Privatisation is not a panacea for all economic problems, particularly in Africa, where it is frequently part of structural adjustment programmes, writes Asghar Adelzadeh of the NIEP in the fourth of a series on economic policy
PRIVATISATION has become increasingly prominent worldwide in the past 15 years and has now become extremely important in policy debate for developing countries.
Outside the developed countries discussion has, however, typically focused either on the successful privatisers in Latin America and South-east Asia or upon the more substantive issues posed by the economies in transition from central planning, predominantly those in Eastern Europe.
In the African context, there seems to be a consensus that state-owned enterprises (SOEs) have not been performing well and various reasons have been put forward, including poor investment decisions and inappropriate pricing policies; managerial impediments such as overstaffing; political interference in day-to-day management decisions; unclear objectives; a weak human resource base and incompatibility of civil service procedures with commercial operations; lack of infrastructure, excessive centralisation, and lack of capital.
One of the key driving forces behind privatisation in Africa has been the increasing role of policy-based lending – of which privatisation is often a component – from the international finance institutions (IFIs). Between June 1981 and December 1991, 182 World Bank operations supported privatisation in 67 countries, half of them in Africa. Divestiture components are to be found in 70% of all structural adjustment loans and 40% of sectoral adjustment operations. In 1992, there were also 60 technical assistance projects in support of privatisation efforts, mostly in sub-Saharan Africa, and almost all aimed at strengthening capacities to privatise.
In many countries privatisation has been embraced as an economic policy that serves almost as a panacea for, if not for all, economic problems. In general, the rationale is assumed to be one of welfare improvement. Privatisation is also expected to improve the government’s macro-economic position because state enterprises are frequently loss-making and, hence, net receivers of government funds.
By transferring SOEs to the private sector, it is argued that not only will the state receive an injection of funds but the resource drain from deficits will be removed. If privatisation improves the efficiency of production, the state can also expect increased income in the future through tax revenues.
Privatisation is also perceived to contribute to the development of weak or non-existent capital markets and hence to enhance domestic savings mobilisation.
This rosy picture has been shown to depend upon specific favourable factors that are too readily overlooked. One of the principal requirements for privatisation is an adequate administrative capacity. Divestiture is technically demanding, even in advanced economies. Most of the African divestiture programmes are dependent on technical assistance or financial aid from external agencies. Establishing an effective machinery to manage divestiture programmes has proved difficult in Africa with significant effect on policy outcomes.
The market structure in which an enterprise operates is also more important than ownership in determining economic performance. In the absence of an appropriately competitive environment, a strong regulatory framework is required, as is strong capacity to implement the regulations.
This is necessary to guard against abuses of monopoly power such as price fixing and collusion. Access to technology is another important determinant of both productivity increases and market structure which has some bearing on the impact of privatisation. Anticipated productivity increases would be restricted given the cost of new technology.
For employment, privatisation is frequently associated with staff reduction. The state sector is often characterised by strong trade unions and, as a result, the cost of shedding staff in political as well as economic terms can be great.
The macro-economic and micro-economic impacts of privatisation programmes are closely interlinked. A positive fiscal impact depends crucially on privatised enterprises being more efficient than if they stayed in state hands, creating more profit and hence more tax revenue for the government. Otherwise, the exercise consists of swapping a future income stream for a current asset with no net contribution to public accounts.
Research in Latin America found that proceeds from privatisation had an insignificant impact in terms of reducing government deficits, and high growth in privatisation has had only a modest impact on fiscal accounts from a present value perspective.
In many African countries, the actual receipt of funds from enterprise sales is not expected to have a major fiscal impact given the capital constraints. Gains to public revenues are expected to be achieved more by putting a stop to the financial drain of transferring funds to loss-making SOEs. However, African states have been advised by the World Bank to transfer their most profitable assets first.
This means that the revenue position of governments may suffer rather than benefit in the short term as the profitable enterprises are transferred, although this may be ameliorated in the longer term by a higher revenue base if private enterprises are more efficient and profitable.
Privatisation is normally a component of a wider structural reform programme. Therefore, it should be judged in the context of an overall adjustment strategy or within a policy framework that incorporates the sequencing of reforms. Choices have to be made concerning the order in which polices are implemented as they will have an impact on one another.
As discussed above, any industrial restructuring programme will depend for its success on the macro-economic policy framework, infrastructure, international markets and availability of skilled personnel.
The impact of privatisation in Africa is complex, situation-specific and touches upon a wide range of economic and political effects. The factors covered above need to be taken into account.
Against this background, it is possible to assess South African prospects and initiatives. There are a number of positive features:
* A cautious sectoral approach, with attention to sequencing of policy.
* Recognition and participation of the trade union movement and other popular interests in negotiations, as reflected in the National Framework Agreement (NFA).
* Distancing from the terminology of privatisation as the only or main form of dealing with public enterprises, as reflected in the use of “the restructuring of state enterprises” phrase in the NFA.
* The tying of restructuring of state assets to sectoral, supply-side policies in which closely negotiated joint ventures are prominent rather than simply selling off public enterprises.
However, there are a number of negative features. These include:
* An unwarranted belief in the role that privatisation might play in financing the reconstruction and development programme. Within the context of a broader investigation of the role of the financial system, the relationship between the restructuring of state assets and the financial system needs to be assessed for its impact on government finance in general and on the levels and composition of industrial investment.
* An inevitable dependence of privatisation upon finance provided by South Africa’s major conglomerates, which are themselves more strategically focused on globalising their productive and financial operations.
Foreign investors are faced with a wide choice of alternative assets around the world. These factors will place downward pressure upon privatisation revenues and will lead to an increase in what is already a highly concentrated level of corporate ownership and control.
* The process of privatisation is expensive in terms of costs and administration. Apart from draining resources, it tends to undermine the ethos, morale and motivation of the public sector where South African capacity is already limited.
No careful consideration seems to have been given to whether resources being devoted to the privatisation programme and future regulation might not be better allocated to reforming and enhancing the present public administration and to delivering Reconstruction and Development Programme (RDP) projects through public sector agencies.
* Although restructuring of state enterprises is being considered within the context of specific enterprises and sectors, it is not clear that the associated policies:
(i) employ full social cost-benefit analysis of projected outcomes;
(ii) incorporate an overall strategic vision for the South African economy with due attention to its strengths and weaknesses and the goals of the RDP;
(iii) are sufficiently developed in detail in depth and scope; and
(iv) will have in place, in advance, the necessary measures for ensuring continuing commitment to, and delivery of, intended outcomes in view of commercial and other pressures for them to be undermined.
* There is an excessive deference to an elusive business confidence in economic policy in which privatisation is seen as an objective in its own right, thereby hastening privatisation unduly and leading to misguided policies.
This article is based on a paper commissioned by the National Institute for Economic Policy from Professor Ben Fine of the School of Oriental and African Studies, University of London