quantum available for direct equity investment is nowhere near what the privatizing countries put together need. As a result, the opportunities of choice are heavily in favour of the foreign investor; and he can easily improve upon the formal concessions by beating down the divestiture price itself, not to speak of helpful kickbacks. Table 25.8 Conflicts in transfer-of-technology agreements Licensor

Licensee

Increase in turnover Savings in labour Savings of R&D expenditure abroad Contract as long as possible Limiting of competition Limiting of exports/territories Limiting of choice of technology

Start of new production Pay by local standards Increase in R&D at home Contract as short as is economical No restrictions No restrictions No restrictions

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Licensor

Licensee

No improvements Limitation of guarantee Right to all improvements

All improvements Full guarantee To retain all rights on improvements and to receive payments

Table 25.9 Conflicts in joint venture agreements Foreigners interest

Local partner’s interest

Sales in local market Transfer of profits Control of company management Supply spares Less equity More intangible contributions Local loans R&D abroad Protection against removal of foreign property

Export Retention of profits Control of company management Freedom to order anywhere More equity More tangible contributions, e.g., cash Foreign financing R&D at home Protection against abuse of dominant position

8 The joint venture option is likely to be in far greater vogue under the privatization policies of many countries. Here again the key to the benefit of the host country lies in the efficacy of the agreement and the effectiveness with which expressed intentions of the two parties manifest themselves and transparently. The problem is not a new one. Conflicts between the local and foreign partners can range over a wide area, as illustrated in Tables 25.8 and 25.9.56 9 Many of the country studies clearly suggest that the most fundamental as well as urgent requirement concerns technological and managerial upgrading in so far as the micro or enterprise level is concerned, and a qualitative change in development planning in so far as the macro level is concerned. Short of these it will be difficult to expect enterprise viability and reasonable international competitiveness. Privatization by itself—the more so, divestiture alone— will prove ineffective in improving the nation’s economic performance. To some extent the quest for foreign capital and/or foreign technology and management skills reflects cognizance of this proposition. But the more important requirement from the long-term point of view is that domestic technology and management should improve conspicuously. It is hoped, rightly, in developing countries, that the injection of foreign capital and joint venture collaborations triggers managerial upgrading at the domestic level. A fairly long learning curve is involved here; but one should constantly and dispassionately evaluate how the curve is moving and whether it is often taking the shape of a plateau. The longer the curve or the more nominal the achievements, the longer the real dependence of the national economy on foreign expertise —a factor that originally triggered nationalization the world over. 10 It is commonly argued that the costs of divestiture are immediate— through unemployment or closures of plants, whereas in the long run there are sure benefits through improved efficiency, output expansions, fresh demands for labour intake, increased tax revenues for the government, and so on. In theory, the argument is well founded. But there are two serious qualifications. The first refers to the length of the long-term when such benefits materialize. The other is more fundamental. How certain can we be, in the given context of a country, that, when market forces are permitted a free sway, there will be such second round effects as to absorb almost the entire segment of the initially unemployed? Does

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international competition ruin some industries? Do free markets damage small units as against largesized enterprises within the range of domestic entrepreneurship itself ? And how much of governmental intervention will be continually called for in order to regulate the burdens of these occurrences and protect the affected groups or regions? Do we come back a part of the circle gradually? 11 There is another aspect of the long-run costs of privatization, which one might find it convenient to push under the carpet. Certain consequences of changes in the ownership structures, such as widened income disparities and foreign control over the domestic economy, will have a potential for economic difficulties as well as social tensions. Add to these the cruelties of the market system in a country whose production and export structures are not sufficiently geared to efficiency; several businesses, large and small, can fail, disturbing the credit agencies and aggravating the national burdens of unemployment. It is not easy to predict what the exact position will be in any given country ten to fifteen years from now. However, it will be helpful if reasonable (and dispassionate) estimates of the economic impacts of privatization measures are attempted ex ante, with reference to a bunch of measures contemplated for, say, a five-year period—particularly with reference to employment, competition, export prospects, impacts on the exchequer, and movements of income/wealth distribution. The estimates have to be continuous. They help in formulating proper ‘sequencing’ of privatization as well, taken along with estimates of capital markets potential. 12 To conclude, there is an unmistakable and genuine enthusiasm in most countries for privatization. The concept is being implemented, rightly, through both divestiture and non-divestiture options. The pace of action is, however, behind the expectations of policy-framers and implementors themselves. This is not surprising, in view of the complex issues surrounding successful privatization. Two simple caveats may be sounded: first, that the focus ought to focus steadily on efficiency gains as a result of privatization, rather than on a divestiture per se; and second, that no divestiture should be so conducted as to contain the seeds of tensions which will trigger a reverse action of some kind in the near future. NOTES 1 National Economic Development Office (1976) A Study of UK nationalised industries: their role in the economy and control in the future, London, HMSO. 2 For a detailed account of the special terms offered to employees during a public flotation, see V.V.Ramanadham (1989) Privatisation in Developing Countries, London, Routledge, pp. 71–3. 3 Dieteru Helm (1987) ‘RPI minus X and the newly privatised industries: a deceptively simple regulatory rule’, Public Money 7(no. 1). 4 The Economist Intelligence Unit (1990) Greece in the 1990s, Serial Report no. 2099, by Robert McDonald, London, 112. 5 Financial Times, London, 25 April 1991, iv. 6 CEC, Annual Economic Report, 1988–89, Com (88) 591 Final, Vol. II. 7 As note 4, 8 OECD Economic Surveys: Turkey 1990/91. 9 Financial Times, London, 23 October 1990. 10 Financial Times, London, 14 June 1991, 2. 11 The Economist, 11 August 1990:67. 12 New York Times, 20 October ;1991: E 5. 13 The Economist, 27 July 1991:64–5. 14 The Economist, London, 7 September 1991:52. 15 The Economist, London, 21 September 1991, ‘Business in Eastern Europe Survey’, p. 9.

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CONCLUDING REVIEW

New York Times, New York, 25 October 1991: D4. See Figure 25.2 on p. 538. The Economist, London, 21 September 1991, ‘Business in Eastern Europe Survey’, p. 9. Financial Times, London, 30 March 1991. Financial Times, London, 21 May 1991, 2. Hungarian Stock Market Courier, Budapest, 4 April 1991, 1. Guardian, London, 30 May 1991, 13. Observation by Janós Palótas, President of the National Association of Entrepreneurs (VOSZ), Hungarian Stock Market Courier, Budapest, 14 March 1991, 1. Financial Times, London, 14 June 1991:2. The New York Times, New York, 19 July 1990. The Economist, London, 11 May 1991:83–4. L.Lipschitz and D.McDonald, German Unification: Economic Issues, IMF Occasional Paper 75. The Social and Political Consequences of Decentralization and Privatization, Gdansk Meeting Report, 1991:8. The New York Times, 22 October 1991: D23. Ibid. Independent, London, 25 March 1991. Financial Times, London 16/17 March 1991:2. The Social and Political Consequences of Decentralization and Privatization, Ibid.: 9. The Guardian, London, 12 April 1991. George Akerlof, Andrew Rose, Janet Yellen and Helga Hessenius, East Germany in from the Cold, Forthcoming in Brookings Papers on Economic Activity, 1:1991 (cited in the Economist, London, 11 May 1991). For interesting observations by Minister Ivan Pushkarov concerned with privatization matters, see Financial Times, London, 17 May 1991, 18. Financial Times, London, 9 April 1992, 3. For a discussion of some of these arguments, see Eduardo Borensztein and Manmohan S.Kumar, ‘Proposals for privatization in Eastern Europe’, IMF Staff Papers 38(2) 303. The Social and Political Consequences of Decentralization and Privatization, Gdansk Meeting, April 1990, ii. The Economist, London, 21 September 1991, 13. For a review of the non-divestiture reforms seriously undertaken in many regions, see Prajapati Trivedi (ed.), (1990), Memorandum of Understanding: An Approach to Improving Public Enterprise Performance, New Delhi. For example, the Volga Automotive Plant Association in the Soviet Union and the Wedel chocolate enterprise in Poland. Susan Collins and Dani Rodrik (1991) Eastern Europe and Soviet Union in the World Economy, Institute for International Economics, Washington DC, 76–80. World Investment Report 1991: the Triad in Foreign Direct Investment, New York, United Nations Center on Transnational Corporations (UNCTC), 1991. Jose Pinera and William Glade (1991) in William Glade (ed.), Privatization of Public Enterprises in Latin America, International Center for Economic Growth, San Francisco, Chapter 2. The Economist Intelligence Unit (1990–91) Algeria: Country Profile, London, 12. Ibid. Julius K.Nyerere, Economic Nationalism, Dar es Salaam, 1968:264. Kenneth D.Kaunda, Zambia’s Economic Revolution, Lusaka, 1968:22, 65. Kenneth D.Kaunda, Take up the Challenge, Lusaka, 1970:61., Uganda Development Corporation Ltd: Corporate Plan 1988–91, Arusha, 1. J.W.Okune, The long-term well-being of the country and the costs of privatisation policies’, paper submitted at the Orientation Programme on Privatization in Uganda, Kampala, August 1991. He concludes: ‘in short, to recommend privatisation as a solution to Uganda’s long-term problem of development is to prescribe a wrong medicine for a wrong disease’.

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53 For example, J.B.Kakoza argues, in connection with the former properties of the Asians: ‘Repossession will not afford a just solution to the problem’. ‘Trying to reverse’ history ‘will cause new social injustices and will certainly cause tensions that are not called for’, The New Vision, Kampala 26 August 1991:10–11. 54 The Institute of Administrative Management, The Administrative Management and Reform in Japan, Tokyo, 1990. 55 For a full discussion of the distributional effects of privatization, see V.V. Ramanadham (1988) Public Enterprise and Income Distribution, Chapter 6 on ‘privatisation’, London, Routledge. 56 Joint Ventures as a Channel for the Transfer of Technology, Geneva, United Nations Conference on Trade and Development, 1990.

Index

abandoned units 444, 446, 449, 450–1, 452 accountability 210–12 accounting 277–8, 465, 484 active earners 105, 106 administration of privatization see managing privatization administrative constraints 48 administrative reform, Japan 494–5 advisers 357 Advisory Group, Guyana 271–2 AES Data 213, 221 AFPs (pension funds in Chile) 239, 242, 246, 251–2 Agricultural Bank of Greece 34, 36–7, 42 Agricultural Development Bank, Vietnam 459 agricultural sector: Algeria 320, 328; Australasia 472; Bangladesh 452, 455; Chile 234–5; Egypt 343; Hungary 107; Morocco 319; Poland 83, 83–4, 86; USSR 74, 76–7, 77–8; Vietnam 465; Zambia 393 AIR CANADA 202, 203, 210, 215, 221, 228; organizational learning 217; privatization processes 218, 219, 220 Alaoui, Moulay Ahmed 308 Alexandria Tyre Company (ATC) 342 Algeria 318–35, 570–1; privatization actions 330–2; problems encountered 332–4; public enterprises 318–24, autonomy 319–20, growth 322, 325–6, regulation 320–2, 334,

statistical data 322–4; thinking on privatization 324–30, content and meaning 329–30, progress 327–9, reasons for turn in favour 324–7 Amersham International 4, 7, 17, 18, 19, 20, 25 Amin regime 395 ancillary relationships 549, 550 application-appraisal 274–6, 567 asset sales 253; Australasia 477; Guyana 274; Nigeria 358–9; UK 6 assets, public: Bulgaria 159, 162–3, 166, 167; Canada 203, 204, 205, 206, 207; Greece 31, 34; Israel 422–4; Japan 495; Poland 87; theft of 281; USSR 68, 69; Yugoslavia 187 Associated British Ports 7, 9, 17, 18, 19, 20, 25 Associated Labour Law (Yugoslavia) 181, 182 Athena 42 Athens buses 33, 39, 46, 49 ATN/GT & T 285 ATOMIC ENERGY CANADA 210 attitudinal change 44, 563 auctions see bidding audited accounts 277–8 Aussat 478, 481, 482, 486 Australasia 469–89, 581–2; actions on privatization 481–5, denationalizations 481–2, 430

INDEX

joint ventures 482–3, operating environment for public enterprises 483, preparations for privatization 484, regulation; 484–5; problems encountered 485–8, Civil Service reactions 486, conceptual clarity 485, foreign investment 487, political support 485–6, sale issues 487, social consequences 487–8; public enterprises 470–8, cash flows to treasuries 477, degree of public ownership 472–3, divestitures 477–8, holding companies 472, losses 477, participation 470–1, profitability 473–4, by sector 471–2, size and structure 472; thinking on privatization 479–81, perception 475–6, progression 474–5 Australia: levels of government 470–1; see also Australasia Australian Airlines 478, 481, 482, 486, 487 Austel 484 austerity 459 authority 57, 58 autonomy: Algeria 319–20, 322, 330; Egypt 343–4 Awami League 444 Bangladesh 444–56, 580; denationalization programme 447–51; promotion of private sector 445–7; public sector 454–6, expansion 444–5, management; 451–2; reserved industries 454 Bangladesh Agricultural Development Corporation (BADC) 452 Banking, Law on (USSR) 73 banking system/sect or: Algeria 321; Australasia 472, 474;

431

Bangladesh 445, 449, 450; Chile 238, 238–9; Greece 33, 35–7; Israel 422, 427, 442; Poland 92–3; Turkey 63; Vietnam 459 bargaining 148–9, 281–2 Basic Rights Stemming from Employment Law (Yugoslavia) 185 bauxite 265, 266, 272 Bauxite Industry Development Co. (BIDCO) 255 Bell Canada (BCE) 223, 564 Bezek 423, 424, 429–30, 431, 434, 438–9 bidding 177; Chile 239, 246; Czechoslovakia 132, 137; GDR open formal 148–9; Yugoslavia public 195–6 bilateral investment production agreements (BITs) 133–4 Breuel, Birgit 142 British Airports Authority 7, 17, 18, 19, 23, 25 British Airways (BA) 7, 17, 18, 25, 256; productivity growth 23 British Columbia Resources Investment Corporation (BCRIC) 212 British Gas 7, 13, 17, 18, 19, 20, 23, 25 British Rail 17, 18, 19, 23, 25; quality 25–6 British Steel 7, 17, 18, 19, 23, 25, 26 British Telecom 17, 18, 19, 20, 23, 25; competition 11, 13; popularity of flotation 6–7; regulation 9 Britoil 7, 9, 20 broad-based capitalism 238–9 brokers, sales through 60, 65 budgetary allocations, Nigeria 360–1 budgeting 585 building societies 388 Bulgaria 158–79, 548–51, 553; actions on privatization 176–9, economic 177–8, legal 176, organizational 176–7, municipal property 175–6; possible privatization approaches 173–4; problems 178–9; public enterprises 159–71,

432

INDEX

capital investments 163–6, enterprise types 160–1, fixed assets 162–3, industrial enterprises 166–71, structure of national economy 159, types of ownership 161–2; reform and privatization strategy 171–3; transformation of co-operative enterprises 175 Bureau of Public Enterprises, Nigeria 364, 365 bureaucracy, Israel 419, 433, 578 Byelorussia 532 buyer interest, Uganda 403–4, 408–11 buyers, evaluation of 274–6, 567 buy-outs: after leasing 71; Bulgaria 173–4; employee see employee buy-outs; management (MBOs) 150 Cabinet, Moroccan 304–6 Cable and Wireless 4, 6, 7, 9, 17, 18, 19, 20, 25 Caisse de dépôt et placement du Québec 209, 210, 224, 227, 565 Cajas de Previsión 251 CAMBIOR 215, 219, 220 Cambodia 463 Canada 201–27, 564–5; agreement with Japan 508; comparison of federal and provincial programmes 224– 7; divestment 201–3; federal level: control and accountability 210–12, evaluating outcomes 220–3, problems 215–17, public enterprises 203–4, 205, 208–9, strategy 213–14; provincial level: changing goals and mounting losses 212–13, evaluating outcomes 223–4, 225–6, problems 217, public enterprises 204–7, 209, 209–10, strategy 214–15 Canada Development Corporation (CDC) 208, 213, 221 Canada Development Investment Corporation (CDIC) 202, 208, 211–12, 213–14, 215 CANADAIR 202, 215, 219, 220, 221, 223 CANADIAN ARSENALS 215 Canadian Broadcasting Corporation 203

Canadian National (CN) 213, 221, 223 Canadian National Railways (CNR) 208–9 CAP 244 capacity utilization: Guyana 269; Uganda 397, 403, 575; Vietnam 462 capital: shortage in Bulgaria 178; Yugoslavian founders’ 193 capital markets: Bulgaria 158; Czechoslovakia 137; Israel 438–9; performance monitoring in Australasia 484, 485; Poland 90, 99; Turkey 52, 55, 60, 62, 62–3, 63; Uganda 408; Vietnam 465–6 capital reduction 244 capitalism, broad-based 238–9 capitalists, creation of 89 see also entrepreneurship career development, Israel 436 Casablanca 312 Casablanca Stock Exchange 315 cashflows to exchequers/treasuries: Australasia 477; Eastern Europe 558; Morocco 298; Zambia 377–8; see also taxes catering: Hungary 110, 112, 117–19; USSR 74, 75 cement 401 centralization: Canada 216–17; Hungary 106–7, 109 centrally-planned economies (CPEs) 111, 554; Algeria 318; Czechoslovakia 124, 125; Hungary 103–4; see also Eastern Europe; and under individual names chemical industry 241, 534 Cherifian Phosphate Office (OCP) 292, 294 Chigaga, G.G. 385–6 Chile 233–52, 565–6;

INDEX

privatization in the 1970s 234–8, evaluation 237–8, process 235–7; privatization in the 1980s 238–47, accounting results 245–6, CORFO companies 240–7, difficulties encountered 246–7, effects on employment and distribution 247, return of concerns under intervention 238–9, sale mechanisms 242–4; social sector 250–2; state ownership 234–5 Chittagong Export Processing Zone 447 Choma Milling Co. Ltd 389 CIH 311 citizens’ shares 560 city property expropriation 161–2 Civil Aviation Authority, UK 8 civil service: Australasia 486; Israel 436, 579–80; see also government officials closures see liquidations coach services, express 10–11, 12, 13 coalition structure 130 Coffee Marketing Board, Uganda 401, 576, 577 collusion 283 commerce 32, 34, 35, 83 Commerce and Industry Bank, Vietnam 459 Commercial Bank of Greece 33–4, 36,42 commercialization: Australasia 475, 483, 484; Czechoslovakia 134–5; Nigeria 354–6, 356–7, full 368–9, partial 368; see also corporatization Commonwealth Bank 473, 477–8, 481, 482, 486 Commonwealth Telecommunications Union 275–6 Communications Satellite Co. 508 communications sector: Australasia 471–2, 474, 484; Canada 203, 204; Chile 241; Guyana 283–4; Hungary 110; Israel see Bezek; Japan 495–508; Zambia 393

433

communism 550; see also centrally-planned economies, nomenklatura Community Service Obligations 473, 487–8 Company Act (Hungary) 112 competition 496, 527; Australasia 485; Czechoslovakia 133–4; GDR 152–3; Greece 40–1; Israel 424, 433–4; Japan 493, 503–4, 505–7, 513, 583; Nigeria 354; UK 10, 10–16, 26; Zambia 382, 388 competitive tendering see contracting-out concessions, employee 526–7; Chile 242–3, 566; Israel 439; Poland 92, 538; Yugoslavia 188–90 consensus 310–11, 573 Constitutional Union (UC), Morocco 306 construction industry: Bulgaria 164; Hungary 109; Poland 83, 84, 86; USSR 534 consumer goods: USSR 534; Vietnam 460; see also light industry consumer protection 284–5, 567–8 contracting-out 341; Greece 46; Guyana 268; management of divestment in Canada 213–14; UK 4, 13–16 contractors’ failure 16 contracts of employment 185 control: Canadian public sector 210–11; Tréuhand 155–6 convertible bonds/preferred stocks 467 Cooperative Financial Agencies (COFA), Guyana 255 co-operative enterprises: Bulgaria 160, 166, 168, 175; Hungary 107, 108, 112; Israel 418, 427, 442; Poland 82, 84, 86;

434

INDEX

USSR 67, 71–2 CORA plots 240 core enterprises 584 Corporación de Fomento de la Producción (CORFO) 236, 240–7, 248 Corporación Nacional del Cobre de Chile (CODELCO) 236, 566 corporatization: Australasia 475, 476, 483, 484, 485, 581; Czechoslovakia 134–5; GDR 150; Poland 91–2; see also joint-stock companies, limited liability companies costs of privatization 587–8 cotton textile industry 449–50 Council for Mutual Economic Assistance (CMEA) 459, 463, 537 credit: Vietnam 462; Yugoslavia: employees 189–90, 190, foreign 186 Croatia, Republic of 197, 198–200, 551, 552; Decree on Fund for Development 198–9; Law on Agency for Restructuring and Development 199–200; see also Yugoslavia cross-ownership model 137 cross-subsidization 12–13 Crown corporations 209–10 see also Canada Czechoslovakia 124–39, 545–7, 553, 557; commercialization and small-scale privatization 134– 5; large-scale privatization 135–6; legislation 131–4; problems encountered 136–9; public enterprises 124–6; financial position 125, 126, 127–9; thinking on privatization 126–31 Danang Peninsula 460 De Havilland 202, 220, 221, 223 debts, government: Australasia 469, 470; Chile 233; Eastern Europe 537; Egypt 348, 350;

GDR 547; Guyana 265–6; Israel 425; Japan 497, 509: Poland 88, 535, 536, 537; Turkey 531; Vietnam 459 debts, public sector: Algeria 323–4; Australasia 477; Bangladesh 446, 448, 456–7; Canada 204, 205, 206, 207, 208; Chile 234; Egypt 337–8, 344; GDR 143, 151; Greece 37–40, 42–3, 47, 48–9; Guyana 265–6, 270; Japan 509, 510–11, 517–18; Uganda 400, 403, 408; Zambia 377 decentralized divestment 213 deconcentration, GDR 150–1 de-etatization 67 see also Union of Soviet Socialist Republics defence sector 419, 424, 425 deferred exchange rate guarantee 533 Demerara Distillers Ltd (DDL) 254, 285, 288 Demerara Woods Ltd (DWL) 273, 274, 276, 284 Departed Asians Property Custodian Board (DAPCB) 395, 396, 403, 407, 410–11, 577–8 Department of Regional Industrial Expansion (DRIE), Canada 212, 214, 217 deregulation see liberalization developing countries 584 see also under individual names development plans 584 DIAFA 311, 312 dinar, convertibility of 185 distress sales 554 distributional effects: Australasia 582; Bulgaria 178–9; Chile 247, 566; concessionary share offerings 527, 538; Japan 492; Nigeria 363 distributive proposals 560 see also vouchers divestiture design study, Uganda 402–4

INDEX

divestiture proceeds: Australasia 477–8; Bulgaria 168–71; Chile 249; Guyana 568; Nigeria 363–4; Turkey 531–2; Yugoslavia 192–4 divestment, defining 201 Doi Moi reforms 458, 458–60 Dunn and Bradstreet reports 275 East African Community 396 Eastern Europe 552–64, 583–4; creation of ‘owners’ 559–62; debt 537; enterprise culture 562–3; foreign investment 556, 563–4; government role 555–6, 561–2; speed of privatization 554–5; valuation 556–7; vouchers 557–9; see also under individual countries economic crises: Chile 237–8; Egypt 348–51; Israel 427 economic policy 59; Czechoslovakia 125; Hungary 120–1; Yugoslavia 181–2 economic reforms: Egypt 343–5, 348; Hungary 104; USSR 66; Vietnam 458, 458–60; Zambia 383 education 251 efficiency 354, 528–9, 559–62, 585, 588; Algeria 319, 324; Chile 245, 246; Greece 43; Guyana 269; Hungary 122; Israel 433–4; Nigeria 353; Poland 541–2; Turkey 531; UK 1–2, 3, 13–14, 15, 526;

435

Zambia 379, 380–1; see also capacity utilization; performance Egypt 336–51, 571–3; agriculture 343; debating privatization 339–41; economic crisis 348–51; external support for privatization 345; government’s reform plan 343–5; industry 341–3; privatization modalities 341; prospects and obstacles 345–7; public sector 336–9; tourism 341, 467 Egyptian Federation of Trade Unions 347 El-Al Airlines 423, 424, 431 electric supply: Canada 209–10; Chile 241; UK 7, 13, 23; Vietnam 466 employee buy-outs 341; Greece 47; Poland 538–41; Yugoslavia 188 employee share ownership (ESOP): Chile 242–3; Czechoslovakia 138; Egypt 341–2; Poland 89, 94–5; Uganda 410 employees: concessions see concessions; enterprise culture 562; misappropriation of assets 281, 554; ownership/management in Zambia 389; resistance to privatization 49, 280–1, 333, 390, 486, 530; representatives 92, 183; see also workers’ councils; Yugoslavia 551, behaviour change needed 191, proceeds from sales 193 employment: Australasia 471; Bulgaria 166, 167; Canada 203; Chile 247; Czechoslovakia 125, 126;

436

INDEX

GDR 153; Greece 31, 33–4, 35; Guyana 256–60, 261–3, 281; Israel 419, 420, 422, 423; JNR 509, 513–14, 514–15, 517, 519, 519–20; Poland 83, 84, 85; Turkey 53, 54; UK 21, 25, 26–7; Yugoslavia 185 employment contracts 185 Encouragement of Capital Investments Law (Israel) 439 energy sector 204, 393; see also electric supply; oil enterprise culture 562–3 Enterprise Accounting System Law (Bulgaria) 172 Enterprise Councils, Hungary 111, 542 Enterprise Oil 7, 17, 18, 19, 20, 25 Enterprise Law: USSR 68, 73; Yugoslavia 182–3 entrepreneurship: expatriate and Vietnam 465, 581; Hungary 106, 113, 120, 545; voluntary groups 107–8; learning curve 561; training in Eastern Europe 563; Yugoslavia 181; Zambia 381 entry barriers 11–13, 130 environmental damage liability 151 equity fund, Uganda 405–6 ETBA 42 ETEVA 36 ethnicity 280–1, 569 European Bank for Reconstruction and Development (EBRD) 171 European Community 43–4, 48, 131, 498–9 European Court 529–30 Exbud Kielce 99 exchequer, cashflows to see cashflows Existence Funds, Hungary 120 expatriate entrepreneurs 465, 581 export processing zones (EPZs) 447, 460 exports: Czechoslovakia 125, 126, 133; Vietnam 459–60; Yugoslavia 186; see also trade

finance: Algeria 321; Egypt 346–7 Finance Development Corporation Ltd (FINDECO), Zambia 373–4 Finance Ministry, Japan 497, 502 Financial Administration Act (FAA, Canada) 211 financial intermediaries 560 financial sector: Bangladesh 455; Canada 203, 204; Israel 435; Vietnam 465–6; Zambia 373–4, 393; see also banking fiscal benefits of privatization 270–1, 287, 568 fit, strategic 202–3 flotations: concessions see concessions; Guyana 266–8; Israel 429–30, 437–9; Nigeria 356, 358; Poland 92–3, 95, 99, 538; Turkey 59, 60, 61, 62; UK 6–7, 7–8, 9; Zambia 384–5 FNA-UGTM 307 Ford Aerospace 508 foreign credit 186 foreign exchange 186 foreign investment 585–6; Algeria 320, 328–9, 329, 333, 571; Australasia 487; Bangladesh 445–6, 446, 447; Chile 244, 245; Czechoslovakia 133–4, 136, 138, 545–6; Eastern Europe 556, 563–4; GDR 150; Greece 49; Guyana 279–80, 566–7; Hungary 112–13, 120, 544–5; Israel 439–42, 579; Japan 502, 507–8; Morocco 315; Poland 93; Turkey 532; Uganda 401–2, 404, 576; USSR 73, 533–5; Vietnam 464, 581

INDEX

foreign partners, Uganda and 409–10 Foreign Private Investment Act (Bangladesh) 447 foreign trade see trade Foreign Trade Transactions Law (Yugoslavia) 186 France 527 free distribution schemes 560 see also vouchers freight transportation 509, 511 see also Japan Freight Railway Co. Fujitsu 507 General Motors (GM) 342–3 German Democratic Republic (GDR) 141–55, 547–8; guidelines of privatization 143–4; identities of enterprises 150–1; power and control 152–3; transparency of process 148–50; unemployment and restructuring 145–8; see also Treuhandanstalt German Federal Republic (FRG) 141, 142, 152, 156, 546, 547 Gesellschaft zur Privatisierung des Handels (GPH) 143 goals of privatization see objectives golden share 285, 359–60, 441, 529 Government Insurance Office (GIO), Australia 478, 481, 482 government officials, Moroccan 310 see also civil service Government Plenipotentiary for Ownership Changes, Poland 98–9 government role 584–5; Bangladesh 454; Bulgaria 549–50; Eastern Europe 555–6, 561–2; Egypt 347; Israel 417–19, 426, 578–9; need to contract 432–3, 435–6; Uganda 576–7; government as shareholder 409; see also political intervention Grain Corporation 478, 481, 482 Greece 29–50, 529–30; privatization 42–9, forms of 45–7, problems in implementation 47–9, thinking on 42–5; public enterprises 29–42, competition 40–1, divestitures 41–2,

437

holding companies and ownership structure 35–7, profitability 37–40, reasons for state ownership 40, sectoral distribution 31–3, size distribution 33–5, 36, totality 29–31 Greek Aerospace Industry 46 gross domestic product (GDP): Egypt 350; Greece 529; Guyana 256, 259 gross national product (GNP): Bulgaria 163; Israel 417, 418–19 Guidelines on Privatization 569 Guyana 253–87, 566–9; Economic Recovery Programme (ERP) 286; lessons 286–7; problems of privatization 273–86, application-appraisal 274–6, choosing mode of divestment 283–4, employee reaction 280–1, ‘hard sell’ 279–80, managing privatization 278–9, negotiating tactics 281–2, preparation 276–8, pricing and valuation 282–3, subsidies and fiscal concessions 284, unfair practices 284–5, watering-down of shareholding 285–6, public enterprises 254–68, early divestments and marketization 266–8, establishment 260–4, factors contributing to demise 264–6, nature of 254–60; thinking on privatization 268–73 Guyana Agricultural Products Corporation (GAPC) 254 Guyana Broadcasting Corporation (GBC) 258, 262, 272 Guyana Co-operative Insurance Service (GCIS) 254, 257 Guyana Electricity Corporation (GEC) 257, 261, 268, 269, 271, 282 Guyana Fisheries Ltd (GFL) 257, 261, 272, 273, 283 Guyana Glassworks Ltd (GGL) 254, 258, 262, 266, 282, 283 Guyana Leathercraft Ltd (GLL) 254, 266 Guyana Liquor Corporation (GLC) 258, 261, 285, 288 Guyana National Co-operative Bank (GNCB) 254, 258 Guyana National Engineering Corporation (GNEC) 258, 261, 272

438

INDEX

Guyana National Newspapers Ltd (GNNL) 258, 262, 272 Guyana National Trading Corporation (GNTC) 257, 261, 272, 273, 281 Guyana Pharmaceutical Corporation (GPC) 257, 261, 272 Guyana Stores Ltd (GSL) 257, 261, 272, 274 Guyana Sugar Corporation (GUYSUCO) 256, 279, 282 Guyana Telecommunications Corporation (GTC) 257, 261, 268, 271, 279, 285 Guyana Timbers Ltd (GTL) 257, 261, 268, 272, 279–80 Guyana Transport Services Ltd (GTSL) 257, 261, 272, 273, 281, 282, 283 GUYCONSTRUCT 268, 281, 283 GUYMINE 266, 268, 279, 282 GUYSTAC 260, 265, 266, 271 see also Public Corporations Secretariat ‘hard sell’ 279–80 Hassan II, King 302–4 health 251 heavy industry 135, 460, 461 see also industry sector Heracles (Hraklis) 42, 530 ‘hidden privatization’ 94 Histadrut (Labour Union) 417, 418, 420, 427 Ho Chi Minh City 460 Hokkaido Railway 513, 514, 516, 518, 519 holding companies: Australasia 472; Egypt 344, 573; Greece 35–7; Guyana 255, 272; Morocco 295, 296, 316; Zambia 372 Honshu Railways 513–14, 515, 516 hospital cleaning 14–16 hostile bids 544 hotels 467; Egypt 341; Morocco 311, 312, 314; see also tourism housing 251, 531 Housing Development and Public Participation Administration (HDPPA), Turkey 55–6, 57, 58, 60, 64, 65, 531 Hraklis (Heracles) 42, 530 Hughes Aircraft 508 Hungary 103–22, 542–5, 553, 554; economic reform (1968) 104; legislation 111, 112–14;

major sectors of economy 107–10; marketization and privatization 110–12; pattern of SOEs 105–7; privatization programme 543; public enterprises: pattern 105–7; role 103–5; retail trade, catering and services 117–19; scope of privatization 544; small business sector 119–21; SPA programme packages 115–16; spontaneous privatization 116–17 HYDRO-QUÉBEC 209, 210 IDO (Nippon Ido Tsuhin Corporation) 504 immigrants 420, 425, 426, 432 import controls 186 see also trade incentive structure, Israel 436 Independence Party (PI), Morocco 307 India 545 Individual Entrepreneurship Law (Hungary) 113 individual labour 72 Industrial Development Corporation (INDECO), Zambia 372, 373, 374, 375, 380 Industrial Development Office (ODI), Morocco 312, 314 industrial policy, Bangladesh 445–6, 446, 447–8, 453 Industrial Reconstruction Organization (IRO), Greece 35– 6, 37, 41–2 industry sector: Bangladesh 454–5; Bulgaria 166–71; Egypt 341–3; Hungary 107–9; Morocco 293, 294; Poland 83, 85; Vietnam 460–1; Zambia 373, 392 Industry Ministry, Israel 433 infitah (open door policy) 348–9 inflation: Chile 233; Israel 425–6; Poland 88, 535; Vietnam 459 information 148–50 informatization 497 infrastructure: Australasia 483;

INDEX

Vietnam 465–6 institutional investors 408, 576–7 institutional structures 561–2 insurance 359–60, 388, 445, 472 interest groups 346 interest rates 177, 459 Interflug 153, 156 interlocking ownership 29–30 inter-ministerial denationalization committee, Greece 44, 45, 530 internal shares 188–90, 190–1, 194, 551 International Finance Corporation (IFC) 276 International Monetary Fund (IMF) 44, 171, 353, 447, 555; Czechoslovakia 131; Guyana 265, 273 international pressures 43–4 International Telecommunications Union 275–6 investment: Algeria 321, 327; Bangladesh 445–6, 446, 447, 448–9, 453; Bulgaria 163–6; foreign see foreign investment; GDR 153; necessary 547; Greece 46–7; Israel 425; Japan 495, 509–10; Morocco 294, 295; Turkey 52, 63; Uganda 398, 399, 400–1, 576–7; attracting 401–2, 404; UK 2–3; Zambia 390–1; see also institutional investors Investment Corporation, Bangladesh 446–7 investment funds: Algeria 320, 330–1, 332, 334, 571; Poland 100, 101; Uganda 404–5, 405–6, 576; USSR 75–6, 77; Yugoslavia 191–2, 192, 198–9, 551 Ionian Bank 36 Israel 417–42, 578–80; issues and controversies 431–42, conflicting goals 433–5, divestiture technique 437–9, foreign investment 439–42, government intervention 432–3,

439

incentive structure 436–7, political interference 435–6; privatization 425–31, economic challenge 425–6, plea for 426–8, record of divestiture 428–31; role of state 417–25, macro impact of public sector 417–19, state-owned enterprises 420–5 Israel Chemicals Ltd (ICL) 423, 424, 431, 439 Istanbul Stock Exchange 59, 60, 62 Japan 490–521, 582–3; JNR see Japan National Railways; NTT see Nippon Telegraph and Telephone; privatization and deregulation 490–5, administrative reform 494–5, meanings 490–1, reasons for privatization 491–3, role of state 493 Japan Air Lines 494 Japan Freight Railway Company 514, 515, 516, 517, 517– 18 Japan National Railways (JNR) 494, 495, 508–20, 521, 583; operational changes 512–13; organizational changes 513–15; ownership changes 516; reasons for privatization 509–12; results of privatization 516–20 Japan Tobacco and Salt Public Corporation (JTSPC) 494, 515, 583 JNR Settlement Corporation (SC) 516; debt 514, 517, 518; employment 515, 519, 520 joint-stock companies: Algeria 330–1, 333–4; Bulgaria 174; Poland 91–2, 100; USSR 67, 70– 1, 74, 75; Yugoslavia 190–1; see also corporatization joint ventures 586, 587; Algeria 328–9; Australasia 482–3; Czechoslovakia 133–4; Egypt 342–3; Hungary 112–13; Israel 439;

440

INDEX

Turkey 52–3, 54–5, 58, 63, 63–4; Uganda 409–10; USSR 72–3; Vietnam 581; see also foreign investment Jouahri, Abdellatif 299, 302 jute industry 445, 449–50 Kaunda, K.D. 379, 381–2, 384, 574 Kenya 585 khaskhasah concept 339 Kobe City’s Port Island 492 Kokuro 520 Koor conglomerate 420, 421, 427 Krosno 99 Kupat Cholim (mutual health fund) 418, 427 Kyushu Railway 513, 514, 516, 518 labour, individual 72 Labour Bank (Bank Hapoalim) 418, 427 Labour Ministry, Israel 434 labour productivity 19, 21, 23 labour relations 321–2, 500 see also wages Labour Rotation Adjustment Law (Japan) 500 Lagos 363 Lamrani, Mohamed Karim 304 land: JNR 518; ownership in Bulgaria 161–2; reform: Chile 236–7; USSR 77–8 Land Ownership and Land Usage Law (Bulgaria) 161, 176 Laraki, Azeddine 304–5 large enterprises 173–4 see also size of enterprises learning, organizational 217 leasing 71, 99, 341 legal complications: Greece 48, 529–30; Turkey 532; Uganda 577–8; USSR 79 legislation: Algeria 319, 320, 328–9; Bulgaria 176; Chile 242–3;

Czechoslovakia 131–4; GDR 143; Hungary 111, 112–14; Japan 491, 499–500, 503, 512; Morocco 298, 300–1; Nigeria 356; Poland 90–1; Turkey 55–7; UK 5; USSR 73; Yugoslavia see Yugoslavia; see also regulation Lévesque, René 212 liberalization 341, 496; Bangladesh 446–7; Japan 490, telecommunications market 495–9, 503–8; UK 10–16; Vietnam 458–61; Zambia 388 licences: Hungary 111–12, 118; UK telecommunications 9 light industry 135, 136, 460, 461; see also industry sector limited liability companies 70–1, 190–1; see also corporatization liquidations: Bulgaria 174; GDR 548, decisions by Treuhand 143, 145–7, 154–5, 156–7; West Germany and 152–3; Guyana 254, 266; Poland 93–4, 99, 538 liquidity credits 143 Lithuania 557 Livingstone Motor Assemblers 378 Liwa International 314 Ljubljana Stock Exchange 184 ‘load shedding’ 341 loan fund, Uganda 405 lobbying 279–80 local buyers 279–80, 571 local enterprises, Algeria 324 Local Land Commissions 176 Lockheed 46 long-term costs of privatization 587–8 Lorch, Klaus 450 losses, public enterprises’ see debts, public;

INDEX

sector Madelipêche Inc. 223, 225 majority ownership 30 Management Act (Algeria) 330 management agreements 388–9 management buy-outs (MBOs) 150 management/managers of enterprises 586–7; advantageous position 554, 557–8; Algeria 330, 333, 570–1; Australasia 484; Bangladesh 451–2; Canada 218– 19; Czechoslovakia 547; Egypt 344, 572; enterprise culture 562; Guyana 269–70; Israel 439; Poland 540; self-management 389, 560, 575; Uganda 399, 401–2, 410; Vietnam 581; Yugoslavia 191; Zambia 388–9; see also self-management management shareholdings 410 managing privatization: Canada 213–14, 218–19; Guyana 278–9; Poland 98–9; Turkey 57–8 manufacturing: Australasia 472; Czechoslovakia 125, 126; Greece 31, 32, 33, 34, 35; Zambia 376 Mards Workshop 255 market disciplines 561 Marketing and Export Office (OCE), Morocco 311–12 marketization 256, 554–5; Algeria 328–9; Australasia 485; Egypt 571–3; GDR 144–53; Hungary 104, 110–12; Israel 426–7; Poland 89–90; USSR 66; Vietnam 580–1

441

mass privatization: Bulgaria 173–4; Czechoslovakia 135–6; Poland 95; programme 100, 101, 541 memoranda-of-understanding see performance contracts Mercury Communications 11 Merrett, T. 533–5 Mining and Industrial Development Company (MINDECO), Zambia 373, 374 Mining Research and Holding Board (BRPM), Morocco 292 mining sector: Chile 241; Israel 420, 423, 424; Vietnam 465; Zambia 373, 391 ‘minkatsu’ projects 491 MITI 497 Mitsubishi Electric 497 mixed companies, Algeria 328–9 Money and Credit Act (Algeria) 320, 321, 329, 331–2 monopolies: Czechoslovakia 126–30; Guyana 254, 283–4, 567–8; Israel 424, 429; Morocco 311–12; UK 4, 8–10, 21; Zambia 574 Moroccan General Economic Confederation (CGEM) 309 ‘Moroccanization’ 293, 314–15 Morocco 292–316, 467, 569–70; denationalizations 311–14; political opposition 315; preparations for current programme 314–15; public enterprises 292–8, divestitures 298, general structure of public ownership 295–7, holding companies 295, 296, investment 294, 295, origins 292–4, profitability 297, size structure 294–5, 296, transfers to Treasury 298; thinking on privatization 298–311, actors 302–11, legislation 300–1, PERL 300 Mubarak, Hosni 340, 343, 345, 348–9, 350

442

INDEX

municipal property: Bulgaria 175–6; Czechoslovakia 135 municipal services see social services mutual funds 467 mutual health fund (Kupat Cholim) 418, 427 Nasr Automotive Co. (NASCO) 342–3 National Bank for Economic Development (BNDE), Morocco 311, 312–13 National Bank of Greece 33, 36, 42 National Bank of Industry and Commerce (NBIC), Guyana 254, 258, 263, 266–8 National Bus Group, UK 12, 13 National Democratic Party (NDP), Egypt 345–6, 573 National Economy Ministry (DEKO), Greece 30, 32 National Express, UK 10, 11, 12, 13 National Fishing Office (ONP), Morocco 313 National Freight Consortium (NFC), UK 7, 8, 17, 18, 19, 25 National Independents’ Rally (RNI), Morocco 306–7 National Industrial and Commercial Investments Ltd (NICIL), Guyana 285–6 National Investment Company (SNI), Morocco 311, 312, 313 National Property Funds, Czechoslovakia 135 National Railway Workers’ Union (NRU), Japan 512 National Railways Act, Japan 512–13 National Resistance Movement (NRM), Uganda 395, 396 National Wealth Management Funds (NWMFs), Poland 541 nationalization: Algeria 318; Bangladesh 444, 446, 452; Bulgaria 162; Egypt 336; Guyana 260–4, 265–6; Japan 493; Uganda 395–6 natural resources 434–5, 440–1 negotiation 148–9, 281–2 net material product (NMP): Czechoslovakia 124–5; Hungary 104–5, 106 New Kansai International Airport 491 New South Wales (NSW) 483; divestitures 478, 481, 482; leadership in privatization 474–5, 476, 479, 480–1, 485

New South Wales State Bank 478, 481, 482 New Towns Commission, UK 6 New Zealand 288 see also Australasia NIEC 372, 375 Nigeria 353–70; categorization of enterprises 366–9; critical review 359–64; implementation 356–9; objectives 353–6; subcommittees 369–70; TCPC see Technical Committee on Privatization and Commercialization Nippon Telegraph and Telephone Corporation Law 499, 500 Nippon Telegraph and Telephone Public Corporation (NTT) 490, 493, 494, 495–508, 521, 583; operational changes 499–500; organizational changes 500–1; ownership changes 501–2; reasons for privatization 496–9; results of privatization 503–8 nomenklatura 78–9, 550, 554, 557 ‘golden parachutes’ 94, 136 Northern Transportation 213 Nova Corporation 223, 564 Nyere, J.K. 574 objectives of privatization: Canada 210–13, 220–3; Chile 240; Israel 431, conflicting 433–5; Japan 491–3; Morocco 306, 569–70; Nigeria 353–6; Uganda 397–401, 402 Obote government 395 OCE 315 Office of Privatization and Regulatory Affairs (OPRA), Canada 216, 217 oil: Algeria 324–7; Israel: price rises 425, 442, refineries 420, 423, 424, 431; USSR 534; Vietnam 465 Okinawa Electric Power Co. Ltd 494

INDEX

Olympic Airways 33, 39 Olympic Catering 44, 45 ONA 309 Organization for Economic Co-operation and Development (OECD) 44 organizational learning 217 organizational restructuring see restructuring output: UK 17–18; Vietnam 460; see also gross domestic product; gross national product; net material product Overseas Telecommunications Commission (OTC) 478, 482, 486 over-staffing 526, 575 owners: creation of 559–62; enterprise culture 562 Ownership Changes Ministry, Poland 99, 102 ownership dilution (by recapitalization) 285–6 ownership disputes: GDR 151; Uganda 395, 407, 410–11; Yugoslavia 187–8 ownership structure: Algeria 327; Australasia 470–1, 472–3; Bangladesh 444–5; Bulgaria 161–2; Canada 203–7; Chile 234; Czechoslovakia 124–5; Greece 29–30, 35–7; Guyana 254–5; Hungary 105; Israel 417–19; Morocco 295–7; Poland 82–3; Turkey 52; USSR 69; Zambia 372–6 Ozal, T. 58, 62 Ozal government 51, 59 Pakistan 451 Parliamentary Select Committee, Zambia 382–3 Part1 Québécois (PQ) 213 partial sales of equity:

443

Australasia 476; Greece 42, 45; Nigeria 359, 366–7 participations (Turkey) 52–3, 54–5, 64 party politics see politics Party of Progress and Socialism (PPS), Morocco 308 passenger transport 509, 511, 513–14 see also Japan National Railways Paz Oil Company 429, 430, 442 Peiraki-Patraiki 38, 42 pension funds 239, 242, 246, 251–2 pensions, JNR and 511 performance: Bangladesh 446; corporatization and 484; Egypt 349, 572; Guyana 263; Israel 424; ownership change and 528–9; Poland 84–7; Turkey 53; UK 3, 528–9, liberalization and competitive strategy 10–16, public utilities 16–26; Zambia 379–80, 383; see also efficiency performance contracts 271–2, 355–6 Permanent Interministerial Public Enterprise Committee (CIPEP), Morocco 299 PETRO-CANADA 211 planned ambiguity 64, 531 planning 584; need for strategic 56–7; piecemeal in Greece 47–8 Poland 82–102, 535–42, 553, 557; actions in privatization 94–5; mass privatization programme 100, 101, 541; Ministry of Ownership Changes 99, 102; problems encountered 95–9, demand for shares 98, identifying enterprises 95, organization of administration 98–9, restructuring 97, valuation 96–7; public enterprises 82–7, capitalization 87, definition 82, performance 84–7, totality 83–4;

444

INDEX

recent developments in privatization 99–100; thinking on privatization 87–94, connotation 89–90, legal framework 90–4, progress 87–9 political intervention in public sector: Israel 419, 432–3, 435–6, 578–9; Japan 512; Turkey 51, 62, 531; see also government role politics: Australasia 485–6; Bulgaria 550; Egypt 347–8; Greece 43, 49; Morocco 306–8, 315; Turkey 58, 60–2; UK 526; USSR 78–9 POLYSAR-CDC 210, 223, 564 portfolio investors 440, 579 Post Office Corporation (POC), Guyana 272 Postal, Telegraph and Telephone Company (PTT), Turkey 58–9, 64 Posts and Telecommunications Ministry: Japan (MPT) 491, 503– 4, 507; NTT 499, 500, 501, 502, 505; Morocco 314 potential growth 95 Poultry Development Company, Zambia 378 preparation for privatization: Australasia 484; Guyana 276–8; Nigeria 357, 369 prices: enterprises/shares: Bulgaria 169, 177–8, Chile 247; Guyana 282–3, Nigeria 357–8, UK 18 see also valuation; procurement in Egypt 343, 351; telecommunications in Japan 498, 505–7, 508; UK 2–3, 528; deregulation 10–11, monopolies 9–10 Principal Bank for Development and Agricultural; Credit (PBDAC), Egypt 343

private investment projects 483, 491, 582 private property 67 private sales: Australasia 476, 478, 485, 487; Israel 429, 437; Poland 95, 99; Turkey 59–60, 61, 65; UK 7, 8 private sector 526; Algeria 318–19, 320, 328, 331; Bangladesh 445–7, 453–4; Egypt 339, 571, 572–3; Greece 45, 49; Hungary 106, 111, small businesses 119–21; Israel 435; Morocco 309; Uganda: interest in privatization 408–11, 413–14, rehabilitation investment 400–1, revitalization 398–9; Zambia 379, 385 privatization: concepts 253; Algeria 329–30, Australasia 475–6, Egypt 339, GDR 143–4, Hungary 110, Japan 490, Nigeria 354, USSR 67; forms 341 privatization agencies 57–8 see also under individual names Privatization of the Assets of State-owned Enterprises in Retail Trade, Catering and Consumer Services Law (Hungary) 114, 116, 118 privatization companies 560 Privatization Investment Funds, Uganda 404–5, 405–6, 576 Privatization Law: Bulgaria (proposed) 550–1; Hungary 114; Poland 538; Turkey 55, 56, 59 Privatization Ministry, Quebec 214–15, 565 Privatization of State-owned Enterprises Act (Poland) 90– 1

INDEX

Privatization Task Force, Uganda 405, 406, 407 ‘problem firms’ 37, 42, 43, 44 proceeds of sales see divestiture proceeds processes 217–20 Prochnik 99 procurement prices 343, 351 productivity see labour productivity; total factor productivity profitability: Australasia 473–4; Chile 245, 250; future in GDR 146; Greece 37–40; Israel 424; Japan: JNR 516, 519, NTT 506; Morocco 297; Turkey 53; UK 3, 17–19, 20–1, 526; Zambia 376–7 profits, distribution of 183, 189 property valuation see valuation proprietary structure 182–3 prospectuses 276–7 Provida 239 Provisional Commission on Administrative Reform, Japan 490, 494, 500, 510, 511 Public Corporations Secretariat 255, 269, 277–8; Divestment Unit 276, 278–9; see also GUYSTAC Public Enterprise Restructuring Loan (PERL), Morocco 300 public enterprises see under individual countries Public Enterprises Law (USSR) 66, 68 Public Enterprises Project, Uganda 396 Public Enterprises Secretariat, Uganda 407 public opinion: Australasia 475, 488; Quebec 214; Treuhand 154; USSR 78–9 Public Property Funds, USSR 75–6, 77 public sector deficits see debts, public sector public services see social services public utilities: Bangladesh 455; Czechoslovakia 134; Greece 31, 32, 33, 34, 35; Guyana 271–2;

445

Israel 420, 422, 423, 434; Japan 493; UK 16–26 Public Utilities Commission, Guyana 285 Public Works Ministry (MPW), Quebec 228 Qantas 473, 478, 481, 482, 486, 487 quality 23–6, 27 Quebec 228, 565; changing goals and mounting losses 212–13; divestment strategy and structure 214–15; outcomes 223–4, 225–6; problems encountered 217; programme compared with federal programme 224–7; public enterprises 204, 209 QUÉBECAIR 215, 217, 219, 220, 223, 224, 226 Queensland 479, 481, 485 Rabat-Salé 312 Raffinerie du Sucre du Québec 223, 226 Railroad Business Act (Japan) 512 Railroad Marketing Act (Japan) 512 Railway Information Systems Company, Japan 514, 516 Railway Technical Research Institute, Japan 514, 516 Railway Telecommunications Company, Japan 514, 516 railways: Bangladesh 452, 457; Greece 39; Japan see Japan National Railways; UK 25–6 raw materials 440–1 recapitalization 285–6 re-entry costs 146–7, 156–7 refuse collection 13–14, 15 regional inequalities: Czechoslovakia 546; GDR 547; Nigeria 363; Vietnam 466 regulation 584–5; Algeria 320–2, 334; Chile 236; Egypt 347; Greece 48, 50; Guyana 284–5, 567–8; Israel 434, 579–80; Japan 493, 505, 512–13; UK 527–8; future 26–7;

446

INDEX

reform 2–10 regulators 562–3; Australasia 484–5; UK 8–9, 10, 27 rehabilitation, Uganda 400–1, 401–2 Rehabilitation Loan Fund, Uganda 405, 406–7, 576 reimbursable contributions 243 reinvestment funds see investment funds Republic Funds, Yugoslavia 191–2, 192, 198–9, 551 research projects 508 reserved industries 446, 448–9, 454 resistance to privatization 49, 280–1, 333, 390, 486, 530 resource allocations, Nigeria 360–1 Restitution Law (Czechoslovakia) 132 restitution principle 151 restructuring: Algeria 319, 328, 329, 330, 331, 570–1; Australasia 484; Bulgaria 171–2, 549–50; Canada 201, 202; Egypt 344; GDR 143–4, 145–8, 548; Greece 45–6, 48–9; Hungary 542, 544; Japan 583; Poland 97; Uganda 401; UK 526; USSR 532–3; Zambia 374, 378– 80, 388–9 Restructuring and Recapitalization Agencies, Yugoslavia 194–5, 199–200 retail trade: Hungary 110, 112, 117–19; USSR 74, 75 return on assets: Canada 204–8, 209; Greece 37–8 revenue-raising: Israel 433; Turkey 52; Uganda 399 REXFOR 210, 223–4, 226 risk aversion 147 River Basin Development Authorities 359 Rohwedder, Detlev 142, 153, 156 Rolls-Royce 7, 17, 18, 19, 25 Romania 553 ruling elite, Bangladesh 453

SABRE system 452 safeguards, Guyana 284–5, 286–7, 567–8 see also regulation safety, occupational 519 safety nets 584–5 sales of assets see asset sales Sale of Social Capital Law (Law of 1990, Yugoslavia) 187–98 passim sales decisions/approval 195–6 sales mechanisms 242–4 sales proceeds see divestiture proceeds Santa María 239 Savannah Industries Ltd (SIL) 254, 266 savings: Czechoslovakia 136, 138; Uganda 408; Vietnam 459 Savings and Management Fund (CDG), Morocco 313, 314 scale economies 23, 108 ‘second economy’ 107–8 Scottish Express 10, 11 ‘second economy’ 82, 107–8 Securities Law (Yugoslavia) 183–4 security of supply 25 Seikan Tunnel 517 selection of companies for privatization: Hungary 115; Poland 95; Uganda 402–3, 415 self-management 560, 575 Self-Management Enterprises, Zambia 389 sell-off model 136–7 service sector: Bangladesh 455, 455–6; Hungary 117–19; Morocco 293, 294; Poland 84, 86; USSR 74, 75 see also social services Seto-Ohashi Bridge 517 shadow economy 82, 107–8 share sales: Bulgaria 174; Chile 238–9, 243, 244, 246, 249; concessions see concessions; Czechoslovakia 137–8; GDR 149; Guyana 254; Poland 91–3,

INDEX

demand for shares 98; USSR 70; Yugoslavia 183–4, internal 188–9, 190–1, 194; Zambia 378; see also flotations; partial sales of equity shareholding, watering down 285–6 shareholding funds, Algeria 320, 330–1, 332, 334, 571 Shekem 423, 424 Sheraton Hotel, Kampala 401–2 Sherif, Khaled 347 Shikoku Railway 513, 514, 516, 518 Shinkansen Holding Corporation 513, 514, 515, 516 Shinkansen line 509 Shinto, Hisashi 498 SIDBEC 210, 215, 219, 220 Silesian Cable Company 99 size of enterprises: Australasia 472; Bulgaria 168, 169, 170; Czechoslovakia 125, 126; GDR 150; Hungary 105–7; Morocco 294–5, 296; Zambia 375; see also large enterprises; small enterprises skills, privatization 57, 79, 98, 276–8, 569 Skitube Railway 483, 582 Slovak Republic 546; see also Czechoslovakia Slovenia 551–2; see also Yugoslavia small enterprises: Bulgaria 174; Hungary 106–7, 111–12, 119–21; USSR 68–9, 74, 79; see also size of enterprises Small-Scale Privatization Law (Czechoslovakia) 132 SNA 224, 225 Social Accountancy Service (SAS), Yugoslavia 185–6 Social Capital Law (Law of 1990, Yugoslavia) 187–98 passim social groups 49 social security 251–2 social services: Australasia 473, 487–8; Chile 250–2;

447

Eastern Europe 556; Israel 419; Vietnam 466–7 Socialist Union of Popular Forces (USFP), Morocco 307– 8 Société des Alcools du Québec (SAQ) 215, 217, 219, 220, 224 Société générale de financement du Québec (SGF) 209, 210, 224 Société Immobilière du Quebec (SIQ) 228 SODEA 311 SOE Authority, Israel 420 Solidarity 94 SOQUEM 210, 223, 224, 225 SOQUIA 223, 225 SOQUIP 210, 224, 226 Space Communications Corporation 508 special share see golden share Special Task Force on Privatization, Zambia 386–7 speed of privatization 554–5 spin-off industries 362 spontaneous privatization: Czechoslovakia 136; Hungary 113, 116–17; Poland 94 start-ups 111–12, 112 state see government role State Agency for Privatization (SAP), Bulgaria 174, 175, 176–7 State Committee for Co-operation and Investment, Vietnam 464 state-owned enterprises see under individual countries State Property Agency (SPA), Hungary 113–14, 118, 121, 543–4; programme-packages 115; spontaneous privatization 116–17 statement of objectives 570 Steering Committee of the Restructuring of the Parastatal Sector, Zambia 387, 574 Stevens, Sinclair 211–12, 213 stock exchange sales see flotations; share sales stock market: faith in 438–9; manipulation 65 Stoleru, Lyonel 171 stop-and-go costs 146–7, 156–7 strategic fit 202–3 strategic investors 440, 579

448

INDEX

strikes 500 structural adjustment: Guyana 271–2; Hungary 110–11; Japan 520–1; Nigeria 353, 356; Uganda 396–7, Zambia 380; see also restructuring subsidiaries: Guyana 255, 257–8, 287; Morocco 293; NTT 501; Turkey 52, 54–5, 58 subsidies: Bulgaria 177; Chile 233, 234; Czechoslovakia 128–9; Egypt 572; GDR 145–7, 155, 156–7; Guyana 284; Israel 419; JNR 509–10; Vietnam 462 sugar 265, 266, 272, 311 Supervisory Council (SC), Guyana 271–2 Supplementary Finance Act (Algeria) 329, 332 Supreme Planning Council, Turkey 55, 56, 58, 64 Sydney Harbour road tunnel 483, 582 Sydney Water Board 480–1 Sykes, A. 533–5; Tanzania 585 taxation 558; Czechoslovakia 128–9, 134; Guyana 284; Hungary 120; Israel 419; Vietnam 462 Technical Committee on Privatization, Zambia 387, 574 Technical Committee on Privatization and Commercialization (TCPC), Nigeria 355, 364, 365; Directorate of Finance and Investment 360–1; functions 360–4, 370; implementing privatization 356–9; subcommittees 357, 369; code of conduct 358, 369–70 technology 164–5, 561, 586–7 Telecom (Australasia) 478, 482, 486

telecommunications see communications sector Telecommunications Business Law (Japan) 499, 503 Telecommunications Technology Council, Japan 507 TELEGLOBE CANADA 215, 217, 219–20, 222, 223, 224, 564 telephones 142, 155, 466, 495 Teletas 58–9, 64 tendering, competitive see contracting-out thefts of assets 281, 554 Three Islands Fund 514 Tokyo Telemessage Inc. 505 Tonsil 99 Toshiba 497 total factor productivity (TFP): Czechoslovakia 125–6, 130; UK 19, 21, 23–5 tourism 467; Algeria 329–30; Egypt 341; Vietnam 465; see also hotels trade, foreign: Algeria 321; Bangladesh 445, 452, 452–3, 455; Eastern Europe 552; Egypt 348, 350; Guyana 264; Hungary 109–10; Japan 496; Poland 535, 536, 539; Yugoslavia 186–7; Zambia 393 trade sales see private sales trade unions: Australasia 486, 488; GDR 148; Greece 49; UK 4–6 Training Needs and Facilities in Privatization 569 transfer-of-technology agreements 586 transferees 585 transfers to exchequer see cashflows; taxation Transformation Law (Hungary) 113, 122–3 transnational corporations (TNCs) 260, 264, 282 transparency 148–50, 275 Transport Ministry, Japan 512, 515 transport sector: Australasia 471–2, 474;

INDEX

Bangladesh 452, 455; Canada 203, 204; Hungary 110, 112; Israel 420, 422–4, 435; Japan see Japan National Railways; Morocco 312; Poland 83; UK 10–11, 11, 12–13; USSR 534; Vietnam 466; Zambia 393 Trans-Tokyo Bay Bridge 491 Treasury Department, Israel 433 Treuhandanstalt (Treuhand) 141–55, 547–8; decision-making 156–7; history and organization 142–3; performance assessed 153–5; power and control 152–3; see also German Democratic Republic Turkey 51–63, 531–2; implementation 58–62; legislation 55–7; organization of privatization 57–8; public sector 52–5, 63 turnover: Guyana 260, 261–3; UK 17–18, 20 Uganda 395–16, 575–8, 585; actions in privatization 402–7, analysis of enterprises 403, buyer interest 403–4, company screening 402–3, 415, divestiture classification 415–16, divestiture design study 402, investment funds 405–6, method of sale classification 404, 416, rehabilitation loan fund 406–7; problems encountered 407–11, capital market expansion 408, private sector interest 408–11; public enterprises 395–7, 411–14; thinking on privatization 397–402, possible strategy 401–2, raising revenue 399, relieving financial/ administrative burden 400–1, revitalizing private sector 398–9 Uganda Development Corporation (UDC) 395, 400, 410, 575

449

unemployment: Australasia 486; Bulgaria 549; Eastern Europe 552; GDR 145–8, 154, 156; Greece 530; Israel 426, 432, 434; Morocco 315; Poland 535; Vietnam 462, 467; Yugoslavia 185 UNIDO 103 Union of Soviet Socialist Republics (USSR) 66–80, 103, 532–5, 537; co-operative enterprises 71–2; de-etatization programmes 73–7; economic reform 66; individual labour 72; joint stock and limited liability companies 70–1; joint ventures 72–3; leasing 71; legislation 73; Principal Guidelines for Stabilizing the National Economy and Switching to a Market Economy 73, 77– 8; privatization and de-etatization 67; problems encountered 78–80, economic/legal 79, political 78–9, technical 79–80; public enterprises 68–70 United Kingdom (UK) 1–27, 278, 285, 525–9, 567–8; future of regulation 26–7; liberalization, competition and performance 10–16; performance of public utilities 16–26; regulatory reform 2–10 United National Independence Party (UNIP), Zambia 372, 381–2 United Nations Development Programme (UNDP) 450, 569 United States of America (US) 466, 496, 507; US AID 341–2, 343, 351 universities 250 utilities see public utilities valuation: Bulgaria 178; Czechoslovakia 136–7; Eastern Europe 556–7;

450

INDEX

Guyana 277, 282–3; Israel 437; Poland 94, 96–7, 538; Uganda 410–11; USSR 79–80; vouchers and 559; Yugoslavia 190, 194, 196; agencies 194–5 vertical linkages 12–13 viability of companies 143, 144 Victoria 479, 481 Victoria State Bank 478, 482 Vietnam 458–68, 580–1; natural resources 465; privatization environment 458–63, macro perspective 458–61, micro perspective 461–3; problems 465–6; public enterprises 461–3; strategies for privatization 466–7; thinking on privatization 463–4 Vietnam State Bank 459 Vigilance Committee, Morocco 299 vouchers 557–9, 560; Bulgaria 173; Czechoslovakia 137–8, 546–7; Poland 98, 100, 541–2; trading 558–9 wages 556; Algeria 321–2; Bulgaria 167; GDR 547; Israel 436 Wahab, Muhammad Abdel 342 Wall Street 438, 440 Warsaw Stock Exchange 100 water industry 7, 466, 567–8 Western Australia 479–80 ‘worker capitalism’ 242–3; see also employee buy-outs, employee share ownership, employees workers’councils 132, 181 working conditions 515, 520 World Bank 171, 353, 555; Bangladesh 450, 452; Czechoslovakia 131; Egypt 347; Guyana 264–5;

Morocco 300; Uganda 396; Zambia 380, 388 X factor 10, 528 Yugoslavia 181–200, 551–2, 575; environment 181–7, economic reforms 181–2, employment relationship 185, Enterprises Law 182–3, financial operations 185–6, foreign credit 186, foreign exchange 186, foreign trade system 186–7, Securities Law 183–4; legislation on social capital 187–98, agencies for valuation 194–5, internal shares 188–90, ownership question 187–8, reinvestment funds 191–2, sale of enterprises as going concerns 188, sales decisions/appro val 195–6, transformation of enterprises 190–1, use of proceeds from sales 192–4, valuation 194 Zahidi, Moulay Zine 305–6 Zambia 372–91, 573–5; actions on privatization 386–9, restructuring; 388–9; Stock Exchange 385, 388; New Economic Recovery Programme 383; public enterprises 372–8, 391–4, cashflows to exchequer 377–8, divestitures 378, losses 377, nature and extent 373–5, ownership structure 375–6, profitability 376–7, size structure 375; thinking on privatization 378–86, INDECO 380, origins of 381–2, Parliamentary Select Committee 382–3, policy pronouncements 383–6, ZIMCO 380–1 Zambia Consolidated Copper Mines (ZCCM) 372, 373, 374, 375

INDEX

Zambia Industrial and Mining Corporation (ZIMCO) 372, 373, 374–6, 379–80, 380–1, 391–4 Zambia National Holdings Ltd 372, 373 Zambia Pork Products Ltd 389 Zim Navigation 423, 424, 431

451