Privatization and management development in Africa
by Cornelius Dzakpasu
Preface
The fundamental thrust of most privatization programmes is to increase the efficiency of the economy, reduce government budgetary costs, broaden direct ownership of productive assets, and reduce and reorient the role of government to concentrate on the provision of social and economic infrastructure. Whatever methods are adopted in the privatization process, the realization of the goals of the programme rests on effective management of the privatization process and the privatized enterprises. And in the absence of a fully developed, supportive and mature enabling environment characterized by a well developed capital market, investment codes, a flexible labour market, and adequate infrastructural facilities, effective managerial practices are crucial to the attainment of privatization goals. With the short-term negative consequences of a privatization programme such as unemployment due to retrenchment, management of privatized enterprises and restructured state-owned enterprises need to be socially responsible in not only mitigating the adverse effects of privatization, but also responding to the emerging needs of the society. Achieving economic goals, maintaining competitive advantage, and being socially responsible simultaneously require innovative managerial practices. Innovative managerial practices are needed not only to seize the opportunities but also to face the challenges created by privatization.
The purpose of the three comparative studies that form the basis of this report is to identify good and innovative managerial practices and draw lessons from these for wider usage. The three studies are based on the experiences of Ghana, the United Republic of Tanzania and Uganda. These three countries have established an institutional framework to plan, manage and monitor the results of their privatization policies and processes. These institutions are: the Divestiture Implementation Committee (DIC) of Ghana, the Public Enterprises Reform and Divestiture Secretariat (PERDS) of Uganda and the Parastatal Sector Reform Commission (PSRC) of the United Republic of Tanzania. A comparative analysis of the three institutions, their effectiveness in achieving their respective aims, their structuring and efficiency in managing the privatization programme, provide broad guidelines for similar institutions elsewhere.
Privatization in itself, without dramatic improvements in the management system and managerial competence, attitudes and motivations, does not result in improvement in the effectiveness of privatized companies, and often leads to even worse business and social results. The impact of privatization on management can be traced through several logical stages: privatization has an impact on organizational restructuring and managerial practice, leading to changes in managerial styles, competencies and attitudes and creates new demands for Management Development Institutions (MDIs) to meet. Recognition of the strong links between privatization and changes in managerial practice will encourage a proactive approach in developing the necessary result-oriented management development programmes in parallel or even ahead of the privatization process.
Max Iacono,
Action Programme Coordinator for Privatization,
Contents
Preface
Contents
Acknowledgements
Abbreviations used in the report
1. Introduction
2. Institutional framework for privatization and its effectiveness
3. Impact of a privatization programme on enterprise management
4. Impact of privatized and restructured enterprises on management development institutions
5. Conclusion
Acknowledgements
On behalf of the ILO Interdepartmental Action Programme on Privatization, I would like to thank Mr. Cletus Dordunoo of the Ghana Institute of Management and Public Administration (GIMPA), Mr. Paulo Mwazyunga of Intermaecos Ltd., Management and Economic Consultants of Tanzania, and Mr. Bashaija M. Kazingo of the African Management Enterprise of Uganda for preparing the case-studies on Ghana, the United Republic of Tanzania and Uganda respectively. I am also grateful to my colleagues, Messrs. Joseph Prokopenko, Max Iacono and Arturo Tolentino, all of the Entrepreneurship and Management Development Branch of the ILO for providing useful comments on the integrated draft and to Ms. Jeanne Harwood for typing the manuscript.
Abbreviations used in the report
DIC Divestiture Implementation Committee (Ghana)
DRIC Divestiture and Reform Implementation Committee
ECG Electricity Corporation of Ghana
ERP Economic reform programme
GOU Government of Uganda
IMF International Monetary Fund
MDI Management Development Institutions
MIS Management Information System
NRM National Resistance Movement
PERD Public Enterprise Reform and Divestiture
PERDS Public Enterprises Reform and Divestiture Secretariat (Uganda)
PMU Parastatal Monitoring Unit
PSRC Parastatal Sector Reform Commission (The United Republic of Tanzania)
RDP Rehabilitation and Development Plan
SCOPO Standing Committee on Parastatal Organizations
SOEs State-owned enterprises
SSNIT Social Security and National Insurance Trust
TACC Tanga Cement Company (The United Republic of Tanzania)
TBL Tanzania Breweries Limited
TCC Tanzania Cigarette Company
TZS Tanzania shillings
1. Introduction
This paper is based on studies carried out in Ghana, the United Republic of Tanzania and Uganda in May 1997 with the main objective of determining the impact of privatization on management development. Prior to initiating their respective privatization programmes, the three countries had a sizeable number of state-owned enterprises (SOEs), some of whose performances fell below expectations and one of the major reasons cited for their unacceptable performances was poor management.
The paper consists of five parts. Part one summarizes the rationale, the process and strategies for privatization from which the definition of privatization is derived; part two describes the institutional framework for privatization; part three assesses the impact of a privatization programme on enterprise management; part four describes the impact of the above parts on management development service providers' (e.g., training institutions) programmes and activities; and part five, the conclusion, provides a framework for action.
In the three countries, the term "privatization" has many definitions and connotes different processes, measures and strategies.
-- The divestiture (as privatization) approach can be defined as the process in which the state sells all or part of its ownership of state-owned enterprises (SOEs) to private investors, local and foreign. The process represents a shift in the economy from a centrally planned system towards a market-oriented system and is intended to promote greater efficiency in the operations of the enterprises.
-- The term privatization can also be any measure which results in the transfer of ownership and/or control over assets or business activities from the public to the private sector. Typically, privatization involves the transfer of SOEs engaged in such areas as manufacturing, agricultural production and the provision of public services and utilities such as water, transportation, hospitals, telecommunication services, broadcasting, electric power, etc., to entities that are completely or partially owned by or managed or operated by the private sector.
-- Privatization is also one of the major mechanisms by which an "overextended" State reduces its direct involvement in the economy. It may take any of the following forms: (i) full or partial sale or transfer of ownership; (ii) sale of assets; (iii) leasing arrangements; (iv) contracting out; and (v) liquidation of enterprises.
In summary, privatization is a composite of policies, measures and strategies. As a policy, it involves the State's withdrawal from direct intervention into the economy; as a measure it affects the transfer of assets or business activities embracing manufacturing, agriculture, selected public services and utilities, from the public to the private sector; and as a strategy it takes the form of one or all of the following: sale or transfer of ownership, sale of assets, leasing arrangements, contracting out and liquidation of enterprises in order to achieve a high degree of efficiency and effectiveness.
In the three countries, privatization is a component of an overall economic reform programme (ERP) which seeks to shift production of goods and services from the public to the private sector. In Uganda, when the National Resistance Movement (NRM) Government came into power in 1986, it inherited an economy that had been shattered by years of civil strife, political instability, economic neglect and mismanagement. The extent of damage to industrial facilities, infrastructure, agriculture, etc., was such that it would require years to repair and rehabilitate them to acceptable productive levels. In addition to the destruction of the economic base, large numbers of skilled personnel and experienced administrators left the country owing to fear caused by repressive regimes. Those that remained were deeply demoralized by years of misrule, insecurity and economic hardships. In this context, state-owned enterprises' poor performance became a budgetary burden and drain in terms of deficit financing from both domestic and foreign capital markets.
The NRM Government adopted an economic recovery programme (ERP) designed to stabilize the economy. This was followed by the Rehabilitation and Development Plan (RDP) in May 1987, which was later converted to a three-year rolling plan. The plan attracted substantial donor assistance which enabled the Government of Uganda (GOU) to put in place measures to expand the local resource base; the plan has succeeded in rebuilding the socio-economic infrastructure, thus returning the country to the path of economic growth and sustained development.
In designing its ERP, the Government recognized the need to undertake a comprehensive reform by reducing the number of SOEs, and improving the performance of the remaining ones through privatization and restructuring. According to a 1993 survey of direct foreign investment, the reforms that were undertaken and the incentives provided have made Uganda more attractive to investors than any other country in the region. Despite this, however, lack of infrastructure such as power, serviced land, skilled manpower and telecommunication bottlenecks are perceived as major deterrents to investments. The Government has put in place programmes to deal with these constraints.
For the three countries under review, the objectives of their SOE's reform programmes and their privatization policies are broadly similar and can be summarized as follows:
-- improve the operating efficiency of enterprises that are currently in the SOE sector and their contribution to the national economy;
-- reduce the burden of SOEs on the government budget;
-- expand the role of the private sector in the economy, permitting the Government to concentrate public resources on its role as provider of basic public services, including health, education and social infrastructure;
-- encourage wider participation by people in the ownership and management of business;
-- create a more market-oriented economy;
-- secure enhanced access to foreign markets, to capital and to technology; and
-- promote the development of the capital markets.
2. Institutional framework for privatization and its effectiveness
In the three countries, the Governments enacted laws to provide legal backing for the establishment of an institutional framework for privatization. The Divestiture Implementation Committee (DIC) of Ghana was set up under the Divestiture of the State Interests (Implementation) Law, 1993 (PNDC Law 326). In the United Republic of Tanzania, the Public Corporations Act of 1992 was amended in 1993 to facilitate the establishment of the Presidential Parastatal Sector Reform Commission (PSRC) as an autonomous organ for implementing SOE reform policies. Similarly the Ugandan Public Enterprise Reform and Divestiture (PERD) Statute of 1993 provides for the establishment of the Divestiture and Reform Implementation Committee (DRIC).
The membership of DIC (Ghana) comprises ministers of state, trade unions, and institutional and private sector representatives. The day-to-day management of the divestiture programme is undertaken by a secretariat headed by an executive secretary. The members of DIC meet regularly to consider specific transactions negotiated by the secretariat, submitting, as applicable, recommendations to the President's Office for approval. The DIC is assisted by specialized subcommittees such as on mining, cocoa and coffee plantations, among others, which may be set up for specific activities for specialized cases. At the core of the managerial aspects of the implementation strategy are the information collection and analysis of operational figures and documentation, and the preparation of a company dossier on each SOE listed to be divested. The decision as to the preferred mode of divestiture is made on the basis of available information.
The Ugandan DRIC is composed of ministers of state, three eminent Ugandans, the Chairman of the Uganda Investment Authority, the Chairman of Parastatal Bodies, and the Attorney-General. The Minister of State for Finance (privatization) has overall responsibility for the PERD programme with line ministries playing key roles in policy and implementation activities. The PERD secretariat responsible for implementing DRIC decisions was dissolved and replaced by a parastatal monitoring unit (PMU) under the responsibility of the Permanent Secretary of the Ministry of Finance.
In the United Republic of Tanzania, the Public Corporations Act, 1993, which created the PSRC, also specified the roles to be played by the National Assembly, President, Cabinet, Attorney-General, Minister of Finance and sector ministries. The PSRC carries out its duties as the secretariat with executive powers on behalf of the Ministry of Finance (Treasury). All final decisions on privatization and restructuring have to be approved by the Government (cabinet). The involvement of the cabinet is indicative of the fact that the PSRC is not a one-stop centre but rather a coordinating body for privatization of SOEs.
In order to evaluate the outcome of the divestiture policies and processes, especially in terms of achieving the goals of privatization, the performance needs to be compared with two criteria: (i) the number of SOEs privatized; (ii) the acceptance of the general public of the privatization of a particular SOE. Public acceptance is assessed on the basis of transparency of the process and general accountability to the public; and (iii) the impact of a privatization programme on enterprise management and performance.
In Ghana, prior to the privatization programme there were over 300 SOEs. Between 1991 and 1995 covered by the study, 159 SOEs had been divested as the following table shows:
Table 1. Divestiture of state-owned enterprises 1991-95
| Up to 1991 | 1992 | 1993 | 1994 | 1995 | Total | ||||||
| Sale of assets | 16 | 4 | 3 | 30 | 19 | 72 | |||||
| Sale of shares | 11 | 5 | 2 | 2 | 6 | 26 | |||||
| Joint venture | 6 | 3 | 1 | 4 | 0 | 14 | |||||
| Lease | 3 | 1 | 0 | 1 | 0 | 5 | |||||
| Liquidation | 24 | 2 | 5 | 5 | 6 | 42 | |||||
| Total | 60 | 15 | 11 | 42 | 31 | 159 |
Even though not all the SOEs planned have been divested, it is important to note that the privatization programme is a continuous process planned to cover more than a decade depending on the identification of the right buyer. About 53 per cent of the SOEs have been successfully wholly or partially divested. The following SOEs are some of the few examples that have been modernized and are in full production: (i) Tropical Glass (formerly Aboso Factory); (ii) West Africa Mills Company Limited, Takoradi; (iii) Tema Steel Company; (iv) Golden Tulip Hotel (formerly Continental Hotel); (v) Ghana Agro-Food Company Limited (formerly part of Tema Food Complex Corporation); (vi) Ghana Textile Printing; (vii) Willowbrook Ghana Limited; etc.
It may be said that one of the techniques adopted by the Government is to list as many companies as possible on the Ghana Stock Exchange. However, because of poor performance and poor profitability, many of the SOEs do not meet the listing requirements of the Stock Exchange and thus a very important technique of public listing as an option for privatization has been restricted to just a few companies, mostly those with some original private sector participation. The plain truth is that most of the SOEs would require considerable restructuring and the injection of some capital before meeting the listing requirements of the Stock Exchange even as the Exchange now has a first, second and third listing with lowering capital requirements. Another important event which occurred in 1994 was the Government divesting 25 per cent of its shares in the nation's most profitable mining company, the Ashanti Goldfields, which was oversubscribed and allocation of shares was done on a pro-rata basis. The Government also sold all its shares in seven (joint venture) companies which were listed on the Ghana Stock Exchange. These included Lever Brothers, Enterprise Insurance Company, Pioneer Tobacco Company, Guiness (Gh) Ltd., Nestlè Ghana Limited, etc.
In order to avert or reduce the rate of default of investors to honour payment obligations, the DIC revised its procedures in early 1994 by introducing bid bonds, which is to ensure that divestitures are consummated as a one-stop transaction.
Since late 1993, the DIC has come under intense criticism from a suspecting and sceptical general public that had accused the Committee of (i) lack of transparency in its operations; (ii) non-involvement of private sector operators in its membership; (iii) some perceived inefficiencies in the operations of the secretariat; (iv) allowing Social Security and National Insurance Trust (SSNIT) (a government organization) to become "omnivorous" and to be crowding out the local private sector, which for lack of capital, cannot compete effectively; and (v) increasing the rate of unemployment through its divestiture activities.
The DIC had accepted some of the criticisms and took steps to solve them. To achieve some degree of transparency and accountability it started publication of vital pieces of information such as: (i) the DIC's procedures; (ii) list of all SOEs listed and purchased; (iii) names and addresses of purchasers; (iv) for what amount (value); (v) what has been paid up front; and (vi) the balance outstanding. In addition to the above publications, the DIC refocused the divestiture process as an integral part of the accelerated privatization policy highlighted in the 1993 and 1994 budget statements.
The Government also engaged the services of private accounting, law, banking firms and securities houses under outsourcing contractual arrangements to carry out the actual privatization activities. This made it possible for the DIC to concentrate on the supervision, control, monitoring and evaluation of the total divestiture process. Additionally, a further transparency and democratization of share ownership was enhanced countrywide through the adoption of voucher schemes based on international best practices such as those of Czechoslovakia.
An important strategic move by the Government to accelerate the divestiture process had been the incorporation of SOEs, in accordance with the Company Act, in which the State has interests. This enabled the SOEs to be turned into public limited companies and this paved the way for the pre-divestiture preparation of these companies to get them listed on the Ghana Stock Exchange. This exercise made it possible for hitherto tax exempt SOEs to pay taxes. Examples of this category include COCOBOD, Electricity Corporation of Ghana (ECG), State Housing Corporation (SHC), and Omnibus Service Authority (OSA). To ensure smooth performance under the company law, steps were taken to ensure a corresponding system of corporate governance.
In 1993, the list of SOEs to be divested was extended to include state financial institutions. Thus state banks such as Social Security Bank (SSB), National Investment Bank (NIB) and Ghana Commercial Bank (GCB) were outsourced to private firms to prepare them for divestment. The divestiture of these financial institutions was part of the Financial Sector Adjustment Programme supported by the World Bank and IMF.
The above renewed and re-engineered strategies, to a very large extent, resulted in meeting the main objectives set for the divestiture process to the general satisfaction of the public. However, it must be pointed out that despite the revamped strategy of an accelerated divestiture programme, the pace of actual privatization still proceeded at a slower pace than expected reflecting the myriad of remaining problems confronting the process.
In the United Republic of Tanzania, the PSRC has been operating since 1993 and a number of parastatal enterprises were included in the reform programme. The time frame for the programme is five years commencing in 1993 and it was anticipated that most of the work in the parastatal reform programme would have been completed within the period. However, the work of the Commission may have to be extended as more work still remains, particularly with the parastatals in the utility sector, such as power, telecommunication and water, etc. This is attributed to slow decisions by the Government on either policy issues or approval for divestiture of particular enterprises. Regardless of this slow pace of privatization, the Government is keen not only for a change in ownership of assets from the public sector to the private sector, but also for improvements in production efficiency of retained SOEs leading to more government revenue through taxes and dividends.
PSRC has faced a number of constraints in implementing the policy of reforms on parastatal enterprises, some are related to institutional and financial set-up aspects and others are socio-political considerations. Some policy-makers and the general public have questioned the rationale for the Government to carry out wholesale privatization of state assets. The main cause of criticism of the privatization programme has arisen from two factors, namely: (a) an entrenched notion of public ownership of assets in the United Republic of Tanzania which has existed for well over 30 years; and (b) an inadequately informed public on the privatization of parastatal enterprises.
The Tanzanian experience of privatization has been very limited. For a long period, the country has only known public ownership of enterprises through parastatals owned by the Treasury. The private sector concept was new to most people, particularly to employees of firms being privatized. To them the solution to solve the shortage of capital in an organization was to ask the Government, the shareholder, to inject capital to bail out the enterprise. Many people, including politicians and senior policy-makers, resented the sale of national assets to the private sector, which had the connotation of foreign domination. For a country which for more than a quarter of a century had known and practised central planning economy with public ownership of commanding heights of the economy, the move to implement privatization was seen as a contradiction to the once cherished economic policy.
On the other hand, the Government did not do enough work to involve the public through public debate to discuss and air their views on the destiny of the parastatal enterprises in view of their poor performance. There was no public discussion or education of the people regarding the reasons and rationale for the new policy. A careful review and publicity of the new policy was necessary to enable people to understand and support its implementation. The general public is unaware of the management practices of business enterprises and the obligation of the investor. Many people had thought the public enterprises were there for serving the nation, but were not informed as to how much was required to keep the enterprises operating at the expense of the taxpayer. Many of the problems which PSRC encountered in implementing the privatization programme stems from the above factors. Other common problems faced by PSRC since the process of change in economic management can be summarized as follows: bureaucratic arrangements; political non-transparency; government inertia; buyers' inertia; lack of schemes or funds for acquisition of shares; fear of private and foreign investment in ownership of the national assets; and lack of appropriate legal procedures and administrative system.
In Uganda, a total of 68 SOEs have been divested. This is just over 80 per cent of the SOEs that were earmarked for privatization by December 1997. The table below shows the trend of privatization to date.
Table 2
| Year | Number of PEs divested |
| 1993 | 6 |
| 1994 | 9 |
| 1995 | 19 |
| 1996 | 13 |
| 1997 | 21 |
The privatization programme is behind schedule. Its pace declined substantially especially in 1996 and some of the reasons for this are:
(a) Speculative bidders: The bidding process has been saturated with speculative bidders who present very high bids but ultimately have no capacity to meet their undertakings in the tenders. The result has caused undue delays in awarding tenders to deserving bidders. There has been a proposed amendment to the PERD statute to put in place a bid bond.
(b) Lack of public education on the benefits of privatization: Initially the privatization programme met with resistance from the public. This was solved by a public relations/education programme which was launched in 1995. This was in recognition of the public's demand for more information relating to the divestiture and reform of public enterprises and concern for the transparent execution of the privatization programme. The Ministry of Finance hired a reputable international public relations firm, Burson Merstaller, which in conjunction with local counterparts conducted public awareness campaigns.
(c) Economic value of the assets: Whereas Government used both "replacement cost" and "going concern" concepts to value the assets of its enterprises, the private sector (local and foreign) have used only the "going concern" approach. This means that whatever the Government might have spent in civil works, infrastructural developments, etc., it has been considered as "sunk costs". As a result, the divestiture concluded so far have achieved less than the assets value of the enterprises.
(d) Assets stripping: Occasional delays in concluding the divestiture of some public enterprises has led to asset stripping and siphoning of cash by the employees who are uncertain of their future employment. Proposals to solve this problem have been made and include representation of unions on boards of directors, appointment of a "charge agent" and replacement of senior managers.
(e) Lack of a common formula for computation of terminal benefits: Each SOE had its own terms and conditions of service on which terminal benefits and retrenchment packages are based. Employees of different public enterprises were therefore awarded different packages ranging from generous to unacceptable.
(f) Capital market: The slow evolution of a viable capital market mechanism has made mobilization of investment funds locally extremely difficult thus slowing down the process of privatization.
(g) Low worker morale: Privatization has often resulted in low morale of workers and management caused by uncertainty of future employment.
(h) Bickering amongst state organs: The privatization programme has also been plagued by bickering among various government officials and organizations. The post-elections personnel appointments failed to satisfactorily address the critical issue of allocating authority and responsibility between the privatization unit (PU) and the line ministries. Successful privatization is extremely difficult without the PU's influence over the line ministries to which parastatals belong.
From the foregoing facts, some of the determinants of effectiveness of the privatization process are: profitability (actual or potential) of the SOEs earmarked for privatization; an enabling environment for private sector development characterized by effective capital markets, supportive investment laws, etc; a well-informed public; managerial practices of the privatization institution; and the structuring of the privatization institution within the public administration system.
3. Impact of a privatization programme on enterprise management
One of the major causes of the failure of SOEs is poor management. Apart from regulations and laws which apply to all business enterprises, SOEs are subject to additional managerial constraints which distinguish them from private enterprises. The additional managerial constraints facing SOEs stem from the wider public administration system and the obligation imposed on them (SOEs) to meet social goals and expectations of the general public.
The above management and institutional constraints have made ineffective the huge investments undertaken in the SOEs. The inadequacy of management has been complicated by other factors such as the lack of marketing capability, lack of ability to run and maintain plants effectively, lack of financial control or some other management weakness. The inadequacy of working capital, government interferences and bureaucratic requirements have been identified as major limitations, making it extremely difficult for even the best management to achieve positive results; indeed enterprise management has not even been allowed to borrow on its own using enterprise assets as collateral.
There are, however, certain essential conditions which must be met for the full benefit of the privatized enterprises to be realized of which improved management is one element. The first is an effort on the part of management to improve effective and efficient use of all resources: materials, human, capital, etc; these are "internal" factors. Secondly, there are structural as well as "external" and macroeconomic policy impacts that can prevent the realization of the benefits of the "internal" efforts of management. In the foregoing perspective privatization itself, without improvements in macroeconomic policy environment, the management system and managerial competence, attitudes and motivations, cannot lead to an improvement in the efficiency of privatized companies. In some cases, this may lead to even worse business and social results.
Some of the standard conditions for efficient privatization are that proceeds are maximized, right buyers are selected; employment is safeguarded and social cost minimized at least in the medium to long term; and management practices are conducive to improved performance. With respect to issues of employment protection and avoidance of social problems, it is almost impossible to avoid them in the short term. The reasons are illustrated in the following examples.
State-owned enterprises have always been concerned with social welfare issues by providing employment and often satisfied with a modest, break-even, position. It seems to be an almost invariable characteristic of state-run organizations that they recruit and retain an excessive number of staff relative to the workload. Since someone else, in the end, the taxpayer, bears the burden, they have very little incentive to take the hard decision to reduce staffing levels to match the workload. In the end, as the case of Ghana illustrates, the State, through the DIC, has to make the difficult decision. The usual procedure is to make all employees redundant, paying them their end-of-service benefits and severance pay. The new owner can then start with a clean slate and employees retained are offered new contracts of employment. Divestiture is, therefore, inevitably, a traumatic experience for employees with their employment terminated and only a chosen number are offered jobs by the new employer on new contractual terms.
The following example illustrates the extent to which a divestiture programme can create social problems. In a number of cases, an SOE is the major employer in a town or village and the wholesale redundancy of employees can be disastrous for the social well-being of the local community. African Timber and Plywood (AT&P) in Ghana is an example: 5,000 people are dependent on the 1,250 employees of AT&P. This company had a loan facility for upgrading its facilities but much of the loan was mismanaged; the company also lost its assets (uninsured) as a result of fire. It required further substantial investments before AT&P could become viable. In the circumstances, the company had to lay off most of its labour force creating unemployment in the community that looked to it for sustenance. Hence, when companies in rural areas represent the sole source of employment for an entire community, the handling of such a potentially serious social problem requires both professionalism and compassion. Divestiture, therefore, must be seen to have a human face.
An even more traumatic experience is created when, owing to management failures, productive jobs cannot be created in the medium term in the privatized companies. The avoidance of such situations depends on management improvements to enhance "internal" organizational efficiency and also put in place strategies and plans to deal with external environmental factors that impact on the company. The importance of an improved management system, managerial competence, favourable attitudes and motivations for divested SOEs cannot be over-emphasized.
A successfully divested company in Ghana which is in full production, namely, the Tema Steel Company (TSC) reveals critical changes in management style. TSC was the first SOE to be divested in 1991 with 60 per cent of the shares going to Amexfield while the Ghana Government retained 40 per cent. The impact of privatization coupled with financial restructuring, rehabilitation of equipment and managerial practices on the post privatization performance of TSC is illustrated in the table below.
Table 3. Selected variables for the Tema Steel Company
| Variable | Before privatization | After privatization | Percentage change | ||
| Share ownership structure | 100 per cent GOG | 60 per cent private
40 per cent GOG |
|||
| Capacity utilization | 5 per cent | 85 per cent | 80 per cent | ||
| Production level
Rolled products Steel billets |
9 000 tons 11 000 tons |
20 000 tons 26 000 tons |
122 per cent 136 per cent | ||
| Profits | Loss/subsidy | ¢350m | 400 per cent | ||
| Employment | 130 | 500 | 285 per cent | ||
| Human resource
development/training |
Almost absent or sporadic | Fairly regular |
The use of casual labour at peak production periods has reduced the huge wage bills. With increased output and improved financial performance, employment has increased from 130 (pre-privatization period) to 500 (post-privatization period). This improved performance has been accompanied by the introduction of new technology since the company was divested. A sizeable number of spare parts and equipment which were imported during the pre-privatization period are now made locally. There are currently 16 expatriate managers with performance contracts within the top management of the company. The following are some of the major elements in their current management practices and style.
-- clearly stated operational objectives and a means of measuring performance;
-- computerized financial accounts;
-- autonomy of management in decision-making;
-- harmony and dialogue between workers and management;
-- receptiveness to necessary changes for improved performance;
-- harmony and coordination between horizontal levels of management, namely, transport, marketing, production and finance functions, supported by an effective flow of information;
-- regular management improvement training programmes for both top and middle management officers;
-- jobs clearly defined and delineated at all stages of production, from procurement through to marketing and service/product delivery;
-- effective resource and time utilization; and
-- regular meetings between management and workers.
In reviewing the impact of the privatization programme on enterprises management in the United Republic of Tanzania, the following strengthened management practices were introduced in the privatized companies which improved enterprises' performance:
-- organization structure and staffing;
-- decision-making;
-- valuing of human resources;
-- industrial relations;
-- measurement of performance and incentives;
-- management development -- training;
-- information technology and management information systems;
-- institutional reconciliation and management of change;
-- employees' commitment.
Organization structure and staffing: For the companies that were privatized, the first step was to study the existing structures and their roles vis-à-vis the company's core business and productivity. Structures were reorganized and streamlined to ensure cohesion and better coordination among various departments. In some cases departments were reduced to sections under one main department. The streamlining of departments is common to all the companies studied including the Tanga Cement Company Limited (TACC) which is still carrying out this process. It is a continuous process to ensure that structures contribute to achieving the desired goals. In the case of Tanzania Cigarette Company Limited (TCC), in the finance department, the situation was such that there were many accounting staff in the lower levels while at the top there was only one person who was expected to undertake all the accounting work. This proved to be difficult in view of the fact that under the new management, the flow of data and information on the operations is required to be produced regularly and promptly for submission to overseas partners within the first week of every month. As a result, functions were streamlined creating more responsible and accountable managers while retaining a small staff below them. This made generation of data more efficient and easier to identify the source of information and data for Management Information System (MIS) reporting. This new structure created positions manned by competent staff and made information flow more efficient, improved competitiveness in the market and improved staff remuneration and productivity. The structures are continuously reviewed to better define reporting links at different levels, rationalize the allocation of work and improve role clarity.
Staffing had undoubtedly been high in all areas of production, and had very little relationship to productivity prevailing in the enterprises. In this area, the privatized companies have also streamlined the staffing levels. The companies decided to increase the depth of skills in staff to facilitate management succession through recruitment of high calibre young Tanzanian graduates. Parallel to recruitment of qualified staff, the management of these enterprises have also been developing the potential of new and old (pre-privatization) employees. Recognizing the political sensitivity of the problem of staff reduction, the companies have undertaken the process in two main stages, namely, voluntary and forced staff reduction. The application of the two approaches was to enable the staff to feel that the company was concerned by their plight and recognized their earlier contribution to the company, hence a golden handshake was offered to those who volunteered to retire. In most cases the offer was more than what the law and the labour union provided. The companies have worked very closely with the labour union both at the plant and national levels to ensure that the law was adhered to. Forced retrenchment has also been exercised because of low production activities; in some cases jobs have been identified not requiring permanent employment, but casual employment. It should be understood that some privatized companies have inherited low production systems thus restructuring and large amounts of capital were required to increase the production levels that can accommodate high employment levels; but this could not be accommodated during the initial period of the process. The system of staff reduction was accepted by workers and work unrest in the companies was avoided.
Decision-making: The decision-making process in parastatal enterprises was bogged down by bureaucracy and thus indecision has prevailed at many levels even that of the chief executive. The powers given at different levels were limited, though accountability was required by the shareholders. The requirement for accountability was not commensurate to the powers and responsibility. There is noticeably improved decision-making under privatized enterprises where at every decision-making point powers to make decisions have been provided. The Chief Executive Officer (CEO), heads of departments have been given wide powers and mandates in carrying out their duties and thus speeding up the decision-making. For example, the Tanzania Breweries Limited (TBL), which was privatized in 1993, has installed an effective decision-making process at all levels. The executive board, under the executive managing director, and composed of all the executive directors (who are heads of departments), meet regularly to make decisions and review the operations of the company. The executive board has been mandated by the board of directors to make decisions on its behalf since it meets only four times a year to make major policy decisions. The delegation of powers and authority has extended down to the branches. However, their operations are guided by laid-down procedures and regulations which are adhered to by everyone. In view of this, decisions have to be made and one is accountable for the decisions made. As a result of this, efficiency has been improved and there is no backlog of unaccomplished tasks because of indecisions. This is a very healthy management style, particularly since decisions have been left with the operations managers. It would be difficult to hold board meetings regularly to make decisions considering the fact that it involves shareholders from outside the country.
Valuing human resources: The privatized enterprises have demonstrated care and concern for the human resource in their operations. This has been one area where the investors have moved fast to arrest the declining situation with human resource development. Staff has to be motivated to be productive in commercial operations. Training was given utmost priority as a way to make the staff understand the new rules of operating the plants. Training was tailor-made to suit the operations and included short-term courses in plant training seminars, etc. Care for human resources has extended to other economic and social considerations such as provision of good food from the canteen, better medical services and attractive remuneration.
Industrial relations: Industrial relations are more cordial under privatization than it was thought at the time of negotiations with investors. The new investors accepted trade unions as having an important role to play, and thus have not been disturbed. The management of enterprises negotiate directly with the enterprises' branches of the trade union rather than negotiating with the national trade union. This has made it possible for every plant to negotiate its own remuneration package depending on their productivity. The question of uniform remuneration packages which were supervised by the Standing Committee on Parastatal Organizations (SCOPO) no longer function. This has improved the working relationship in the privatized institutions because workers take part in negotiating for the salary review on an annual basis based on their performance. This has increased staff dedication to work as they realize and see the results of their efforts through better pay and services.
Measurement of performance and incentives: Measurement of performance at enterprise level rather than on individual basis is practised by many of the privatized companies and is used as a basis for determining improvement in remuneration. TBL, for example, sets a target for the company annually and if it is achieved, bonuses are paid. On the other hand, the Tanzania Cigarette Company Limited (TCC) focuses on individual contribution to corporate goals. On this basis, TBL and TCC are now developing performance-based pay, bonus and incentive schemes. All these actions are aimed at instilling a sense of responsibility and enhancing the commitment of staff to work. With these practices, enterprises are now getting production on track and this should enable them to embark on other innovative and effective management practices. Privatized companies thus avoid the habit practised earlier during the public sector-led era when salary increases were automatic rather than being a function of performance by the individual and/or company. A market-related salary system is also being introduced as a way of retaining staff.
Both TCC Ltd. and TBL are improving the performance appraisal and objective setting process. While this was supposed to be undertaken in the companies before privatization, there was no serious implementation. These processes are now being taken seriously to instil productivity consciousness and accountability among staff. Disciplinary procedures are being implemented fairly and consistently and, most importantly, by involving the labour union in the company.
Management development/training: Management development/training in privatized companies is given great consideration and management development programmes are being implemented successfully. The main area of concern has been to make the staff in the privatized organizations understand the objectives of the company, their internal systems covering accounts, commercial, human resource and technical areas. Companies like Reynolds International and Indol for the TCC and TBL respectively have established uniform systems which have made reporting and monitoring easier. The first step in management development by the new investors has been to introduce staff to their own existing systems.
Information technology and management information systems: Information and the methods of generation of information prior to privatization of the companies was not time-based and was not seen as a priority for bringing about efficiency in the running of the companies' operations. Computers were used for word processing and perhaps maintaining a debtors' or creditors' list. Privatization of the companies has led to serious use of information technology systems in operations given the requirement for information and data for use by the shareholders and directors. This demands prompt submission of quality information. For example, TCC receives all the information from its branches scattered all over the United Republic of Tanzania within two days at most and it is processed for submission to the management who in turn transmit it to their head office in Zurich, Switzerland. The entire picture of the operations of TCC is known by directors by the first week of every month. If there are any operational problems, decisions are taken immediately and resolved forthwith. This is also the case with TBL and with companies acquired by multinationals.
Institutional reconciliation and management of change: In the Tanzanian privatized enterprises, there has been institutional reconciliation amongst the staff employed prior to privatization and newly recruited staff resulting in harmony in the organization. At the initial stage, the staff in managerial positions prior to privatization were not fully integrated into the new "team"; however, this has now changed. The new management has created a friendly environment in which staff cooperate. There are also two other categories of staff in the privatized companies, namely local and expatriate staff. Again, as a result of an improved work environment, the two groups cooperate very well. The increased interaction among staff has reduced conflicts. Institutional reconciliation is essential for creating a conducive work environment and for promoting productivity and effective industrial relations in these privatized enterprises. The privatized companies have embarked on a process of cultural change at all levels and are striving to upgrade standards in all the areas affecting operations and staff welfare. A process of cultural change within the privatized companies is also necessitated by the development of increased competitiveness and the introduction of international performance standards. The management of TCC and TBL have made significant efforts to promote effective companywide communication, in an attempt to keep employees up to date and also to know what is happening in their work lives and social environment. The companies have taken initiative to introduce and train staff on various aspects related to change. TCC has introduced its staff to various subjects related to change, such as customer service, change management, exposure to the way companies operate in a free market economy with emphasis on how the United Republic of Tanzania has evolved in this direction.
Employees commitment: The measures taken by the two Tanzanian privatized companies (TCC and TBL) in managing their operations, particularly areas affecting staff, has won staff commitment. Although at the time of negotiating for privatization, staff in these companies were against privatization, their attitude toward the process has now changed and there is now much support for it. The support is attributed to positive measures which have been taken to restore the confidence of the staff, demonstrating to them that the new owners care and assuring them of good remuneration and other benefits. This commitment of the staff has led to higher accountability and improved performance. The staff saw the privatized operations as a reliable source for their livelihood and thus strived to increase productivity to be rewarded accordingly. The staff now know that they have to commit themselves to hard work to raise productivity so that they can benefit more. They have accepted a concept that they have to work hard for the company to get better benefits. The strong commitment demonstrated by the staff shows a sense of belonging to the organization.
The impact of the above innovative management practices as a result of privatization has had far reaching positive social and economic results on enterprises. There have been reported improvements in production in both quality and quantity. For example, TBL performance indicators show that production has increased from 4.5 million cases in 1993 (prior to privatization) to 9.8 million cases in 1996 after privatization and for 1997 it is projected to reach 11 million cases. The market share of TBL in the beer industry has grown from 31 per cent in 1993 to 75 per cent in 1996 and it is projected to increase to 80 per cent in 1997. The value of sales has increased from US$19.5 million in 1995 to US$23 million in 1996 and the forecast for 1997 is US$28.8 million. As regards return on investment, dividends totalling US$8.8 million was declared in 1995 for the first time and in 1996 this was US$14.5 million. In addition to the dividends which the Government as a shareholder in TBL received, other receipts were from sales tax. Sales tax increased from TZS12 billion in 1993, prior to privatization to TZS24 billion in 1995 and TZS34 billion in 1996. In 1997 it is projected to pay to the Government about TZS40 billion.
On the social front, staff remunerations have improved as compared to prior to the privatization period. In TBL, the minimum wage for staff has increased from TZS19,000 in 1994 (prior to privatization) to TZS105,000 in 1997. The increase of salaries in TBL is a result of increased performance as reflected in the production and sales turnover figures.
On the basis of the above case-studies, one can delineate some positive managerial practices which evolved or were resorted to as a result of privatization. These include employees' commitment, participatory decision-making, maximizing economic and social goals of enterprises, harmony between workers and management (effective industrial relations), improved flow of information and effective resource utilization. Others include clearly stated operational objectives, computerized financial accounts, strategic planning and regular management training programmes for all levels of management.
One main lesson emerging from these successful privatized enterprises is the impact of appropriate and effective management systems which form the basis of improved performance. If privatization is to achieve its goals (page 8), one criteria to be used by the Government privatization institution in selecting the new investor is "a track record of good management performance".
4. Impact of privatized and restructured enterprises on management development institutions
The performances of privatized enterprises in the three countries indicate that effective management can be singled out as one of the major reasons for improved performance. Previous studies of the same enterprises, prior to their privatization, concluded that poor management was indeed the basis of their abysmal and unacceptable performance.
On the basis of the case-studies of the privatized enterprises in Ghana and the United Republic of Tanzania, a number of management areas which are of critical concern to enterprise success have been identified. These include strategic planning and management, human resource management and development, organizational structures and staffing, productivity improvement, domestic and export marketing, information technology and data management, financial management, budgetary control, procurement methods, supervisory management, employee performance and evaluation, incentives, employees commitment, industrial and labour relations, interpersonal skills, time management, management of change, team building and production methods.
Since the above factors contribute to the success of privatized enterprises, the challenge facing new, unprivatized and other enterprises is how to internalize these factors to create an effective managerial culture. Analysis of the privatized enterprises' case-studies indicates that training and development within enterprises is accorded the highest priority, and in-house management training programmes aimed at addressing enterprise-specific training needs are continuously carried out. In the United Republic of Tanzania, TBL has established a training department headed by a senior manager. The training department of TBL focuses on staff with responsibility for others (i.e., supervisors) and emphasizes training methods, i.e., coaching, etc. The policy adopted regarding management development in TBL is to improve skills of staff in activities related to the functions of the company. The training department, in collaboration with other line departments, organizes various short courses as part of departmental on-the-job training. TBL discourages long courses which can take staff away from work for longer periods as no replacement is expected to be made. In view of this, TBL's policy is to employ already qualified staff who need only to be introduced to the company's working methods. Recent TBL practice on management development has been to give tailor-made courses in areas relevant and of immediate use to the enterprise, e.g., exposing accounting staff to accounts systems used by sister companies, or production staff being given in-plant training on specific areas in production, maintenance of machinery, etc. The extensive short duration training covers all levels of staff from managerial to support staff.
But how have the management development institutions (MDIs) responded to these needs and changes? In Ghana, interviews with the following relevant institutions -- Association Ghana Industries, Ghana Standards Board, Ghana School of Law, Ghana Institute of Management and Public Administration, Management Development and Productivity Institute, and State Enterprises Commission -- reveal that privatization policies and processes have had very little or no significant effect on the programmes of MDIs. The same could be said of the MDIs in Uganda and the United Republic of Tanzania. In the case of Ghana, only one MDI has plans to develop tailor-made programmes for privatized enterprises in collaboration with foreign MDIs with such capacity. Examination of current programmes (curriculum) of MDIs indicate that the programmes offered are of little or no relevance to privatized enterprises. Obviously there is a gap which needs to be filled either by the privatized enterprises themselves (e.g., TBL of the United Republic of Tanzania) and/or by reforming existing MDIs to become more market-driven. The assumption here is that MDIs would be willing to take on privatized enterprises as one of their clients.
Like SOEs, MDIs are also in need of restructuring to become proactive and competitive in offering customized programmes in a market-oriented economy. Analysis of the performance of MDIs in the three countries reveal that their inability to respond to the management development needs of privatized enterprises are due, in part, to the following constraints:
-- obsolete legal instruments which bear no relationships to current ways of conducting business. As most MDIs were established during public sector-led era, their structures, internal systems and procedures, recruitment procedures and conditions of service are similar to those of national civil service;
-- as public sector institutions, MDIs depend largely on government subventions and have been adversely affected by declining government funds available to its institutions;
-- programmes offered by MDIs are primarily aimed at public service including the civil service and SOEs; however civil service reforms, privatization of SOEs, the growing private sector and NGOs denote the emergence of "new clients" with "new needs". As illustrated by the case-studies of the three countries above "current programmes" of MDIs are of little or no relevance to privatized enterprises;
-- the growing number of private management consulting companies offering training and advisory services to public and private sector organizations is indicative of a highly competitive market in which MDIs operate.
5. Conclusion
The main lesson(s) emerging out of the case-studies of privatized enterprises indicate the importance of continuous management development and training for all levels of staff. Secondly, for management development and training to be effective, it must be enterprise-specific, demand-driven and job-related. Thirdly, enterprises need to accord great importance and priority to management development and training, i.e., resource allocation and management of the human resources development and training function, which, although a prime responsibility of all supervisors, should be coordinated at a senior management level. Since one of the reasons cited for the slow pace of privatization and enterprise development in Africa is the lack of adequate managerial capacity, MDIs and other relevant institutions need to evolve new dimensions to their ways of executing their programmes through training, consultancy and research. It should, however, be stressed that management development/training is just one of the several factors affecting privatization, the emergence of new enterprises and their subsequent performance. Any agenda for action should also address macroeconomic, political, social and technical questions associated with privatization and enterprise development. With respect to managerial skills development, the case-studies illustrate the need for continuous capacity-building for management development not only within enterprises but also within divestiture institutions. More and better could be achieved if MDIs were to become more proactive and market-driven to provide customized services to their clients. MDIs would need to form a strategic partnership and dialogue with enterprises and privatization institutions if they are to be relevant and sustainable in a changing world.
Any agenda for action should also address the capacity-building needs of MDIs to be more proactive and be able to offer customized demand-driven programmes. The elements of this section of the agenda, based on the case-studies, include the following:
-- changing the legal framework of MDIs, the composition of their boards of trustees/governors, their governance and structuring, etc., to be more sensitive and responsive to private sector needs;
-- the restructuring or institutional strengthening of MDIs must be based on consensus reached by all stakeholders on measures needed to diminish the level of resistance to change; the planning process must be participatory in order to generate a sense of ownership and the commitment necessary to implement it;
-- in a dynamic and competitive environment, the internal capacity of an MDI is crucial for achievement and to sustain acceptable levels of performance; strategic planning; financial management; management control; marketing; management of training; consulting; research and support services are essential for maintaining a competitive edge;
-- skills to develop and deliver training programmes and consulting services in various disciplines; personal and professional competence; training needs analysis; case-study writing; programme design and evaluation; group facilitation methods; business management training and consulting; project analysis and management, etc., are areas in which skills development are most needed;
-- strategic partnerships, networks, alliances, etc., are also needed by MDIs to complement their internal capacities since it is impossible for any single MDI to possess all capacities required to design and deliver all programmes to diverse clients;
-- capacity-building of MDIs is also inextricably linked with availability of funds. As MDIs depend largely on government subventions, the shrinking national budgets means there are reduced funds for these institutions. In recent times, some MDIs have generated incomes through their own efforts; the shift towards a market economy and the impact of privatization denote an increasing emphasis on "internally generated income" through user charges for programmes that are much more demand-driven.