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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