Dear Sidi,

Thanks for a well written article. You have correctly pointed out all the 
reasons why a carefully thought out privatization  process can be a good move 
in Africa,  and that  it is essential for all these factors to be carefully 
considered so that it is approached and monitored in the proper way in order 
to achieve the results we need. You are also  so right about individual 
domestic markets in Africa being too  small and therefore  offer  only 
limited attraction for huge investment even after the privatisation process 
has been completed, and thus the need to "seriously consider the benefits of 
regional market integration."
The role a well planned Privatization can play towards increasing the tax 
base, as well as the creation of  more jobs by the private sector, are some 
of the very good benefits that I think a lot of African governemnts fail to 
see as a good means of improving  the financial well-being of both government 
and individuals.

Jabou Joh
 
In a message dated 1/30/00 6:37:56 AM Central Standard Time, 
[log in to unmask] writes:

Dear G-L Members,
 
 As indicated in my earlier posting on the subject, below is the abridged
 version of my statement during the “Divestiture Workshop” held in Banjul,
 June 1999. The views expressed herein are mine and do not necessarily
 reflect the views of Gambia Government or of the African Development Bank.
 
 
 
 Privatisation is indeed a very important issue in any nation’s economic
 development.
 Enterprise reform and privatisation is aimed at increasing private sector
 participation in the economy.  The reform of public sector enterprises
 (PEs) can be said to belong to the second phase of structural adjustment,
 the first being the stabilisation phase.  It has been argued that while the
 first phase marked the implementation of what could be termed “stroke of
 the pen” policies such as devaluation/divestitures, related infrastructure
 reforms, and development of small and medium enterprises which are
 potentially more demanding both socially and in terms of planning.
 
 They also take a long time to implement.  Moreover, while policies like
 devaluation could deliver immediate benefits, such as increased public
 revenues those of the second phase only bear fruit in the medium to long
 run.  In spite of these real and potential constraints, many African
 countries have been able to reduce the extent of direct public sector
 engagement in production by undertaking changes in the management and
 ownership of public companies.
 
 Is privatisation necessary?
 
 In spite of the mounting difficulties of public enterprises during the
 1970s, pressures for its privatisation were not felt strongly until well
 into the 1980s, with the onset of Structural Adjustment Programmes.  Still,
 privatisation was not proposed as the first line of action, the feeling
 being that commercialisation was a more politically viable alternative,
 which would, nevertheless, increase competition, lead to greater managerial
 autonomy and generally, improve the incentive structures in the public
 enterprises.  It was even thought that these changes would be sufficient to
 improve the efficiency and productivity of the PE sector without resorting
 to privatisation especially since theory was equivocal about the
 differential in performance between private and government ownership.
 
 The following were among the principal goals of privatisation: improvement
 of the efficiency of resources use via competition, increasing the tax base
 of the Government as firms and transactions multiply; economic
 diversification as firms seek out new opportunities in traditional and new
 sectors; increased investment in infrastructure and utilities; expansion of
 the activities of the export sector; improving private access to credits
 and other forms of finance; and widening the ownership of key industries .
 Ultimately, these changes would lead to the acceleration of economic growth.
 
 There are also a number of more specific ways in which privatisation is
 beneficial to the operation of the economy.  It increases the incentives of
 owners to monitor their managers and to ensure that the best results are
 achieved.  The case for privatisation could, however, be based more
 convincingly on the need for governments to establish reputation.  By
 undertaking privatisation, governments signal to potential investors the
 direction of future policies.  More predictable policies improve the
 planning horizon and thereby reduce the risks related to an investment.
 
 This reasoning thus sees privatisation as a necessary step in the
 establishment of a full-fledge market economy.  But while sending a strong
 signal about future policy behaviour is important for all countries, it has
 been even more crucial for countries where nationalisation formed the
 thrust of economic policy in earlier years.  In these countries,
 Governments made too many unsuccessful attempts at reform, inflicting
 serious damage to their credibility.  Thus privatisation marks a departure
 from past practice.  The market becomes an agent of restraint, and
 bankruptcy a credible enforcer of discipline.  Subjecting firms to market
 discipline is thus the single most important benefit from privatisation.
 
 However, since numerous factors besides ownership affect the efficiency of
 the firm, privatisation cannot be the only solution to the poor performance
 of industry as a whole.  It has also been pointed out that privatisation
 under duress, such as that undertaken as fulfillment of conditionalities
 related to structural adjustment, could hinder the policy signaling that is
 such a beneficial outcome of the exercise.
 
 Under pressure, Governments might privatise when the conditionality is
 still binding and become lax or non-responsive afterwards.  Thus
 conditionality driven privatisation could lead to time inconsistent
 behaviour and thus cause more harm than good.
 
 As can be noted from above, privatisation is not “a stroke of the pen”
 policy and requires considerable planning and preparation to succeed.
 However, due to the multiplicity of objectives and the circumstances in
 which individual countries find themselves and the circumstances in which
 individual countries find themselves before and in the course of
 privatisation, there is no preferred method to approach the issue.
 
 In the last five years, a number of alternative approaches have been tried
 including management contracting out, management employee buyouts or the
 issue of equity.  When outright privatisation has been chosen then the
 practical issues of asset valuation, preparation of tenders and payment
 schedules become our main preoccupation.  As already noted, sale by issue
 of equity has tended to be difficult in countries with poorly developed
 credit markets.  It can also be argued whether the goal of privatisation
 should be to ensure that the privatised firm has “real” owners.  I would
 argue for the latter, while not ignoring the need for a broad-based
 ownership of the privatised enterprises.
 
 It can also be argued that in light of the major restructuring and
 management problems facing the privatised companies, it is necessary to
 make sure that the new owners have the power and incentive to monitor the
 activities of the managers in order to ensure the best results.
 
 In looking ahead, it will be necessary to deal with three important issues,
 apart from the larger economies such as South Africa, Nigeria and Egypt and
 others that enjoy the proximity to the European Union, individual domestic
 markets in Africa are small and offer limited attraction for huge
 investment even after the privatisation process has been completed.  It is
 necessary; therefore, to look at the benefits enabled by the broader market
 opportunities arising from regional market integration.  Regional
 integration can pave the way for the enlargement of markets to permit
 economics of scale sufficient to attract both domestic and foreign
 investors.  African economies remain fragmented when measured by
 population, size and per capita incomes.  The development of cross border
 projects may assist increasing the project size and potential
 attractiveness to private investors.  The larger scale economies will
 enable the development of stock exchanges, transport networks,
 telecommunications, energy infrastructure and markets that sustain an
 expanding private sector.
 
 Second, there is need to examine closely the extent of the indigenous
 participation in the privatisation process.  Lessons from east Africa and
 elsewhere show that a sufficient indigenous stake in the economy is
 necessary to ensure policy stability and irreversibility.
 
 Third, as part of the democratic process, privatisation needs to be
 explained to the electorate.  This is far from easy but needs nevertheless
 to be done—privatisation succeeds where there is consensus on the need for
 change.
 
 However, privatisation should not be seen as an end in itself.  Its
 ultimate goal should be that of encouraging the expansion of a market
 economy, increasing the efficiency of resource use and the generation of
 employment.  Due to the retrenchment of employees that has been necessary
 after the privatisation of public enterprises, privatisation has sometimes
 been perceived as employment reducing, and thus labour unfriendly.  The
 costs of transition should, however, not obstruct our view.  The successful
 experiences of some of the eastern European countries (Poland, Hungary) and
 African countries (Ghana, Uganda etc.) have shown that the initial results
 and patterns from the privatisation effort are rarely optimal.  Gambia’s
 privatization experience in the mid 80’s and early 90’s is ample testimony
 to this fact.
 
 
 Sidi Sanneh >>

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