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.

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

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.

2. Liberalization and economic democracy

"A change in ownership without both reform of private market structures and the enhancement of regulatory capacity will not necessarily generate efficiency gains." (Adjusting Privatization, p. 76.)

An important element militating against smooth implementation of most privatization and structural adjustment programmes in many African countries is the failure to take due cognizance, at the policy formulation stage, of the endemic political factor. Particularly in Africa, political factors often assume an overbearing influence on the implementation of economic reform programmes. Such factors express themselves as vested interests, be they ethnic, class, geopolitical, professional associations, etc. In order to achieve a development coalition of these various interest groups, it is important to adapt economic objectives to the requirements of the national political situation.

Unfortunately most policy programmes prescribed for African governments under conditions of deteriorating economies, do not arm programme implementors with the requisite political skills and finesse to contain obvious opposition and hence the spate of stalling and postponements of implementations in the face of protest.

Economic democracy and privatization

It should be remembered that privatization in the United Kingdom was carried out within a background of a centuries-old competitive market economy. It was not necessary to effect a change in the pattern of economic direction of the country in order to facilitate the success of the privatization exercise. Privatization was therefore relatively smooth sailing. On the other hand, many countries in Africa are saddled with putting in place a democratically-elected government, installing a workable market economic system, as well as implementing the privatization

programme. In many cases, all these are being carried out simultaneously. It is like juggling several balls in the air while the stage on which the juggler stands keeps shifting. It is not easy.

For instance, in Zambia, it was announced in May 1990 that public enterprises were to be privatized. In the same year, stock exchange legislation was passed. But the Government was at the same time involved in political turmoil as it was seriously challenged by the coming together of groups opposed to it asking for multi-party rule as opposed to the existing one-party government. The agitation for democratic rule gave the government no breathing space for implementation of privatization programmes or the setting up of the Stock Exchange. It was only after the opposition party had won the national election and a democratically-elected government had come to office in October 1991 that steps were taken to mount an economic restructuring programme of which privatization was a component. In December 1991, the new government issued a policy statement entitled "Policies, programmes and action for restructuring the economy of Zambia -- A statement by the Government of Zambia to the donor/creditor community".

There is also the factor of conditionality by creditors and donors which can tie the hands of governments. It was asserted in this respect that real development in Africa will be best served when: "(a) no single foreign source of ideas and finance has disproportionate power; and (b) African indigenous technical capacity is built to the point where genuine policy dialogue, based upon mutual respect, takes place between external donors and African policy-makers, and where Africa's development programmes are fully and unambiguously locally constructed."¹⁰ For example in Guinea, privatization was made a condition in the 1986 World Bank structural adjustment loan. Similarly, most of the reforms undertaken in the United Republic of Tanzania since the 1980s had been under "donor duress". The fact that such terms of privatization were imposed did not make for easy implementation.

Economic liberalization in most African countries means dismantling the import substitution strategy for rapid industrialization which many countries had adopted in the 1970s. In this respect, one of the ways of furthering domestic production was curtailment of imports by the introduction of wide-ranging tariffs to protect infant industries. However, as the objective of the

import substitution regime was self-sustained development, this was difficult to achieve because most of the raw materials and spare parts had to be sourced from outside. The national economy thus became inevitably susceptible to foreign exchange availability. In addition, there was the problem of licensing procedures for imports. As a consequence of all these, there arose the problem of fiscal deficit following heavy government investment, over-valued currencies, high inflation, price controls and public enterprise under-performance.

It became important to liberalize the economy to allow success of privatization, and hence the following actions:

-- relaxation of foreign exchange controls;

-- significant currency devaluations;

-- removal of protectionist measures;

-- increase in agricultural producer prices;

-- removal of price controls;

-- civil service staff reductions;

-- reduction in public expenditure;

-- tight control of credit;

-- increase of interest rate to real levels.

Economic restructuring package in some countries

Almost every country in sub-Saharan Africa has, of recent, liberalized its economy. For instance, in the United Republic of Tanzania, producer prices of maize, rice and export crops were raised and subsidies were reduced on fertilizer and maize. The Schilling was devalued. New company laws were enacted including on banking and other financial institutions. In Nigeria, IMF suggestions included a reduction in aggregate federal capital spending, removal of subsidies on petroleum and fertilizer, reduction in grants, subventions and loans to public enterprises, cessation of transfers to state governments to encourage financial discipline and a review of the Customs Tariff Structure and establishment of an institutional mechanism for tariff review; they also included a review of the industrial incentives and policies and the phasing out of the Approved User Scheme, an upward review of interest rates, a devaluation of the Naira, the promotion of non-oil exports and privatization and commercialization of public enterprises.

Similarly, in Ghana, the IMF/World Bank/Ghana Policy Framework Paper for July 1988-June 1991 comprised "100 clusters of strategies and measures in the area of external sector policies (exchange and trade reform), monetary policy and financial sector reform, fiscal policy, state enterprise reform, public sector management and sectoral policy reforms in agriculture, industry and mining, health and education".¹¹

In Zambia, actions taken under the Policies Programme and Actions for Restructuring the economy of Zambia included the removal of subsidies on maize and fertilizer, doing away with price controls, restoration of financial discipline and accountability and reduction of budget deficits and inflation; they also included overhauling the Companies' Act, ensuring that Zambia State Insurance Corporation no longer monopolized the insurance business and Zambia National Building Society did not continue to monopolize the real estate business, privatization and the reorganization of the Export and Import Bank, the Bank of Zambia and the Export Board of Zambia.

One of the problems arising from simultaneously installing democratic rule, deregulating the economy and implementing privatization is the over-stretching of already insufficient local technical expertise. As happened on many occasions, when privatization is undertaken under intense pressure the result is not always satisfactory. For example, divestiture of the Kenya Uplands Bacon Factory was carried out in response to the moratorium on disbursement of previous adjustment loans and "as a result there were faults in the design of the privatization package caused by excessive haste".¹² In the end, the sale was a failure. Some governments therefore resort to hiring expensive foreign consultants and while the expertise of such consultants is not in doubt because their experience is often based on United Kingdom privatization, the temptation is to recommend the use of public shares sales which may not fit every situation in African countries.

There are therefore those who hold the view that implementation of IMF/World Bank policies on liberalization could have a seriously detrimental effect on the industrial development of some African countries. For instance, it is argued that devaluation not only encourages cheap imports which in turn harms investment, especially in the small-scale industries sector, but also works against the interest of those companies that outsource their inputs. For instance in Zambia, with interest rates of 30 to 33 per cent, small business owners could not afford credit for domestic purposes. Thus with limited Kwacha reserves and not being able to obtain bank loans, small entrepreneurs were unable to bid for foreign exchange. The liberalization virtually destroyed some of the small businesses which the World Bank/IMF model was relying on for industrial adjustment. Similarly, in Côte d'Ivoire, the 40 per cent reduction in tariffs had a devastating effect on shoe, textile, chemical and automotive assembly industries as they had to face foreign competition. In Kenya, following the devaluation of October 1980 stand-by agreement, large quantities of supplier credits were left unused since the burden of raising local funds to pay back foreign loans was too heavy.

There are some conflicts between the objectives of privatization and those of macroeconomic adjustments, especially in situations where privatization programmes are large relative to GDP. Conflicts usually arise: (a) between the need to decontrol prices in order to enable market forces to record reliable price signals and the urge for price stabilization; (b) between the macroeconomic objective of external balance and the need for economic efficiency allowing producers and consumers access to goods and services at competitive world market prices; (c) between the finance and credit needs of private enterprise development and credit stringency for monetary stabilization.¹³

Furthermore, it has been noted that in the absence of accompanying supply-side measures as well as technical information and technical support, any rapid liberalization must necessarily lead to costly deindustrialization.¹⁴ This has given rise to the view that, in some cases, it may still be necessary to give some protection to infant industries and also to "graduate the liberalization process according to the speed of 'relearning' and the development of the relevant factor markets".

As to which should come first, privatization or restructuring, the experience of Mali is instructive where privatization was carried out in a period of macroeconomic instability and without the parastatals first undergoing restructuring. By 1993, the result of the privatization of the 14 state companies sold was not satisfactory as the sales were hastily carried out and the weak management of the privatized companies was also bedevilled with "obsolete technology as well as inadequate working capital" (World Bank Research Report, 1995). Thus, successful privatization must follow major policy reforms like deregulation, liberalization or stabilization.

In sub-Saharan Africa, economic development requires a longer time-frame than normally allowed in some structural adjustment programmes. Forced adjustment caused by short-term balance of payments arithmetic and import strangulation can have a negative effect on investment required for recovery and also can cause harm to painfully accumulated existing capital stock and give rise to unnecessary output losses in consequence of "underutilization of particularly import-dependent production capacity".

3. Enterprise restructuring including commercialization

"The private sector can be boosted by invigorating, not dehydrating the public sector." Karame Sonko (A tale of two enterprises, p. 1091.)

Earlier attempts to restructure public enterprises

During the early days of their establishment, some public enterprises operated at a profit. For example, in Nigeria, the former Electricity Corporation of Nigeria, the Government Railway, the commodity boards as well as the regional marketing boards all generated surpluses which were reinvested in development projects. The then Eastern Nigeria Marketing Board provided 5 million pounds for the establishment of the University of Nigeria at Nsukka.¹⁵

In the United Republic of Tanzania, the Tanzanian Development Corporation had 60 subsidiaries in such areas as agriculture, mining, manufacturing, construction, commerce and services. In 1967 the Corporation had invested about 4.5 million pounds in 31 projects. Similarly in Uganda, the Uganda Development Corporation had in 1967 a gross turnover of over 22 million pounds and an investment of over 5 million pounds in seven projects. Also in Kenya, especially in the 1970s, state-owned banks spurred growth and were important in the establishment of non-bank financial institutions as well as extensive rural banking.

It can be argued that if, in those days, public enterprises were efficient in their operation, then they can surely be made to operate profitably once again. It has been suggested, in this connection, that one of the steps that can be taken would be for governments to re-examine the relationship existing between them as proprietors of these enterprises and the boards and managements of the enterprises. The idea of reforming public enterprises started long before the era of privatization. Some pressure had to be put on governments both inside and outside public service for parastatals to be run in a business-like manner. At the enactment of the Nigeria Railways Corporation Act in 1955, the Minister of Transport and Works remarked that "it is government's view that a public utility of this kind is better operated on quasi-commercial lines by a statutory corporation than a government department. The rigidity of control and the established formalism which are proper and necessary in the operation of a government department are not suited to a public utility which should not only provide the service required by the public but should do so on sound financial lines."

Several attempts were made by governments to reform public enterprises. It is estimated that up till the 1970s "at least 50 per cent of the corporations in Nigeria and Ghana had had public inquiries conducted into their operations" and that between 1960 and 1966 the Nigerian Railways alone had 13 inquiries into its activities.¹⁶ Following a special committee set up in 1961 by the Federal Government of Nigeria, a public policy statement was issued to the effect that public corporations should enjoy an appropriate measure of independence and should not be subjected to direct government interference in their day-to-day activities.

Despite such official policy pronouncements, the worst problem afflicting the parastatals -- political interference in the affairs of the corporations -- continued unabated; chairmen usurped the powers of chief executives, ministers usurped the powers and functions of both chairmen and chief executives. The management of some of the corporations was chaotic as it became a hotbed of power struggles. In such a confused situation, the finances and general management of these enterprises were in such a parlous state that, in 1986, the Nigerian federal Government issued instructions to the effect that "the volume of non-statutory transfers to all economic and quasi-economic parastatals will constitute no more than 50 per cent of their present levels". Public enterprises were required to provide the balance from price increases, charges, tariffs and rates. Similarly, in Zambia, the former president, Kenneth Kaunda, emphasized the fact that the Zambia Industrial and Mining Corporation Limited (ZIMCO) and its subsidiaries "were business enterprises first and state-owned companies thereafter". They were therefore to operate "no less efficiently than any other business undertaking".

Current efforts at public enterprise reform

Many governments have attempted to restructure those parastatals over which they still wish to maintain ownership. Methods adopted for restructuring include:

-- legal and institutional restructuring involving a revision of the legal framework governing parastatals as well as the introduction of institutional frameworks aimed at achieving a better relationship between government and top management;

-- establishing an independent role for the boards of directors and ensuring transparent accountability of general management;

-- management reorganization through the use of modern management methods and tools;

-- organizational and operational restructuring involving reduction in management hierarchies and reorganization of production processes and marketing and information systems;

-- financial reforms focusing on assets and debt/equity structure, reduction of subsidies and tightening of credit, ensuring budget discipline and timely settlement of bills.

As a result of various reforms and restructuring, a survey in 1984 of 48 public enterprises in North and sub-Saharan Africa showed that 12 enterprises reported net profit margins in excess of 4 per cent while five enterprises reported net profit margins greater than 10 per cent. Then, ten of the 48 enterprises had returns on shareholders' equity of 25 per cent or higher.¹⁷

The restructuring of an ailing enterprise is an expensive affair. For this reason, some governments set up privatization trust funds which are state holding companies serving a temporary bridging function. The funds have been used to ward off public enterprises from government interference pending their divestiture, or to maximize the value of residual shares held by government for sale later on, or to effect restructuring before privatization. For example, Zambia established a privatization trust fund which functions as a "warehouse" for minority stakes reserved for sale later on.

However, for a great number of public enterprises, no amount of tinkering with reforms can turn the companies around owing to endemic political interference. Thus, a former chief executive of the Nigeria Ports Authority remarked in 1979 that "it became impossible to manage with firmness capital development projects approved by the board after unnecessary haggling took months to gain ministerial approval; appointments to posts were controlled by members of the board, and the Ministry's interference in addition to ministerial dictates on practically every issue was the norm".

In order to overcome the political problem while governments still retained the ownership of the enterprises, a recourse was to management contracts where private enterprises took contracts to manage public enterprises. For example, in Senegal, as a result of management contract, la Societé de Transports du Cap-Vert (SOTRAC) greatly improved its performance. In many African countries, some of the large publicly owned hotels and airlines are managed on contract by private management firms responsible for all decisions on purchasing, marketing, employment and production.

Commercialization

In the Nigerian situation, commercialization as an integral part of restructuring takes the form of reorganization and restructuring of public enterprises under a management contract with a private sector company so as to turn such businesses into profit-making commercial ventures without government subsidy. The goal of commercialization is the promotion of greater efficiency and productivity even if government still retains ownership of the enterprise.

The objectives of the commercialization programme include:¹⁸

-- doing away with bureaucratic bottlenecks and political interference through clear role definitions between the supervising ministry, the board of directors and the management of the enterprise;

-- restructuring and rationalizing public enterprises to make them more efficient and cost conscious;

-- providing enhanced operational autonomy at enterprise level;

-- evolving a more result-oriented and accountable management based on performance contracts;

-- upgrading the management information system;

-- ensuring financial solvency of public enterprises through effective cost recovery, cost control and prudent financial management;

-- putting an end to dependence on the Treasury for funding;

-- working out appropriate capital structures for the enterprises to qualify them for market capitalization without government guarantees.

Authority given to commercialized enterprises to:

-- fix rates, prices and charges for goods and services rendered;

-- capitalize assets;

-- borrow money and issue debenture stock;

-- sue and be sued in their corporate names.

In order to give enterprise management sufficient operational autonomy, the role of the supervising ministry has been delimited as follows:

-- interfacing with the National Assembly and the cabinet for budget and policy matters;

-- performing the role of shareholder for government and exercising authority in such areas as the appointment of directors and external auditors;

-- exercising constitutional responsibility for sector policy formulation and determination of broad strategic direction;

-- exercising regulatory powers pertaining to standards, environmental safety regulations and monopoly powers;

-- regulating private sector operators in similar fields, administrative adjudication between the enterprises and other private enterprises providing similar services;

-- monitoring the performance of other public enterprises under the ministry.

In addition, the role of the board of commercialized enterprises is increased to make it more effective in directing and supervising top management. The board is empowered to:

-- ensure that the strategic plan of the enterprise emanates from the guidelines of the National Planning Commission and the supervising ministry or other relevant agencies of the federal Government;

-- measure management performance against agreed targets;

-- recommend the appointment, discipline and removal of the chief executive and the executive directors to the president via the supervising ministry;

-- approve financial and banking policies including borrowing within the capacity of the enterprise balance sheet in accordance with the Articles of Association;

-- acquire and dispose of fixed assets;

-- determine tariffs and charges for goods or services produced or rendered by the enterprise subject to consultation with the supervising ministry;

-- award contracts from time to time within limits set by the National Council of Ministers;

-- appoint, promote and discipline staff at all levels except the chief executive and executive directors and determine terms and conditions of service for all staff.

A system of performance agreement was introduced to instil and sustain a culture of accountability in the management of commercialized enterprises. The main features of the agreement included a corporate plan; a statement of specific, long-term objectives of the enterprise; a negotiated level of enterprise performance and a performance bond with clearly defined reward for exceptional performance and specified penalties for under-performance. Under the performance agreement, public enterprises are required to:

-- identify and specify the overall mission of the enterprise;

-- specify the business strategies and the actions the enterprise would take to attain its mission;

-- provide appropriate incentives for performance;

-- provide a basis for fair performance evaluation by identifying a number of performance indices which the enterprise should achieve;

-- provide for an independent monitoring process through the Bureau of Public Enterprises (BPE) whereby actual performance by the parties of their obligations under the agreement would be effectively monitored, and recommend remedial action to correct anomalies;

-- formalize a business relationship between the federal Government and the enterprise in the context of public enterprise reform embracing certain mutual obligations and responsibilities of the contracting parties.

The board of directors and management are obliged under the performance agreement to:

-- manage the enterprise efficiently and effectively to achieve the objectives in the corporate plan and faithfully implement the approved reform measures;

-- ensure financial prudence through management techniques for cost reduction and revenue maximization;

-- maintain and keep in proper working order and condition the machinery, plant, equipment and buildings belonging to the enterprise;

-- insure and keep insured all insurable property and equipment against business risks in accordance with sound commercial practice;

-- keep proper books of accounts in line with sound commercial principles which give a true and fair picture of enterprise finances and operations;

-- publish its annual report and accounts within three months of the end of the financial year;

-- make contributions to the staff pension fund;

-- do all that is consistent and reasonable with other provisions of the agreement to achieve the level of performance specified in the corporate plan, annual budget and performance targets.

In this concept public enterprises have a pivotal role to play in rapid national economic development. Under the performance agreement for commercialized enterprises, the Bureau for Public Enterprises is empowered to:

-- monitor due performance by the parties to the agreement of their obligations;

-- compile and publish operational data on enterprise activities;

-- facilitate the process of negotiation between the federal Government and enterprises;

-- demand in writing from any party in default of an obligation remedy for such default within 30 days of demand.

There are in all two types of commercialization -- full and partial commercialization. Fully commercialized enterprises are expected to raise funds from the capital market without government guarantee. Examples of enterprises under this category include Nigerian Telecommunications Ltd., the National Insurance Corporation of Nigeria, the Nigerian Ports Authority, etc. In the case of partial commercialization, while the enterprises are expected to generate revenue sufficient to cover their operating expenditures, government can still consider them for capital grants to finance capital-intensive projects in Nigeria. Enterprises in this category have included the Nigerian Railway Corporation, the National Electric Power Authority, the Nigerian Airports Authority, the National Provident Fund, etc. In the case of the Nigerian Railway Corporation, the commercialization plan of action included a break-up of the corporation into four operational units, namely, Nigerian Railway Plc, Nigerian Railway Engineering Ltd., Nigerian Railway Track Authority and Nigerian Railway Inspectorate Board. An implementation committee was established -- Railway Restructuring Implementation Committee (RRIC) -- inaugurated on 5 April 1993. The RRIC was given 30 months to implement the reform package. The other fully commercialized enterprise, Nigerian Telecommunications Ltd. which hitherto had been performing poorly, recorded a turnover after commercialization of 6.3 billion in 1993 with an after tax profit of 679 million, i.e. approximately $8 million.

However, the Bureau of Public Enterprises is not satisfied with the way commercialization has progressed owing largely to the perverse political interference which was thought would cease but did not.¹⁹ Furthermore, the Bureau complains that government has not yet set up an effective regulatory body to oversee the operation of commercialized enterprises. Perhaps because of this drawback to commercialization, the banking community in Nigeria has expressed preference for outright privatization as being "a more effective economic reform programme than commercialization or leasing".²⁰

On the other hand, a section of the Manufacturers' Association of Nigeria (MAN) has advocated deregulation of different economic sectors by opening them up for competition.²¹ For instance, MAN argues that, even without the privatization of Nigerian Airways but sadly because the aviation sector has been deregulated by removing statutory barriers to entry, the sector was experiencing an intense business boom owing to the entry of new private airlines into the domestic aviation business. It urges the energy and telecommunication sectors be likewise deregulated to allow private investors to bring in modern equipment and compete with the existing public enterprises.

It is contended that as a result of constraints placed on the immediate privatization of the economic structures of some African countries, direct restructuring of state-owned enterprises in a liberalized economy will offer more fundamental adjustments in resource use than rapid privatization. The example of high-performing East Asian economies where market and State interact to generate rapid industrialization is a pointer to the road of well-run public enterprises in economic development. The argument that some African countries lack the institutional capacity to follow the East Asian countries model may not be correct because when The Republic of Korea decided to embark on the Japanese model in the 1960s, that country also "did not have the institutional capacity. The Korean bureaucracy at the time was incompetent and corrupt as was the case with the Kuomintang bureaucracy when it arrived in Taiwan from mainland China."²² Despite these initial drawbacks, these countries, including later Malaysia and Indonesia, were able to set up appropriate bureaucracy and the relevant institutions required for implementing the Japanese model. It is with this backdrop that some people feel that, given appropriate political will and financial prudence, commercialization can succeed. However, to expect politicians not to interfere in what government controls is almost to say that politicians should not be politicians.

4. The role of the financial market in privatization and restructuring

"Even those African countries which once denounced the stock exchange as 'the prostitute of the economy' have been dragged to the altar of privatization." (West Africa, 23-31 October 1993, p. 1929.)

A successful privatization programme depends to some degree on the extent of domestic savings as well as the investment behaviour of the private sector. In order that savings be directed towards the purchase of public enterprises, it is necessary to ensure that there are sufficient savings in aggregate to absorb state assets and that the private sector can readily switch its investment from liquid low-risk assets in banks into illiquid more risky assets. Clearly, a shortage of domestic capital relative to domestic need has the effect of limiting the role of financial markets in corporate activities.

Financial liberalization and development

The prime objective of financial liberalization is to stimulate economic development since positive real interest rates generate the growth of savings and financial assets. The financial system also plays a vital role in allocating savings and this leads to an increase in the average productivity of investments. Thus, domestic financial liberalization directed at a market-oriented system should involve the deregulation of interest rates by abolishing or reducing controls on both deposit and lending rates. Liberalization also involves a reduction in quantitative controls to permit financial intermediaries to exercise greater control over the use of their liabilities, subject of course to prudential supervision.

Successful financial liberalization depends on two macroeconomic factors: the need for fiscal control including the development of a proper means of tax collection; and the need for effective control over domestic banks for purposes of monetary policy. Preventive arrangements should be put in place to arrest any bank failures alongside regular monitoring of bank portfolios by the central bank. The latter should not wait until a crisis before moving in to pick up the pieces because government bailing out of depressed banks can act as a disincentive to efficient bank management leading to more bank failures.²³

Where there is ineffective prudential regulation, financial liberalization can produce negative results such as increased volatility of real exchange rates leading to higher inflation, deindustrialization, increased price volatility of financial assets flowing from wanton speculation, failures in the domestic banking system and undue emphasis on financial rather than productive investment.²⁴

Unfortunately, financial liberalization in some African countries has witnessed: (a) a misalignment of the prices of financial assets resulting in inefficiencies in resource allocation; (b) sharply increased short-term volatility of asset prices leading to greater uncertainty, shorter maturities and higher interest rates; and (c) excessive borrowing to finance speculative asset purchases resulting in unsustainable stocks of debt, increased financial fragility and reduced household savings.²⁵

Capital markets

Capital markets in African countries can assist in solving some structural problems of the financial system. For example, direct security issues can provide more long-term and predictable finance for companies by replacing debt by equity financing. This reduces the vulnerability of companies to variations in the cost and availability of bank credits while secondary markets in securities can provide savers with much sought after liquidity.²⁶

However, many African stock markets are only just developing. They thus lack adequate public information on corporate performance. They also exhibit greater volatility than those in advanced economies. In unstable economic conditions, stock-market volatility can worsen financial instability, leading to capital flight.

An effective stock market can help an economy develop through growth of savings, efficient allocation of investment resources as well as by better utilization of existing resources. Both the financial market and the banking system carry out similar functions in the area of: (a) diversification of investment risks and the management of liquidity risks; (b) setting up control mechanisms for the improvement of resource management; and (c) evaluating the return on productive activities thus improving the allocation of resources to investment. But the main advantage of the financial markets over the banking system is in the evaluation of productive activities serving as an investment guide. Hence the need for the financial market and the banking system to develop in parallel.²⁷

Effect of privatization on capital markets

Where there is no capital market or where such a market is weak, privatization is mostly conducted through direct sale of assets. This creates some costs for government and search costs also are incurred in trying to identify potential buyers. When assets are sold only to those few able to readily purchase them, the negative effect is unevenly spread and concentration of asset ownership in turn creating monopolies in the private sector.

One of the immediate effects of privatization in some African countries has been the establishment of capital markets and the revision of financial sector regulations. This is due to the fact that privatization issues usually have a higher profile than other issues and involve a larger number of players. Moreover, some of the assets to be privatized tend to concentrate on certain sectors such as energy, mining, finance or transport. There is, of course, the sheer size and volume of such sales and all these factors require the development and strengthening of capital markets.

The stock exchanges of Dar es Salaam and Lusaka are examples of the direct effect of privatization on capital markets. The Dar es Salaam Stock Exchange Ltd. (DSE) was incorporated in September 1996 and its management is vested in a council whose role is to provide an organic link between the Capital Markets and Securities Act (CMSA) and the DSE. The CMSA was established in 1994 with the task of promoting and developing capital market institutions and raising the awareness of market players to opportunities in the domestic market.

Likewise in Zambia, the Lusaka Stock Exchange (LuSE) was launched in February 1994 but only became active in 1996 when market turnover increased from the $300,000 averaged in 1994-95 to $2.6 billion. Foreign participation increased considerably in 1996 as some 48 foreign investors took up more than 40 per cent of the Zambian sugar share issue, buying shares worth $1.4 million, while in secondary market trading foreigners accounted for 90 per cent of business during 1996, with trades valued around $2.4 million.

The Nairobi Stock Exchange

The Nairobi Stock Exchange (NSE) was established in 1954 as a self-regulating body. It comprises six brokerage companies and operates a daily call-over market. It does not have a trading floor and market trading takes place in the New Stanley Hotel in Nairobi. There is the Capital Markets Development Authority (CMA) whose chief function, as announced in the 1988-89 budget speech, is to provide the Nairobi Stock Exchange with a corporate identity and directly handle the market's regulation as well as its transparency. This, as contained in the enabling act, involves:

-- "the development of all aspects of the capital markets with particular emphasis on the removal of impediments to, and creation of incentives for, longer term investment in productive enterprises;

-- the creation, maintenance and regulation, through implementation of a system in which market participants are self-regulatory to the maximum practicable extent, and securities can be issued and traded in an orderly, fair and efficient manner."²⁸

The Nairobi Stock Exchange: 1980-89 (ksh. m.)

	1980	1981	1982	1983	1984	1985	1986	1987	1988	1989
Market capitalization	3 003	2 880	2 580	3 240	3 820	4 250	5 080	7000	8 410	8 730
Market capitalization as % of GDP	2.7	2.2	1.7	2.0	2.0	2.0	2.0	2.5	2.6	2.5
Value of turnover	--	--	--	--	--	--	--	--	--	2
No. of listed companies	57	54	54	54	55	55	53	53	55	55
No. of new issues	--	--	--	--	1	--	1	1	3	1
Value of new issues	--	--	--	--	12	--	90	30	278	305
Market index (1980=100)	100.0	92.6	92.4	101.2	102.1	111.3	133.7	194.4	226.9	215.6
Source: Nairobi Stock Exchange Yearbook culled from Adjusting Privatization, p. 347.

As can be seen from the table, the NSE is a small market with market capitalization just over 2 per cent of GDP right through the 1980s. Throughout the period 1980-89 there were only seven new issues. The turnover in the secondary markets is very low, representing only about 0.1 per cent of capitalization. However, the bulk of trade on the NSE is in government paper.

There was a renewed vitality in the equity market between 1987 and 1989 due to shares issued by the three largest commercial banks -- Barclays Bank of Kenya, the Kenya Commercial Bank and the Standard Chartered Bank of Kenya.

Comparative analysis of stock market performance

Market capitalization as percentage of GNP

	1980	1981	1982	1983	1984	1985	1986	1987	1988	1989
Study countries
Jamaica	2.0	4.3	5.4	3.1	6.0	13.2	21.9	21.6	23.3	24.6
Kenya	--	--	--	--	--	--	--	--	5.6	0.0
Malaysia	50.6	61.2	51.9	76.1	57.2	52.0	54.2	58.6	67.1	106.3
Sri Lanka	--	--	--	--	--	6.1	6.6	9.1	6.7	6.1
Trinidad	--	17.2	17.0	13.0	10.7	6.3	7.8	8.4	6.5	11.0
India (Bombay)	4.4	6.4	6.1	4.1	4.0	6.8	5.8	5.6	8.5	10.2
Nigeria	3.0	3.2	1.6	3.3	3.4	3.0	1.8	3.4	3.1	4.6
Source: IFC, Emerging Stock Markets Factbook, 1991, culled from Adjusting Privatization, p. 83.

From the above table it can be seen that, apart from Malaysia where market capitalization represents over 50 per cent of GDP, elsewhere market capitalization is small. In Nigeria the lowest figures were recorded in 1982 and 1986 with 1.6 per cent and 1.8 per cent respectively.

In sub-Saharan African countries with a high level of illiteracy, public offer for sale of state-owned enterprises has its limitations due to cumbersome formalities in the prospectus as well as complicated application forms, etc. As banking facilities are concentrated in urban centres, the use of public offer in privatization works to the disadvantage of those in rural areas with few banking facilities.

On the whole, privatization programmes have led to marked increases in stock market capitalization as well as increases in the quantity and range of issues traded on the market. The stock exchange has attracted a considerable number of players to the market leading to increased competition within the capital market. The structure and function of capital markets affect the availability of capital, influence investment processes and also influence the ways in which business managers who approach investors project the current performance and future potential of their enterprises.

Capital markets transfer funds from savers to investors in productive assets such as plant and machinery as well as to providers of services. Capital markets also provide a mutually beneficial bridge between those who have short-time horizons and companies and projects with longer prospects. In addition, enterprises are provided with equity capital through the stock market, short, medium and long-term debt is made available through the bond market, and short or medium-term debt is provided through the banking sector. The financial intermediaries in all these transactions constitute the financial service sector and while the constituents of the sector and their relative importance vary from country to country, they generally include banks, stock exchanges, brokers and insurance companies.

5. Case-studies

"The mode of divestiture chosen for a particular enterprise necessarily depends on a blend of political, commercial and strategic objectives." (Emmanuel Agbodo, Executive Secretary, Ghana Divestiture Implementation Committee, in International Herald Tribune, 30 July 1996, p. 18.)

Mode of privatization

Different countries use those methods of sale which suit them best. For example, deferred public offerings are common in Ghana, Nigeria and Zambia. Under this system, the sole purchaser is expected to sell, after a stipulated period, a certain percentage of shares to the general public so as to enable a large proportion of the population to benefit from the privatization programme. Pre-emptive sales practice is instead common in Kenya while in Uganda the public auctioning of shares prevails since this method makes for a greater participation of Ugandans in the sale. In Zambia there has been a large number of management-and-employee buy-outs, up to 17 by 1995 (Paul Bennell, 1996).

Type of sale of SOE shares and assets in main privatizing companies, 1988-95

Country		Open tender						Pre-emptive/ previous owner		Public flotation/ stock exchange		Deferred public flotation/PTF		Sale/auction of assets		Total
		Deferred		Other		Joint venture
West Africa
Burkina Faso Côte d'Ivoire Ghana* Nigeria Senegal		0 2 26 0 1		15 12 41 12 18		0 0 11 0 0		0 27 3 0 1		0 8 7 35 0		0 0 0 8 0		0 2 0 26 0		15 58 93 78 20
East, central and southern Africa
Kenya Mozambique Tanzania, United Rep. of Uganda Zambia		0 0 0 0 13		15 147 25 27 40		7 0 25 0 0		33 0 0 30 6		11 0 0 0 0		0 0 1 0 3		3 0 2 1 2		69 147 53 58 54
All countries		43		512		49		71		70		9		44		798
%		5.4		64.2		6.1		8.9		8.8		1.1		5.5		100.0
Median value of transactions		0.3		0.1		0.3		0.05		2.14		­		0.1		0.4
Average value of transactions		1.0		0.8		1.9		1.0		26.8		­		1.1		4.3
Total value of transactions %		41.4		429.1		92.1		70.9		1 874.8		­		45.3		2 553.6
* Up to end 1994 only. Source: Paul Bennell: "Privatization in sub-Saharan Africa", 1996.

Actual privatization cases

The four cases briefly outlined represent only a few of the several methods of privatization often adopted in most divestiture programmes: public offerings, private placements, asset sales and management buy-outs. Some of the other methods not highlighted here include leasing, contracting, management contract, deferred public offer, etc.

All the four cases are Nigerian and thanks are due to Salisu Liadi and U. Okpa-Obaji, both directors in the Bureau of Public Enterprises, for the supply of information on privatization and commercialization in Nigeria. The cases are simple and easy to follow. They illustrate how the concepts underpinning some techniques of privatization have been applied in real situations. Whatever method or technique of privatization is adopted, it must take into consideration salient enterprise-specific factors including the level of capital investment required for restructuring and the degree of control that the State wishes to retain.

Privatization through public offering

The decision to divest an enterprise through public offering is informed by factors like the need for wide share ownership and the development and strengthening of the capital market. Before an enterprise can qualify for public flotation on the Nigerian Stock Exchange it must have been profitable for five consecutive years with a track record of payment of dividends for three years running, and must offer at least 25 per cent of the equity capital.

Much use is made of professionals in implementing a public offering. The most important in the case of Nigeria, are the issuing house, the reporting accountants, the solicitors to the issue and its stockbrokers. It is these professionals who gather and analyse information and report on the operations of the concerned company leading to the preparation of the sale prospectus for the company.

Price of sharesIn Nigeria, it is the responsibility of the Securities and Exchange Commission (SEC), after consultation with the Bureau of Public Enterprises, to determine the price of shares of an enterprise slated for privatization through public offer. Before working out the price per share, the SEC first decides on the achievable annual earnings per share which is the average of five years of after-tax profit per share. The earning per share is then capitalized using the expected rate of return for the type of business. The price obtained is adjusted up or down reflecting SEC's assessment of the overall risks and prospects of the company.
PublicityPrinted copies of application forms are circulated countrywide through such distribution channels as local government headquarters, post offices, state investment companies, state ministries of commerce and industry, all branches of licensed banks, offices of chambers of commerce and stockbrokers.

In addition, publicity is carried out through advertising on television networks and the radio using the main local languages. Three widely circulated national newspapers publish the abridged prospectus while the chairman of the Bureau of Public Enterprises makes use of press conferences to ensure familiarity with the share offer.

Privatization through private placement

Some companies do not qualify for flotation on the Nigerian Stock Exchange. This can be due either to the small nature of the level of government shareholding or to their performance record falling short of the listing requirements of the Nigerian Stock Exchange. Such companies can be privatized by the private placement method. The Bureau of Public Enterprises has drawn up the following guidelines for all cases of private placements:

-- such companies have to be converted into limited liability companies if they are not already;

-- an issuing house, together with a solicitor and a reporting accountant, should handle the flotation;

-- the issuing house should aim at a maximum of 500-1,000 shareholders;

-- the issuing house must seek to achieve widespread shareholding geographically, and across income groups;

-- a placement document should be prepared instead of a prospectus;

-- except for the core group investors no single shareholder should hold more than one per cent of the shares on offer;

-- it is not necessary to have the completion board meeting as a public event as in the case of public offers;

-- as in the case of public offers, the approval of the National Council of Ministers is required.

Privatization through sale of assets method

This covers enterprises that are no longer viable as going concerns and whose performance record is generally appalling, including the accumulation of large debts.

Guidelines to the committee on asset salesThe asset structure of an affected enterprise falls into three categories -- trade investments, fixed assets and tradeable assets.

(a) Trade investments

These can be quoted or unquoted investments. If quoted, then such investments should be sold through a stockbroker on the floor of the Nigerian Stock Exchange and the proceeds banked. In the case of an unquoted investment and the subject company happens to be a majority shareholder in a viable private company, its interest should be sold to existing shareholders or partners with preference given to state governments, their agents, local communities, individuals in the area, indigenous companies, technical partners, etc. in order of priority. The Bureau of Public Enterprises (BPE) evaluates the shares for a dealing price and obtains the approval of the Securities and Exchange Commission.

Where it concerns a non-viable investment, this should be revalued by an estate valuer appointed by the BPE and sold as an asset and the proceeds distributed to shareholders according to the level of participation, taking into account workers' benefits as well as compensation due to the community together with repayment of loans and grants due to government. However, where the concerned company is the sole shareholder, the investment should be revalued and sold through public tender as an asset.

(b) Fixed assets

Where the company's assets have not been revalued during the past two years, such fixed assets other than land and buildings should be inventoried, revalued and sold through public tender to the highest bidder. Land and buildings should be inventoried, revalued and advertised for sale by public tender.

(c) Tradeable assets (Stocks of finished or raw materials)

These should be inventoried, revalued and sold through public tender to interested buyers.

Terms of reference for

committee on asset salesA committee in charge of the sale of assets operates under the following terms of reference:

-- to study the brief submitted by the Bureau of Public Enterprises on each affected company and devise strategies for its divestiture;

-- to follow the Bureau's guidelines where a decision to sell the enterprise is taken and to consult the Bureau when in doubt;

-- to organize public advertising in at least three national newspapers of all assets to be sold, other than household effects which should be sold to staff at prices determined by independent professional valuers. One of the newspapers should have wide circulation in the catchment area of the sale;

-- to receive and evaluate tenders and make recommendations to BPE;

-- to organize, in the absence of enterprise managers, the handing over of sold property to successful tenderers as notified by the BPE;

-- to look after any unsold or unclaimed items, in the absence of enterprise managers, and resolve any residual issues, especially staff matters;

-- to submit a report to the BPE.

Scale of preferencesThe committee on asset sales is guided by the following scale of preferences in its recommendation for assets disposal:

-- employees of the concerned enterprises;

-- cooperative societies of development associations or such interest groups within the area where the affected enterprise is located;

-- organizations, communities or individuals engaged or likely to engage in similar businesses to the one for sale or requiring the use of the asset;

-- state investment institutions;

-- local government council in the area where the business is located;

-- other interested persons or bodies corporate in the country.

Employees of affected enterprisesWhen it is decided to sell the assets of a company, all serving staff is declared redundant except for the few employees required to run the enterprise on a care and maintenance basis. Severance and terminal benefits as appropriate are negotiated and agreed with the staff union.

Code of conduct for committee membersThe following is the code of conduct for the committee members for the sale of assets:

-- no company or institution in which a member is a partner or shareholder or director or in any way directly connected shall be a buyer of the assets on sale;

-- during his membership of the committee, a member should not put himself in a position where his personal interest is in conflict with his duties and responsibilities;

-- a member shall not engage in any business transaction with the affected enterprises;

-- a member shall not make improper use of any knowledge or information he may acquire during the course of his work;

-- a member shall not buy the shares or assets of the enterprise offered for sale in the course of the privatization exercise;

-- strict secrecy with respect to all transactions of the committee and matters realted thereto is to be observed by members.

Privatization through management and employee buy-out (MEBO)

While it is the declared policy of government to encourage employee ownership of enterprises, only one enterprise so far has been privatized through management and employee buy-out -- the purchase of the National Cargo Handling Company Limited by the managers and employees. However, there is a precedent of such a buy-out in the private sector, this time by the managers only. The company is Lintas Nigeria, an advertising company.

Privatization spread

As can be seen from the table below, the bulk of the privatization sales during the period 1980-95 took place in the manufacturing sector. Of the 1,165 reported cases of privatization transactions as of mid-1996, about 52.1 per cent occurred in the manufacturing sector while 27.7 per cent were in agriculture, finance, hotels and tourism, and the trade sectors (Paul Bennell, 1996).

However, one of the problems encountered in the sales of state enterprises has been described as "unconsummated transactions" whereby the full purchase price of the assets sold was not paid. For instance, in Ghana, the gross sales of the equity and assets of state enterprises between 1990 and 1994 amounted to C63.1 billion out of which only 34 per cent had been paid by May 1994. Other countries that face a similar problem include Burkina Faso, Guinea, Madagascar, Nigeria and Uganda.

Another problem complained of by many prospective buyers of state enterprises is insufficient transparency in the sales transactions. This might be overcome through more openness in the tendering of bids.

SOEs privatized by economic sector, 1980-95

Sector	Sales			Liquidations			Other			Total
	No.	%		No.	%		No.	%		No.	%
Agriculture	96	10.7		19	11.8		12	12.8		127	11.0
Forestry	1	0.1		0	0		1	1.1		2	0.2
Fishing	15	1.7		0	0		0	0		15	1.3
Mining	13	1.5		3	1.9		3	3.2		19	1.6
Manufacturing	466	52.1		42	26.1		30	31.9		538	46.5
Utilities	7	0.8		1	0.6		6	6.3		14	1.2
Construction	16	1.8		3	1.9		1	1.1		20	1.7
Trade	47	5.3		17	10.6		2	2.1		66	5.7
Hotels and tourism	57	6.4		3	1.9		17	18.0		77	6.7
Transport and storage	35	3.9		17	10.6		13	13.8		65	5.6
Real estate	6	0.7		3	1.9		1	1.1		10	0.9
Other services	17	1.9		3	1.9		0	0		20	1.7
Financial	47	5.3		7	4.3		0	0		54	4.7
Not specified	72	8.0		43	26.7		8	8.5		121	10.7
Total	895	100.2		161	100.2		94	99.9		1 150	99.5
Source: Paul Bennell: "Privatization in sub-Saharan Africa", 1996.

6. The social balance sheet of privatization and restructuring

"The market solution is solipsistic. It solves problems by denying their social and public character ... (but) our interdependence is so great, our sense of common destiny so fragile, and our hold on the intangible qualities of social life so weak that we can hardly afford to enthrone the market and run the risk of loosening even further the bonds of community." (Two faces of privatization, p. 986.)

In his capacity then as chairman of the Zambia Congress of Trade Union (ZCTU), Frederich Chiluba, now President of Zambia, emphasized that economic recovery should not be "paid in blood by sacrificing workers". He then predicted "catastrophic consequences in social and economic evils when the action boomerangs".²⁹ Economic restructuring undoubtedly highlights the need to protect vulnerable groups and one of the ways to ensure such protection is the integration of poverty alleviation policies and programmes into structural adjustment schemes. To this end, the combined effort of the World Bank, the United Nations Development Programme and the African Development Bank saw to the setting up (starting in 1987) of the Social Dimensions of Adjustment (SDA) programmes.

The overall objective of SDA is the improvement of macro and sectoral policy management, designing social action programmes, strengthening national information systems and stepping up training and institutional development. The SDA has designed a framework which incorporates the social aspects of structural adjustment into development programmes. The framework seeks to achieve the following:

-- investment in human capital through education, nutrition and health;

-- active promotion of wage employment particularly in the urban and informal rural sectors;

-- increase in households' productive assets so as to raise the income level of the poor;

-- raising the return on such assets through changes in relative prices.

Following this example many other agencies, bilateral and multilateral, have become involved in SDA programmes. In addition some African countries have established action programmes to cushion the effects of adjustment to compensate those hardest hit. Examples of such action programmes include PAMSCAD in Ghana, PASAGE in Madagascar and SIRP in Guinea Bissau. The objective of Ghana's PAMSCAD (Programme of Actions to Mitigate the Social Costs of Adjustment) is to compensate for adjustment related job losses by generating up to 40,000 jobs biennially through the use of credit for small-scale enterprises. In addition there is a "basic needs" component in PAMSCAD which includes primary health care service -- provision of essential drugs linked to primary health care, treating parasitic diseases of school children and supplementary feeding-nutrition enhancement.³⁰

On the whole, a successful adjustment and poverty alleviation strategy must involve an interrelated set of policy actions on macro-policy measures, sectoral policies directed at facilitating the participation of the poor in the process of growth, as well as the restructuring of public finances and mobilization of domestic and foreign resources for growth. For instance sectoral policy objectives would include shifting new investment and maintenance expenditure towards the support of productive activities and employment-generating projects as well as to modifying the composition of public expenditure to favour basic primary education and health services.

In Cameroon and Guinea, community development funds have been set up by government in conjunction with structural adjustment programmes to create employment and finance small-scale community initiatives and to provide basic services for vulnerable groups. In Mauritania, there is a food-for-work programme and food distribution schemes for those that need them most. In Madagascar, there is a special short-term employment programme for laid-off public sector workers. The provision of these schemes confirms the view that an economic development programme that does not distinguish between the need for privatization in some sectors and for increased public expenditure in others only adds to the social cost of privatization.

Consumer protection

In cases where privatization turns public monopoly into a private monopoly, there is need for some form of regulation in order to ensure a successful management of the market-based economy. Some governments have therefore put in place regulatory mechanisms to protect the public interest, guard against the abuse of monopoly power, and ensure that the minimum coverage of services is provided. The regulation of monopoly power of privatized companies and the establishment of an appropriate enabling environment for forces of competition to flourish are essential adjuncts to privatization. Especially in the case of utilities where it is often difficult to have competition it is essential to ensure that the market power of privatized companies is not deployed to the disadvantage of the consumers. Thus Sri Lanka and Malaysia have set up structures stipulating the form of regulatory regime. For the two countries, the regulatory rule is based on RPI-X formulas applied in the United Kingdom which links allowable price increases to the consumer price index.

In the United Kingdom, the RPI-X regulation is adopted in the case of telecommunications, gas and airports. The regulator establishes a price cap which can yield reasonable profits if the utility performs efficiently. Where the utility exceeds the efficiency limit set by the regulator, it retains the extra profit as a reward to be used for the benefit of customers. However, when the price cap is reviewed once every five years the regulator has a chance to determine anew what level of performance is reasonable. Thus, when the time of the price cap is up, the regulator can set a new one with a fresh X for the next period. When the new price cap is set the benefit of lower costs can be passed on to consumers as lower prices.

Depending on the specific industrial sector, the regulating formulas can take the form of

RPI--X+Y or RPI+K or RPI--X(GPI--I)+E

where: RPI = Retail Price Index

X = Percentage fixed by regulator

Y = Percentage increase in price of certain basic inputs

K = Percentage fixed by regulator over and above RPI

GPI = Gas Price Index

E = Efficiency factor-cost of improvement in energy efficiency/savings. ³¹

For instance, the electricity companies in the United Kingdom are regulated in the price formula RPI minus X plus Y plus Z (RPI-X+Y+Z) over a five-year period. X factor is based on an estimate of the company's scope for reducing controllable cost; Y is the local authority rate levy; Z is an index of the average cost of the company's purchased power weighted for the load factor. The resulting prices would be adjusted annually but at the end of five years the formula is revised and X is reset taking into consideration the average performance of the distribution companies in reducing their costs during the period.³²

Another means of protecting consumers is through the setting up of watchdog bodies as is done in the United Kingdom, e.g. Office of Electricity Regulation (OFFER), Office of Gas Regulation (OFGAS), Office of Telecommunications Regulation (OFTEL) as well as Office of Water Regulation (OFWAT). OFTEL has a large staff whose duty is to investigate complaints by the public and also deals with technical problems and complex regulatory issues. OFFER watches over 19 separate electricity companies and its duty is to ensure that there is no collusion between them through price-fixing or cross subsidies. OFFER can also order that compensation be paid to the affected customer in cases of below-standard services by the regional distributional companies. For example, OFWAT forced 11 companies in January 1997 to make customer pay- backs for underspending.³³

Golden shares

The ownership of a golden share, or strategic share, constitutes another regulatory apparatus. A golden share works like a preference share although more powerful and more undemocratic. A golden share is used to enforce codes and rules imposed on the new privatized company by their own articles of association. A golden share can also be used to place stringent restrictions on the other shareholders, particularly in their right to sell their holdings. For example in Malaysia the golden share gives the Government the right to veto the acquisition of Malaysian Airlines by a third party, the acquisition of other companies by the Malaysian Airline System (MAS) and any major assets. The golden share also gives the Malaysian Government the right to appoint six out of 11 board members in MAS.

In Nigeria, the golden share monitoring mechanism is used in the insurance industry since the insurance sector is regarded as crucial for capital formation as well as resource mobilization. The possession of the golden shares gives government right of access to information necessary for the protection of the national interest. Furthermore, it guarantees stability in the ownership as well as management of the concerned companies.

The following are some aspects of the golden share as applied in Nigeria:

-- the golden share is held by the Bureau of Public Enterprises or its successor;

-- the golden share is not entitled to any dividend;

-- the golden share is held for five years in the first instance but is extendable in the public interest for another five years when necessary.

The holder of the golden share has the right of consultation on the following issues:

-- changes in ownership of the foreign portion of the company's equity;

-- changes in the company's Memorandum as well as Articles of Association;

-- major changes in capitalization likely to dilute the current ownership structure;

-- changes in directorship.

Initially, the Nigerian Insurance Association was opposed to the idea of the golden share, but all sides are now satisfied with the situation.

Protection of employees

The following table shows that the effect of privatization on employment in state enterprises in Zambia has not been very severe.

The job market nowadays is quite flexible. One of the reasons for the poor performance of public enterprises is over-manning. It was observed that some public enterprises in Africa employ "ghost workers" who "exist officially on the payroll, but who are either entirely fictitious or else retired long before but whose salaries continue to go to corrupt officials".

However, with the cooperation of the World Bank, some governments have given the issue of redundancies serious consideration. For example in Togo, alternative employment opportunities are examined with funds from the bank's credits. There is a staff reconversion/retraining programme and laid-off workers are offered access to credit to start small businesses. In Senegal, a "Reinsertion Fund" has been established to "ease the transition of workers laid off". The fund refinances loans offered by participating commercial banks for the establishment of small-scale business by laid-off employees. In Benin, there is a Training and Redeployment Programme which "screens laid-off workers and assigns them to retraining programmes or provides them with credit for agricultural investments".

Impact of privatization on employment in SOEs in Zambia

Enterprise		Employees
		1992		At privatization*		Reported redundancies		% change from 1992
ASE		185		145		0		-21.6
Autocare		145		130		0		-10.3
Chilanga Cement		883		822		0		-6.9
Coolwell Systems		29		25		0		-13.8
Crushed Store Sales		136		125		0		-6.6
Eagle Travel		129		119		0		-7.8
General Pharmaceuticals		97		82		0		-15.5
Indeco Milling		569		51		3		-91.0
Monarch		282		185		0		-34.4
Mpongwa Development		1 245		692		0		-44.4
National Breweries		847		585		0		-30.9
National Home Stores		930		n.a.		406		­
Nkwazi Manufacturing		65		40		89		-38.5
Poultry processing		65		65		0		0
Prima Marble (L)		9		0		0		-100.0
Zambia Breweries		1 654		753		0		-54.5
Zambia Consumer Buying		1 670		n.a.		720		­
Zambia Engineering & Construction		532		60		27		-88.7
Zambia Maltings		80		8		34		-88.8
Zambia National Wholesale		1 037		n.a.		134		n.a.
Zambia Sugar		5 736		4 000+		0		-30.3
Zura Zambia		23		19		0		-17.4
* 1993 or 1994. Source: World Bank: Zambia: Second privatization and Industrial Reform Credit, 1993, and unpublished data from the Zambian Privatization Agency. Culled from Paul Bennell: "Privatization in sub-Saharan Africa", 1996.

There are some more elaborate schemes in South-East Asian countries. For instance in Sri Lanka an attractive compensation package was previously allowed but when it became too expensive the policy was changed (in 1990) to allow early retirement with attractive severance pay. In 1991 the policy was changed again and early retirement was granted only where the level of redundancies did not permit divestiture. For the rest, the privatized enterprise agreed with Government to retain the employees in employment for at least two years. This practice was again changed in May 1992 and privatized companies now have to continue to give employment to all employees up to the retirement age of 55 years. Obviously, a provision like this affects the pricing bids or it would be difficult to find buyers.

In Malaysia, during the privatization of Klang Container Terminal (KCT) and Klang Port Authority (KPA), employees were offered three options: (a) retirement with generous lump-sum severance pay together with entitlement to early pension benefits; (b) a choice not to join KCT in which case KPA would be obliged to retain such employees without loss of pay, reduction in employment conditions, grade, etc.; (c) termination of contract with KPA and joining KCT on terms no less favourable than before. The Malaysian Government, in respect of option (c), amended the Pension Act of 1980 to ensure that employees in the new company benefitted from accumulated civil service pension rights.

For employees in privatized companies, the strategy of share-owning democracy has been used to boost their morale and win their loyalty. When a worker sees himself as an owner he is more likely to take care of his property. His ownership of shares and his stake in a capitalist enterprise are bound to have positive influence on him. For instance in respect of state banks in Nigeria, the federal Government gave instruction that 10 per cent of the shares on offer be allocated to staff of the affected banks, provided that where staff already own shares the maximum would be 10 per cent. The Government also encourages employers to grant special loans to their staff members to enable them to purchase shares in the privatized companies. Some privatized companies like the United Bank for Africa (UBA) have set up staff rehabilitation loan schemes to encourage laid-off employees to go into small business ventures.³⁴

Peopleization

Government is often eager to ensure that privatization brings about a maximization of the welfare of people through broad-based ownership schemes. The phenomenon goes by different description; popular capitalism or people's capitalism or taking capitalism to the people. In Sri Lanka, the term "peopleization" is popularly used to describe the popular participation process in privatization. In Nigeria, the Bureau of Public Enterprises (BPE) makes an effort to attract low-income groups as well as students by setting the minimum order amount of shares at only 100. Likewise as an encouragement to small investors BPE adopts an allotment procedure which reserves from 40 to 60 per cent of the shares to those investors purchasing 100 to 5,000 shares. For example, out of 39,428 applications for shares received in the Flour Mills Nigeria Ltd., 35,186 of these came from low income groups, i.e. 89 per cent to which 74.3 per cent of the total shares on offer were allotted. In the case of African Petroleum 117,544 applications out of a total of 130,476 valid applications, i.e. 90 per cent, came from the low income groups and to this group 68.02 per cent of all the shares were actually allotted. The low income group comprises those who applied for between 200 and 1,000 shares.

But, privatization can also adversely affect the rural population in such areas as transport, electricity, banking and health. Public utility extends to the rural population as a social service with no profit motive. After privatization, the continuation of such services to the rural areas often proves unprofitable. It has therefore been suggested that, like in the case of transport, rather than government subsidizing the entire transport system after privatization, any subsidy should cover "only the lines that cover the poorer regions". For other services like banking and health, there could be built-in tax breaks and subsidies so as to ensure that the services are profitable.

Shareholders' Association

In Nigeria there is a well-organized Shareholders' Association. Its duties include:

-- educating and enlightening shareholders on their rights and responsibilities;

-- promoting solidarity among shareholders and stimulating interest in the activities of their company;

-- facilitating representative participation in corporate decision-making through regular attendance at annual general meetings as well as extra-ordinary general meetings;

-- nominating their representatives to serve on boards of directors of publicly quoted companies;

-- facilitating easy access to individuals to claim their dividends and scrip certificates some of which remain unclaimed due to ignorance of their whereabouts.

The Association was initially funded by the Bureau of Public Enterprises (BPE) from interest earned on deposit of shares pending allotment. Now it is funded from quoted companies through a per capita levy determined by the Securities and Exchange Commission and the Nigerian Stock Exchange, based on the number of shareholders in each company. The levy is collected and administered by the Stock Exchange.

The activities of the Association are determined and carried out solely by the members in accordance with the constitution. It obtains professional guidance from the Nigerian Stock Exchange.

Given the size of the country, the Association is organized into seven zones and each zone keeps a register of shareholders in the existing and recently privatized publicly quoted companies. The Association serves the interest of the investing public as shareholders who have the opportunity to contribute to the formulation of broad corporate policies, thereby enhancing management accountability.³⁵

Voucher-based programme

Vouchers are coupons with monetary value which entitle the holders to buy shares at a subsidized rate in companies of their choice. Such voucher privatizations are another example of popular capitalism as it benefits mainly the poorer segment of the population. In countries like the Czech Republic, Russia and Slovakia, voucher holders can use their vouchers to buy shares of privatized companies. In Poland, voucher holders can buy certificates issued by investment funds but cannot use the vouchers to purchase shares in privatized companies. In some cases vouchers can also be traded for cash.

However, the use of vouchers is inappropriate where voucher distribution and trading centres are not easily accessible and where the administrative system is not capable of undertaking voucher registration and distribution. In most African countries with weak institutional capacity, the voucher-based programme would create logistical as well as administrative difficulties.

On the whole, the best safety net to contain the obvious fall-out from structural adjustment including privatization is a thriving private sector. Once the economy as a whole is privatized through liberalization, stabilization and structural adjustment and continuing successful macroeconomic management, the private and the public sectors will be strengthened to create more jobs as is the case in countries of South-East Asia.

7. Conclusion

"A healthy State is one that can recognize its own limits, tap the creative and productive talent of its private citizens, and can accept its full responsibility to ensure that the fruits of the labour of its public and private enterprises are justly shared." (Colombia Journal of World Business, Fall 1986, p. 60.)

Much of the privatization carried out in sub-Saharan Africa can be described as "donor" privatization. Very often, the sale of public enterprises to the private sector is in fulfilment of the conditionality set by the Bretton Woods institutions and other aid agencies. For example, privatization features as a policy orientation by the US Agency for International Development (USAID). Thus in 1985 the former US Secretary of State, George Schultz, in his telegraphic message to the African field offices of USAID, stressed the urgency to impress upon those receiving aid of the need to embark on privatization. The message went on "parastatals are generally an inefficient way of doing business ... In most cases, public sector firms should be privatized". The USAID African field staff were to get involved in "an average of at least two privatization activities by the end of 1987".³⁶

The request by donors to African governments to privatize often finds African bureaucrats unprepared, and given such unfavourable conditions as the deteriorating economic situation, high unemployment, underdeveloped capital markets, inexperienced professional sector accountants, bankers, lawyers etc. and an unstable political system with weak bureaucracies incapable of designing and implementing the privatization process, privatization becomes a very difficult affair.

There is, in some cases, a stark lack of negotiating experience by government with both foreign and domestic investors due to a lack of business orientation by government bureaucrats. This leads to the donor agencies formulating both the agenda and the main parameters of policy negotiation. For instance, in the privatization of the state-owned steel mill in Togo, the lessee extracted quite unusually favourable concessions including a long-term monopoly on iron and steel sold in Togo. The unfortunate result is that governments may react passively to initiatives pressed on to them by international agencies. The local bureaucrats feel deprived of a sense of ownership of the reforms, and hence the difficulty in implementing such reforms, also due in part to inadequate political preparation.

In the end "many of the adjusting countries adjusted in name only" and they openly flouted the Bank's directive either by "implementing less than half of the recommended conditionality or implementing recommended policies and then reversing them or implementing the formal conditionality, but undoing its effects through countervailing measures."³⁷ In some cases the speed at which privatization is carried out is so rapid that the absorptive capacity of the economy becomes overstretched at the same time that the government administrative capacity is overtaxed.

Role of the State in development

An issue of great importance brought forward by privatization and economic restructuring is that of the appropriate role of the State in the industrialization of Africa. In this connection, the federal Government of Nigeria appointed a commission in 1981 to examine "the organization, structure, management and job content of all public corporations and federal government-owned companies and other parastatals". The commission, otherwise known as the Onosode Commission, in one of its recommendations called for a "roll back of the frontiers of government."³⁸ In this regard it has been observed that most African States are too weak to implement the necessary structural adjustment and that vigorous and effective government policies are crucial for effective economic reforms. It follows that what is needed is the strengthening of the State for greater effectiveness.

The launching pad of any reform has to be improvements in government capabilities to mount effective interventions in support of industrialization. One of the main lessons of African development is the central role which bad government has played in bringing about poor economic performance. This has led many observers to turn to laissez-faire and the private sector as an alternative to government-directed development. But the transition to a "private sector-led and politically and institutionally pluralist economy in Africa will demand a significant and effective government role". As Peter Drucker asserts "the economic sphere cannot and will not be considered to lie outside the public domain. But the choices for the economy -- as well as for all other sectors -- are no longer either complete government indifference or complete government control". While it is true that the majority of parastatals in Africa perform badly because of their place in national development especially utilities and basic industries the way to improve their performance is definitely not to dismantle the State but rather to reconstruct it and transform it from a major part of the problem to a major part of the solution, to sustain the process of economic reforms. A lean government does not necessarily mean a better government as witness the spate of redundancies in the public sector which has not resulted in greater efficiency. In fact in many cases most of the downsizing has been counterproductive.

In this regard, one should take seriously the comments made by Professor Earnest Wilson III when he addressed an international conference in Lagos (Nigeria) in 1990 on the implementation of privatization and commercialization:

"In Africa, the public-private relationship is predatory; in Asia, it is a partnership. In Africa, the State preempts the private sector; in Asia the State promotes the private sector; in Asia there is growing prosperity; in Africa, growing poverty. Africa errs, I argue, when the State ignores the need for closer public-private sector cooperation. A central and key linkage in public-private relations is the business interest associations -- the chambers of commerce, the employers' associations, and so forth. African governments should promote their ties with these business interest associations, and not restrict them."³⁹

There is a need to dismantle the disabling environment through the modification or elimination of those functions of state agencies that control and dominate the private sector in such areas as industrial licensing, foreign exchange controls, registration of new businesses, certain financial controls, etc. But it has also been stressed that the accomplishment of industrialization in Africa will be postponed for a long time if governments of those countries featuring a weak industrial base were to stand aloof and rely solely on the market. Perhaps what is needed is a market system leavened by efficient government.

Social partners

Another issue in privatization concerns the involvement of employers' and workers' organizations in the formulation of privatization policies. In almost all African countries employers' organizations consult with government for certain economic reforms advantageous to the private sector. Privatization is usually undertaken within the gamut of structural adjustment reforms and liberalization and employers' organizations often do not specifically initiate discussions with government on the handing over of specific state companies to the private sector. There is however a case in Botswana where the business community did actually put pressure on the Government "to push ahead with privatization in order to sustain the driving force of the private sector for economic expansion". Nevertheless, what private employers usually do demand from government is a level playing-field in their activities vis-à-vis state-owned companies in the same sector.

The business community in Nigeria was openly critical of the action by the federal Government in 1981 to establish a state trading company -- the Nigerian National Supply Company Limited (NNSC). At the 1983 Annual Luncheon of the Distributive Trade Group of the Lagos Chamber of Commerce and Industry, it was stressed that "state trading involves mis-allocation of capital resources since such state organization lacks the initiative, flexibility and dynamism necessary for dealing with problems of the market place [and that] Government would have been better advised to encourage indigenous entrepreneurs to undertake nationwide distribution, through good credit policies, government purchasing policies and the like, rather than establish its own distributive company".

Since a large part of the business community benefits from the import substitution regime that shelters it from outside competition it is bound to feel uncomfortable about some aspects of liberalization and other economic reforms, including privatization. This has little to do with the private sector embracing those economic incentives flowing from liberalization that promote their businesses. The divestiture decision-making process is bureaucratic and political. Therefore private sector involvement is often confined to the final stages of negotiation for bids.

However, since the announcement of the 1997 federal government budget, the Nigerian business community has been vocal in its support for privatization. The 1997 budget speech by the Head of State underlined the need for government to "take the Organized Private Sector into confidence" in matters concerning privatization and commercialization of public enterprises. In furtherance of this, the Manufacturers' Association of Nigeria (MAN) requested government "to set a time-table for the commencement of the privatization programme", while the Institute of Chartered Accountants of Nigeria (ICAN) at a post-budget workshop early in 1997 called on government "to resume the privatization of vital public corporations in order to boost their efficiency", adding that "for an ambitious economy desirous of vast foreign and domestic investment like ours, privatization remains the most effective starting point".⁴⁰

The situation of trade unions is somewhat different. As government is the largest employer in most African countries, public sector trade unions constitute a vital organ of advocacy for workers' interest nationwide and their numerical strength forces government to take them seriously. In Ghana, for example, while employers are not represented on the Divestiture Implementation Committee, the trade unions are. Trade unions are generally opposed to privatization for reason of the redundancies that result. As has been noted, "few workers can be persuaded to accept the birds-in-the-bush of future employment generation in an expanding private sector over the bird-in-the-hand of secure public employment". For instance in Nigeria, the Agricultural and Allied Senior Staff Association (ANSSA) has urged the federal Government "to involve trade unions in commercialization and privatization of key public enterprises so as to ensure adequate consideration for labour's interest". It further requested that trade unions be included "in the high-powered committees to examine the various options open to government before further privatization exercise".⁴¹

Privatization and efficiency

Another important issue of privatization relates to efficiency. There are a few African public enterprises that operate with efficiency but the overall image of the majority of these public enterprises is a depressing picture of inefficiency, losses, budgetary burdens and poor products and services. It has been noted that the excesses of public enterprises -- political interference as well as downright mismanagement -- are far greater in developing countries than in the industrialized ones. For example, nationalized industries are better managed in France because the Ecole Nationale d'Administration trains future administrators for both the state industries and the civil service thus creating a better link between the French civil service and industry.

Efficiency in public enterprises has to be assessed relative to the objectives pursued by those companies and therefore a multiplicity of policy objectives has to be taken into account which these enterprises are expected to achieve -- profits for the government's revenues and for investment, assistance to underprivileged groups or regions, increased and low cost output, increased employment and price stability.

The efficiency of the private sector is not in doubt given the fact that private sector firms are subject to the discipline of market forces while its managers are subject to considerable incentives and discipline different from and more demanding than those which apply to public sector managers. In spite of this there is doubt in some quarters in the industrialized countries as to whether privatization has in fact led to any increase in efficiency. For instance in the UK there is public protest against the privatized public transport "because of baffling, uncoordinated timetables" to the extent that one Dr. Owens of Cambridge University has blamed the introduction of private competition for the "terrible failure of the transport system."⁴²

In African countries, however, there are two sectors within the private sector -- the indigenous private sector and the private sector wholly dominated by branches of multinational companies. While the latter is quite efficient, the same cannot be said for management of the indigenous private sector. It is really the small and medium-sized companies that dominate the indigenous private sector and a culture of large-scale enterprise management is thus ................. among indigenous entrepreneurs. Among the indigenous small-scale and medium-sized businesses in Nigeria there is insufficient ability to "bring and hold together an able staff, delegate authority, inspire loyalty and handle successful relations with labour and the public".⁴³

However, most of the indigenous professional firms like those of accounting, law and medicine etc. perform very well given their size and owner-managed culture. There are also some medium-sized indigenous companies quoted on the stock exchange which are very efficiently run like the Ikeja Hotels Plc., the Kabo Holdings and the ADC Airlines all in Nigeria. Some of these have bought a few of the public enterprises like the purchase in 1993 of the Federal Palace Hotel in Lagos by the Ikeja Hotels Plc. and of the Durbar Hotel in Kaduna (Nigeria) by the Kabo Holdings.

For the majority of indigenous owner-managed small businesses, the excessive drive for a quick return on investment often yields substantial profit but without accompanying efficiency in the use of modern management techniques. As has been rightly noted by a Nigerian indigenous entrepreneur, "the business of this day and age demands sound administrative competence and know-how such as is not possessed by many small Nigerian businessmen who rely mainly on shrewdness and instinct in the running of their enterprises".

Openness to the world economy and the market-friendly approach

The World Bank report (1991) -- World Development Report: The Challenge of Development -- argues that economic growth in a developing country can more readily be achieved by opening to the world economy and integrating the national economy with the world economy.

The report does not rule out the role of the State but its market-friendly philosophy tends to indicate that, in order to derive optimum benefit from state intervention, the State should: (a) intervene selectively as it is inadvisable for the State to undertake physical production or to indiscriminately protect domestic production; (b) apply checks and balances and hence the need to subject state intervention to the discipline of international and domestic markets; and (c) intervene openly by making state intervention transparent and not subject to the discretion of public officials but to laid-down rules.

There are some who hold views different from the World Bank's approach over this matter. Although not in contradiction with World Bank' views, the example of the high performing Asian economies suggests and endorses robust state intervention as a dynamic substitute for a hands-off purely market-based approach. Examples are quoted from the high performing Asian economies where:

Policy interventions took many forms -- targeted and subsidized credit to selected industries, low deposit rates and ceilings on borrowing rates to increase profits and retained earnings, protection of domestic import industries, the establishment and financial support of government banks, public research investment in applied research, firm- and industry-specific export targets, development of export marketing institutions and wide sharing of information between public and private sectors. Some industries were promoted while others were not.⁴⁴

The protection of the home market at the early industrialization stage provided Japan, the Republic of Korea and the other emerging markets of East-Asia "a captive market" which resulted in high profits and allowed domestic companies to make greater investment and learn-by-doing to improve product quality. It was also noted that at the early industrialization stage it is inadvisable to seek an unconditional integration with the world economy. In fact Adedeji (1994) goes further to suggest that as African countries have been de facto delinked from the global economy they should "withdraw from the market system and pursue vigorously for one or two decades a fundamental transformation of (their) political economy based ... on self-reliance, self-sustainment, democracy and justice with equity".⁴⁵

However, what Japan, the Republic of Korea and Taiwan did when they experienced early rapid growth was selective integration with the world economy, i.e. they sought integration to the extent dictated by self-interest. It has also been observed that since openness to the world economy is a multidimensional concept, a country may decide to be open in some direction e.g. trade, and not in others like foreign direct investment or financial markets since openness is affected by factors like the stage and state of national development. There can be irreversible losses when the "wrong kind of openness is attempted or the timing and sequence are incorrect". Therefore, an African country should be wary in its choice of either a wholly export based economy or an economy with a substantial manufacturing base supporting export growth.

The relevance of privatization in Africa

As a result of the deteriorating economic situation in sub-Saharan Africa in the face of enormous efforts at liberalization and restructuring, there are those who doubt the positive effect of World Bank/IMF prescriptions on the industrialization of Africa. For instance, Heidi Vernon-Wortzel and Lawrence H. Wortzel (1989) maintain that privatization "is no more a solution to the problems of SOEs than SOEs were a solution to the problems they were created to solve". Paul Starr (1987) notes that "the illusory appeal of privatization is to provide a single solution for many complex problems", adding that if privatization has any merit at all, it is to remind everyone "that the public-private mix ought not to be considered settled for all time". Howard Stein (1992) is emphatic in his view that the effect of the World Bank/IMF prescriptions will be to "deindustrialize the existing manufacturing base in many African countries without encouraging any significant replacement". He refers to the huge devaluation of African currencies and the negative consequences this has had e.g. the encouragement of cheap imports which undercut local production. Devaluation also penalizes those manufacturing companies that depend on imported inputs. He is of the opinion that "simply getting the prices right and removing the public sector from influencing the economy in the hope that the private sector will respond, will do little to alter conditions in sub-Saharan Africa". Clive Hamilton (1989) observes that the implementation of policies of liberalization could have a dangerous effect on development and growth in developing countries. Guy Arnold (1994) contends that the newly industrializing countries of South-East Asia achieved their economic breakthroughs "with the ruthless use of state interventions or subsidies" designed to give international advantage to their companies. He notes that both the European Union States and Japan subsidize and protect their industries and agriculture "when it makes sense to do so even while lecturing Africa about the benefits of market forces". He then observes that Africa has actually been deindustrializing under IMF pressure.

Happily, the Africans themselves have started to report on the benefits of privatization. Eddie Iroh (1997) regards privatization "as a sure means of removing patronage from public officers". E.M. De Giorgio (1996) quotes the chief executive of Zambia Privatization Agency (ZPA) as noting that the most significant and lasting benefits of privatization "will not be cash received" but the capital investments made, the jobs created, the transformation of inefficient, subsidized companies into profit making and competitive businesses. Mark Ashurst (1996) reporting on the success of privatization in Zambia observes that the country was for the first time exporting coffee and cotton while the export of cut flowers has increased from $5 million in 1991 to $54 million in 1996. William Okecho (1996) notes that all Ugandan companies are performing better under better private sector management and are at the same time "providing regular tax revenues". Hamza Zayyad (1994) in referring to the Nigerian capital market after privatization and commercialization, notes that there have been more offerings of primary issues in the last five years than in all the past thirty years of the existence of the stock exchange. He talks of the demystification of the capital market operations as the ordinary Nigerian no longer regards the capital market as an elitist affair. "There is no local government in Nigeria today where there are no shareholders", he adds. He reports that when his Bureau of Public Enterprises (formerly known as Technical Committee for Privatization and Commercialization) started functioning in 1989, there were only 15 stockbrokers in the country and that by 1994 the number of stockbrokers had risen to 53. Emmanuel Agbodo (1996) notes that many of the privatized Ghanaian enterprises have been modernized and brought back to production. He records that the ABC Brewery doubled its production between 1992 and 1995 while the Ghana Agro-Food Company (GAFCO) increased employment from 500 to 700 by July 1996. Similarly, the Ghana Tropical Glass Company is fast becoming the leading producer of beer bottles in West Africa. Furthermore, in Zimbabwe the Grain Marketing Board came from a loss of more than $100 million to a profit of $21 million in 1995.

However, these differing viewpoints on the merits and demerits of privatization constitute two sides of the same privatization coin. Those who express caution and doubt as well as those who are sanguine about its benefits based on practical results achieved thus far have all enriched our understanding of privatization both as a concept as well as a practical proposition.

What is important is the evaluation of privatization in terms of its contribution to economic efficiency and growth as well as to the wider functioning of society. Studies have shown (Graham Ward, 1993) that production costs for private businesses are between 20 to 40 per cent lower than those in the public sector. It is obvious that the market-induced pressure to keep down costs and increase profits is a more effective discipline for the private business than political directives to economize in the public sector. Barry Gibson of the British Airports Authority (a privatized company) has noted that one of the effects of privatization has been the shaking up of corporate culture thereby turning erstwhile nonchalant public servants with little incentive to serve customers into efficient, effective, profit-propelled and risk-taking managers. He, however, sees little point in debating the "boundary" separating the public from the private sectors once those in business, whether public or private, realize their duty to be one of achieving greater efficiency and effectiveness as well as productivity and concentrating on customers as they continue to improve their products and services.⁴⁶ In a similar vein, Mouhamadou Deme (1997) calls for a "complementarity" between the public and private sectors and advocates an energetic working relationship comprising a "rehabilitated" public sector, a dynamic private sector as well as a free and democratic civil society.

References

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