ISSUES IN PRIVATIZATION AND RESTRUCTURING IN SUB-SAHARAN AFRICA [1]
by
Contents
Preface
Acknowledgement
Executive summary
1. The role of public enterprises
Public enterprise as common property
Definition of privatization
Motive for establishing public enterprises
The State as an engine of development
2. Liberalization and economic democracy
Economic democracy and privatization
Economic restructuring package in some countries
3. Enterprise restructuring including commercialization
Earlier attempts to restructure public enterprises
Current effort at public enterprise reform
Commercialization
4. The role of the financial market in privatization and restructuring
Financial liberalization and development
Capital markets
Effect of privatization on capital markets
The Nairobi Stock Exchange
Comparative analysis of stock market performance
5. Case-studies
Mode of privatization
Actual privatization cases
Privatization through public offering
Privatization through private placement
Privatization through sale of assets method
Privatization through management and employee buy-out (MEBO)
Privatization spread
6. The social balance sheet of privatization and restructuring
Consumer protection
Golden shares
Protection of employees
Peopleization
Shareholders' Association
Voucher-based programme
7. Conclusion
Role of the State in development
Social partners
Privatization and efficiency
Openness to the world economy and the market-friendly approach
The relevance of privatization in Africa
References
Preface
Privatization and restructuring of state enterprises in sub-Saharan African countries (SSA) bears semblance to the experience of other economies in transition. State-owned companies rarely make a reasonable return on investment but continue to benefit from government subsidies. Moreover, in almost all these countries poor macroeconomic management resulted in over-valued currencies, tight foreign exchange controls, artificially fixed prices, overstaffed civil services, unsustainable public expenditures and high levels of public debt.
For several reasons outlined in the paper the idea of parting with the "family silver" through privatization initially constituted a particularly bitter pill for most SSA countries. As it became a condition for further financial support from the Bretton Woods institutions, governments in the subregion embarked on privatization and restructuring. But the road to privatization was and remains tortuous, rendered so by the need to concurrently, or in rapid sequence, implement economic liberalization programmes, other economic reforms, and political reforms.
The paper describes some privatization processes in the region and the issues and dilemmas that manifest themselves during the process of economic transformation. These include, broadly, the inadequate development of an indigenous propertied middle class, weak and undeveloped capital markets, the need to achieve a broad-based consensus on the purchase of public enterprises, the need to evenly spread the benefits and costs of privatization, insufficient institutional capacity for implementation of economic reforms, political instability, and difficulty in correctly determining appropriate sequencing and time horizons for privatization and other economic or political reforms.
The study forms part of a series of working papers published under the ILO's Action Programme on Privatization, Restructuring and Economic Democracy the main
objective of which is to enhance the capacity of ILO constituents to adopt a participative approach to enterprise restructuring and privatization taking into account
both social considerations and the need for enterprises to be competitive. The programme's working papers attempt to place privatization in the context of other major
reforms, offer different perspectives on how to proceed, based on lessons of experience, and, where feasible, attempt to provide indicative guidelines on managing the
process.
Max Iacono,
Action Programme Coordinator for Privatization,
Restructuring and Economic Democracy,
International Labour Office, Geneva.
Acknowledgement
I wish to express my appreciation to the directorate of the ILO ENTREPRISE department for making possible my year-long "sabbatical" in the unit, the product of which is this study. Many people helped me in gathering information for this work among whom are Professor Teriba of the United Nations Economic Commission for Africa, Addis Ababa; Messrs. Maduegbuna, Liadi and Okpa-Obaji all of the Bureau of Public Enterprises, Abuja; Mr. Trevor Byer, World Bank representative, Abuja; as well as Ms. Cynthia Yinusa of the ILO Area Office, Lagos.
The title of the paper came out of an informal discussion with Franklyn Lisk, Chief of Enterprise and Management Development branch who also made available to me various publications on the subject.
A great debt is also owed to many colleagues who reviewed and commented on the manuscript some of whom are Ms. Annette Schaap, Joseph Prokopenko, Pierre Hidalgo and Hakim Hossenmamode of the Turin International Training Centre. The Coordinator of Action Programme on Privatization, Restructuring and Economic Democracy -- Max Iacono -- was most supportive in every way.
Executive summary
The term "privatization" is in such common use, especially in sub-Saharan African countries, that it has almost become a generic term for several transactions involving the transfer of rights of ownership or service-provision from the public sector to the private sector. However, since privatization to a large extent forms an important component in the larger economic liberalization programme, popularly known as structural adjustment programmes (SAP), it received an initial cold reception -- not only because of some short-term side effects of SAP but also as a result of political sensitivities aroused by the sale of public property to private individuals.
The thrust of the paper is the presentation of privatization as a normal step in the development of national economic management from one largely controlled by the State to one driven and directed mostly by market forces. Given the political background of sub-Saharan African countries, state-owned enterprises (SOEs) were not invented but merely inherited by African governments although more of these enterprises were later established by these governments.
The paper's target audience is largely decision-makers for industrialization policies in sub-Saharan African countries. Those interested in the history of economic development in sub-Saharan Africa will also find it useful. In fact, the term "reprivatization" ought to be applied to those cases where a former private sector enterprise was nationalized or in which the State acquired the majority equity and where the same State later decides to denationalize it or surrender or even drastically reduce its equity ownership.
The paper is organized as follows: An attempt is made in the first section to underscore the economic and political basis of state-controlled enterprises. It should be recalled that African governments took a cue from departing metropolitan governments which laid great emphasis on the role of the State in economic development. In fact, the State as the engine of development was the main development theory from the 1940s to the 1960s. With the State as the prime actor, multilateral institutions like the World Bank and other donors interacted with governments to pursue economic development programmes. There was also determination by some governments to reverse a trend whereby Africans were largely workers while employers were predominantly expatriates. To this end, some governments even chose the socialist path as the quickest way to create indigenous entrepreneurship.
The second section discusses some of the economic liberalization processes in Africa. It draws attention to the need to reckon with political factors constituting an impediment during the implementation of liberalization policies. It notes that the situation is complicated by undertaking too much at the same time: installation of democratically-elected governments, restructuring of the economy as well as the implementation of the privatization agenda. The section also describes the general contents of economic liberalization packages, foreign exchange relaxation, currency devaluation, price control removal, interest rate increase, budget discipline and tight control on credit.
Section three concentrates on the restructuring of enterprises for better performance either as a prelude to privatization or to attempt to turn them into profit-making state ventures. It also discusses the process of commercialization the objective of which is the achievement of greater efficiency and productivity. Commercialized enterprises can come under private management while government retains ownership thus giving rise to a hybrid situation. Furthermore, while privatization resolves the conflict between owners and managers over the control and use of resources, commercialization exhibits this conflict since government as owner continues to "interfere" despite agreed rules to the contrary.
The fourth section highlights the role of the financial sector in privatization and restructuring. It stresses the importance of the financial system as the basis of economic development, adding that financial intermediaries are crucial to a healthy and growing economy since they bring together economic agents who can choose to save or borrow.
It also lays emphasis on the need for fiscal control including the development of proper means for tax collection as well as the necessity for effective control over domestic banks for monetary purposes. It notes that capital markets in sub-Saharan African countries are weak and inefficient in allocational and investment criteria. The section also discusses the effect of privatization on capital markets and briefly analyses stock market situations in a few African countries.
Case-studies form the subject of section five. Four cases illustrate the methods adopted in an African country to privatize some of its public enterprises. The privatization methods selected are public offering, private placement, assets sale as well as management and employee buy-out. There is an introduction to each case in which the rationale for the applicable privatization method is explained and the privatization procedures formulated.
Section six discusses the social aspects of privatization and restructuring. It refers to the establishment as well as the functions of the social dimension of adjustment programmes (SDA) aimed at injecting a humane dimension to the process. It describes the methods adopted by some countries to cushion the effect of privatization on employment. The section also describes attempts by some governments to achieve broad-based ownership of privatized enterprises. It refers to the protection provided to consumers through the use of such controls as price caps, etc.
In the last section (Conclusion) the salient issues in privatization and economic restructuring are highlighted. These include the complex issues of the role of government in development, the involvement of the social partners in privatization policy decision-making, the openness of the national economy to global markets as well as the issue of efficiency of privatized enterprises. The section gives a brief review of the ongoing debate on the effectiveness of privatization as a dynamic strategy for rapid African economic development.
1. The role of public enterprises
"Progress in the economic field as much as in the social one, will be made not by disrupting the established tradition but by modifying it to suit the modern requirements of commerce and industry." (Journal of African Administration, April 1949, p. 76.)
In African traditional settings, family property especially land was seldom sold since it was considered to belong to every member of the family. Depending on the operating system of inheritance, the inheritor of the family property held it in usufruct. With his demise, another inheritor took over the property and the process was expected to go on from generation to generation.
In this regard, it has been advocated that privatization should not be regarded solely as a technical policy instrument but as a political measure of symbolic consequence. For instance, in the case of the sale to an individual of important national monuments, such as the National Arts Theatre in Nigeria, the big loss in privatizing such national symbols "would be the sense of a common nation with enduring values other than money" as such symbols belong to no single individual but to the citizens as a whole held as common legacy.
Sub-Saharan African countries (SSA) can be divided into two groups, first according to the degree of privatization -- major, modest as well as minimal privatizers -- and secondly, according to when countries embarked on privatization programmes -- early starters, not-so-early ones and late starters (Paul Bennell, 1996). Major privatizers where the majority of state enterprises have been divested include Benin, Guinea and Mali. Modest privatizers are those cases where less than 10 per cent of the total value of public assets has been sold: Burkina Faso, Côte d'Ivoire, Gambia, Ghana, Kenya, Madagascar, Mozambique, Niger, Nigeria, Senegal, the United Republic of Tanzania, Togo, Uganda and Zambia. The rest of SSA constitute minimal privatizers. Furthermore, early privatizers started from the late 1970s up to the middle 1980s, and include Benin, Guinea, Niger, Senegal and Togo. This group was followed by those countries whose privatization programmes took effect from the late 1980s and include Côte d'Ivoire, Ghana, Kenya, Madagascar, Malawi, Mali, Mozambique, Nigeria and Uganda. The late starters, which did not privatize until the 1990s, include Burkina Faso, Cameroon, Ethiopia, Sierra Leone, the United Republic of Tanzania and Zambia.
Public enterprise as common property
There is a weekly newspaper in Sierra Leone with a "pidgin" English title: WE YONE. This translates as "OUR OWN" and the message is that the Government, together with all it has, belongs to every citizen of the country. Similarly, in Swaziland, the Swazis regard Tibiyo -- a state-owned development venture -- as belonging to "every Swazi born and unborn".1 In Ghana, a notice in the Trade Union Congress hall reads: "Public service -- it's yours; private service -- it's theirs. Join the fight to put public needs before private greed."2 It was with this mind-set that Nigerian Labour Congress leaders opposed privatization by arguing that "Nigeria is not for sale".3 In the same vein, workers in the United Republic of Tanzania took the Parastatal Sector Reform Commission to court during 1994 and 1995 over the sale of some four large state enterprises. In Mozambique, workers are known to have put strong pressure on the Government against the sale of some state companies.
One wonders why a section of the population should hold such a nationalistic view towards privatization. However, upon closer examination, one discovers that in African countries where government is the biggest employer, the bulk of the national trade union membership comes from the public sector. Therefore, to sell a public enterprise to the private sector means not only a decrease in the public trade union membership but also a weakening of its political and economic leverage. There is, of course, the other consideration regarding risk ownership; whether a traditionally risk-averse public sector labour force will be able, or even wish to be able, to become a "risk-loving" private sector owner.
However, a Nigerian commentator on privatization has cautioned that "one should be careful in spreading the fantasy that the country is being sold". He emphasizes that even where public enterprises are sold to foreign companies when such foreigners leave the country "they would not destroy the factories or remove them back home".4
Definition of privatization
There is a variety of definitions of privatization. Some are based on the objectives of privatization and others on the form it takes. Bailey (1990) regards privatization as a general effort to relieve the disincentives towards efficiency in public sector enterprises by subjecting them to the incentives of the market. Others (Paul Starr, 1987) refer to it as a shift from publicly to privately produced goods and services. It is sometimes also defined as the sale to the general public of shares in at least 50 per cent of the assets and earning power of previously state-owned corporations (Clarke and Pifelis, 1993). Some others (de Walle, 1989) regard it as the transfer of ownership and control from the public to the private sector with particular reference to asset sales
However, in a wider sense, privatization is defined (Bishop, Kay and Mayer, 1996) as policies designed to improve the operating efficiency of public sector enterprises through increased exposure to competitive market forces. At its broadest and most symbolic level, privatization is regarded (Bienen and Waterburg, 1989) as a counter movement to the growth of government.
The Second Nigerian Economic Summit held in May 1995 in Abuja defined privatization as a variety of policies aimed at transferring, fully or partially, ownership and control of public enterprises to the private sector to encourage competition and emphasize the role of market forces in place of statutory restrictions and monopoly powers. The Summit also defined commercialization as the reorganization of enterprises wholly or partially owned by the government to ensure that such enterprises operate as profit-making commercial ventures without any government subvention.
In this paper, privatization is regarded simply as the transfer of all or any of three kinds of property rights from the State to the private sector; ownership rights, operating rights and development rights since these constitute the most common type of privatization in sub-Saharan Africa.
Motive for establishing public enterprises
The idea of every citizen claiming a proprietary right in whatever government perhaps stems partly from the motive behind the establishment of some public enterprises. For instance, in Uganda, the Uganda Development Corporation created in 1963 a subsidiary known as African Business Promotions Ltd. the objective of which was to "establish and promote our own people in the trade and commerce field generally so that Ugandans may play a reasonable part and hold a reasonable share of the country's commerce".5 Similarly in Kenya, for want of sufficient indigenous private entrepreneurship after independence, government had to use parastatals "to fill the existing entrepreneurship gap".6 Thus, public enterprises "served as a means to promote the establishment of private African enterprises".
In 1955 in Kenya, among registered companies, there were about 246 new companies owned by Europeans with a nominal capital of £8.9 million, 99 companies belonging to Asians with a nominal capital of £3.6 million, and only one company belonging to an African with a nominal capital of £250. Government therefore had to set up some parastatals in order to implement the programme of indigenization; the Industrial and Commercial Development Corporation (ICDC), the Development Finance Corporation of Kenya (DFCK), the Industrial Development Bank (IDB), the Kenya Industrial Estate Programme (KIE) and the Rural Industrial Development Centres (RIDC). At its inception in 1954, the objective of the Industrial Development Corporation was to promote the industrial and economic development of Kenya. But, by 1967, the objective of the Corporation was extended to include the indigenization of the Kenyan economy.
It is necessary to bear this aspect of economic nationalism in mind when evaluating the success of privatization in Africa. An appreciation of the political function of most public enterprises in Africa can explain why some governments have dragged their feet in respect of the privatization of some public enterprises in situations where the "entrepreneurship gap" was not adequately filled by locals of those countries. In a Financial Times interview with Roger Matthews, the President of Zimbabwe, Robert Mugabe, stressed the need to use privatization "as an instrument for empowering the indigenous people. What we inherited was a system in which the blacks were, by and large, workers and the whites were the employers and entrepreneurs. We want to see blacks go into the manufacturing sector".7 In a similar vein, the Nigerian Head of State during his state visit to the United Kingdom in June 1973 declared the following: "We are consolidating our political independence by doing all we can to promote more participation by Nigerians in our economic life while attracting more investment in sectors of the economy where Nigerians are not yet able to rely on themselves."
Apart from using parastatals to build up local entrepreneurship, there were other equally important reasons for the establishment of public enterprises. For instance, in the United Republic of Tanzania, socialist ideology played an important role in the setting up of state-owned enterprises. Thus, in the Tanzanian Second Five-Year Plan for Economic and Social Development, emphasis was laid on the fact that "considerable benefit will accrue in the long run from the expansion of public ownership because (a) it will be possible to create a genuine Tanzanian industrial know-how faster than under conditions of unrestricted private enterprise; (b) it will be possible to pursue a more effective industrial strategy than is possible under private enterprise; (c) the profits made in industry will be re-invested in United Republic of Tanzania". Thus, the Government as the representative of the people regarded ownership of the means of production by Tanzanians as an "antidote to capitalist exploitation".
In the case of Ghana before independence, it was noted that the country's economy consisted of three levels: at the top were the Europeans and Levantines owning the large commercial enterprises; in the middle were the Asians and Middle Easterners engaged in wholesale and retail trading with a virtual monopoly of general transport services including motor spare parts; at the bottom were the Africans pursuing farming, petty trading and rudimentary services.8 The establishment of state enterprises in Ghana was primarily "to promote economic growth not to serve an ideology". However, government legislation, the Ghanaian Enterprises Decree of 1968, was directed at increasing the "participation of Ghanaians in the modern sector of the economy".
In a few cases, state enterprises were created in response to pressure from a political lobby group rather than on the basis of economic logic. An example of this is the Nigerian National Supply Company which turned out to be "of no benefit to the people". In some cases, some companies became public as a rescue operation from closure, e.g. banks and some schools.
The State as an engine of development
It was an acknowledged tenet of prevailing development theory in the 1950s and 1960s that "the enormous and urgent problems of development cannot be solved by private enterprise and that governments must get away from their traditional caretaker and regulatory functions and move into an era of active participation in the productive sector". This led to ministries of agriculture going into actual agricultural production instead of only being engaged in research, and ministries of mines being involved in mineral exploitation rather than just producing maps of mineral resources. Thus in Nigeria, the Second National Development Plan (1970-74) declared that "the Government will seek to acquire, by law of necessity, equity participation in a number of strategic industries that will be specified from time to time. In order to ensure that the economic destiny of Nigeria is determined by Nigerians themselves, the Government will seek to widen and intensify its positive participation in industrial development".
Private entrepreneurship seemed to concentrate on processing industries without touching basic ones. Public companies had to be set up to fill such vacuums especially in areas like steel production, fertilizer manufacturing, air transport and other public utilities, education and health services. It is noteworthy that in some of these public enterprises, the provision of services to the public was a priority only to be followed by the maximization of profits.
This approach to economic development was not peculiar to Africa alone. For example in Malaysia, the Government in 1969 drew up a New Economic Policy (NEP) following disappointment with the Government's pre-1969 record of economic achievement. The new policy discredited the laissez-faire approach to development and directed the Government to participate more directly in the establishment and operation of a wide range of productive enterprises "either through wholly-owned enterprises or through joint ventures with the private sector".
But, the expansion of state-owned enterprises in Africa also stemmed from "the needs of political leaders for greater authority over their societies" than from failures of the market. Such state companies served as good conduits for official patronage -- jobs, funds, status, etc.
There is a difference of approach to the public enterprise sector between francophone and anglophone African countries. In francophone countries, the public sector is of crucial importance in economic development and public enterprises have a prime rule in the economic system with special administrative and management units charged with control and surveillance. For instance, the Government of Côte d'Ivoire plays a bigger role in directing the economy than most other anglophone African governments. One result is the provision of a better information base on public enterprises in francophone than anglophone countries. Similarly, in Senegal even the political change of 1983 did not usher in any drastic reforms of parastatals solely because these state enterprises constituted an important political base for the ruling party. In fact, it was government policy to strengthen the position of state-owned enterprises through a deliberate policy of co-optation into the government political structure (World Bank Research Report, 1995).
Nevertheless, as far as sub-Saharan Africa is concerned, the issue is not whether States should or should not continue to own enterprises. Given the reason for the creation of some of these public enterprises -- filling the vacuum created by the absence of an indigenous middle class -- complete divestiture of all state enterprises is doubtful. But there is a need to find a solution to problems arising from state ownership. Privatization itself throws up some problems. Should some enterprises be retained for state ownership? Should only the non-profit making enterprises be privatized? Should some of the enterprises be reserved for purchase only by citizens or should public enterprises be sold to whoever can afford to buy, whether foreigner or national?
There are no general solutions to all such situations as each circumstance has to be examined for its particularities. There are those who contend that privatization should only affect loss-making state enterprises. There are those who feel that certain state enterprises should not be sold to foreigners. Still there are those who argue that because very few locals have the business capacity to manage large enterprises profitably over the long haul, considerable care should be taken before selling such enterprises to local business persons. In this connection, a representative of the banking community in Nigeria sustained that ownership was not the issue but that the important consideration was "quality of service provided at a reasonable price". He went on, "as long as you can pick your telephone and it works, whoever owns it is not our problem".9 However, it needs to be added that even in some developed countries there is unwillingness to allow foreign interests to purchase certain industries regarded as sensitive to state security.
March 2002
To be continued