Privatization Conceptual Understanding, Theoretical...

Chapter II

Privatization Conceptual Understanding,

Theoretical Foundation & Empirical Perspective

DETAILED CONTENTS

Contents Page No.

Introduction 30-31

PART–A: Privatization: Conceptual Understanding 31-37

Concepts & Definitions of Privatization 31-34

Objectives of Privatization 35-37

PART–B: Theoretical Framework of Privatization &

Evolution of Privatization Phenomenon 37-57

Aristotle’s Theories: Physiocracy, Classic School 38-42

Government’s Role in Management of Privatization 42-43

Marx’s Theories: Socialism, Neoclassicism, Scully Studies, Structuralism, Dead Weight Loss Theory, Cross-section Studies

44-52

Micro and Macro Economic Impact of Privatization 53-57

PART–C: Empirical Perspective of Privatization 58-85

Privatization Trends in Developed Countries: Privatization in England, France, Germany, Italy, USA, Canada, Japan, East -Europe, Poland, Russia, East-Germany, Czech & Slovakia

58-69

Privatization Trends in Developing Countries: Scope of

Privatization Since 1990-Latin America, Privatization in

Mexico, Brazil, Europe, Central Asia, East Asia &

Pacific, Privatization in China, Middle East & North

Africa, South Asia, Privatization in India, Privatization in

the 1990s in India, Privatization in Sub-Saharan Africa

69-81

Global Scenario of Privatization 81-82

Privatization Proceeds by Sector & Region During 1990-1999

82-85

Summary 86

Privatization of Industries in Iran: A Case Study of Tehran City

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PRIVATIZATION: CONCEPTUAL UNDERSTANDING,

THEORETICAL FOUNDATION & EMPIRICAL PERSPECTIVE

Introduction The economic activities of the public sector were developed in 1940s for

crossing the bottlenecks resulted from the economic crisis of the years 1929-34

and expanded more in 1950s and 1960s for solving the problems occurred because

of the World War II. On the basis of theoretical assumptions, the role of public

sector in providing public goods, foreign consequences, establishing

infrastructure, redistribution of revenues, materializing social justice and removing

poverty and depravation was considered important. Therefore, the intervention of

the government in economic affairs with respect to the flaws observed in the

market system was justified for achieving the optimal conditions. Economic

intervention of government brought different consequences in various countries. In

some countries, especially, in developed ones, a reasonable rate of growth was

observed and the grounds necessary for activation of private capital were prepared.

Besides, in some of the developing countries, especially the oil producing ones, a

significant economic growth was seen, but in many countries no ground necessary

for establishing and employing private capitals was provided. Gradually, after

three decades of dominance of the economy relied on governmental protection and

preparing the essential grounds for developing the private sector, little by little, the

operations of the private sectors became more efficient than the public sectors.

The problems resulted from the intervention of the government in economy and

failure of the designed plans caused the adjustment of economic policies and

theories in 1970s and the early years of 1980s. Many of the countries thought of

reducing the extent of intervention of the government in economic operations.

Privatization: Conceptual Understanding, Theoretical Foundation & Empirical Perspective

31

Thus, privatization of the state-owned enterprises was considered as a way

for rationalizing the economic structure of the society, reducing the pressure

applied by these companies on the government budget, promoting the efficiency of

companies, expanding the ownership throughout the country, equipping the

financial resources of the private sector, using the existing resources efficiently

and creating motivation for facilitating the activity of private sector.

The objective of this chapter is to provide a conceptual, theoretical and

empirical analysis of the research issue. Accordingly, the chapter is divided into

three parts: Part A provides a clear understanding of privatization conceptually.

Part B deals with the theoretical understanding of privatization which facilitates a

more realistic analysis of privatization issue in Iran and part C supports the

analysis with empirical evidences across the globe which in turn enables a critical

policy analysis.

PART-A

Privatization: A Conceptual Understanding

Concepts and Definitions of Privatization Bessley and Little Child1 define privatization as a tool for improving the

economic activities through strengthening the market provided at least 50 percent

of the state shares that are sold to the private sector. Kay and Thompson2, believe

privatization includes methods which change the nature of relationships between

public and private sectors, such as denationalization, selling the state properties,

deregulation and contracting products and services. In theory, privatization helps

1. Bessley, Michael and Little Child, Stephen (1983), “Privatization: Principles, Problems and Priorities”, Bank Review, Sofia, Bu, Hemus Foreign Trade Organization, July 1983, p. 1. 2. Kay, J. and Thompson, D.J.(1986) “Privatization: A Policy in Search of Rationale” The Economic Journal, No. 96, London: Blackwell Publishers Ltd., March 1986, p. 18.


32

to establish a free market and foster competition, which capitalists argue will give

the public greater choice over products at a competitive price.3

“Privatization is a series of measures within the framework of which the

control, ownership or management in various levels and fields are taken from the

public sector and are transferred to the private sector. Thus, finally, the scope of

the direct influence of government on economic operations is limited and the

decentralization of activities on private sector increases.”4

UNDP deems privatization as a movement towards market economy

through the following steps.5

A. Economic Policy-making: Reinforcing the organizational framework for a

market economy (ownership rights, legal instruments, financial institutions,

etc.)

B. Developing Private Sector.

C. Privatization of Public Economic Institutions.

“Privatization can be considered as an attempt for reinforcing role of the

market against the decisions made by the government as the economic

administrator.”6

“Privatization is a process through which the government examines the

possibility to transfer the duties and installations to the private sector in any level,

if it deems advisable and it takes measures for such transfers.”7

3. Iran Daily Newspaper (2005) “Moving along Privatization, Tehran, Islamic Republic of Iran, No. 2264, http://www.iran-daily.com/2005/2264/html/focus.htm#. 4. National Industries Organization of Iran (NIO), 1993, “Methods of Privatization on the Privatization of Public Enterprises” Tehran, Islamic Republic of Iran, Vol. 9, p. 26. 5. Research Group of United Nation Organization (1995), “Practical Aspects of Privatization” Translated by Reza Pakdaman, Publisher: Majd Scientific and Cultural Assembly, First Ed, Tehran, Islamic Republic of Iran, April-May 1995. 6. Behkish, Mohammad Mahdi, (2001) “Iranian Economy in the Process of Globalization”, Ney Publication House, Tehran, Iran, p. 110. 7. Saghir, Jamal, (1993) “Development of Public Sector and Privatization” the report presented to the seminar for privatisation analysis, School of Economic Affairs & The Institute of Economic Development, May 1993.


33

“Privatization in its apparent concept is a process through which the tasks

and installations of the public sector, in any level is transferred to the private

sector, but in reality, privatization is the cultural dissemination in all levels of the

society so that the Legislature, Judiciary and Executive powers as well as all the

people of a country believe that the people’s affairs should be assigned to the

people themselves.” 8

“Privatization is expressed as a symbol of promotion of the thought of

capitalism and trust to market efficiency compared with lack of confidence about

the efficiency of the public sector.” 9

“Privatization is a comprehensive term that refers to the transfer of the

operational or financial control of the institutions owned by the government to the

private sector. In other words, privatization removes any kind of control and

intervention in establishing the supply and demand mechanism.”10

“Probably Market-orientation is the most comprehensive definition that can

be expressed for privatization.”11

In October 1993, a co-ordination meeting was held by the Asian

Productivity Organization (APO) about privatization for the member countries in

Jakarta, Indonesia. In this meeting, concepts such as restoring the nationalized

enterprises to the private sector (denationalization), governing the conditions

required for full competition in governmental units (deregulation) and

liberalization or full transfer of legal control on enterprises were referred for

defining privatization. But finally, the members approved the definition of

8. Rahimi Boroujerdi, Alireza, (1994) “Policies of Macroeconomics and Structural Terminology”, Institute of Business Studies and Researches”, Tehran, Iran, p. 113. 9. Dieter Bos. (1991) “Privatization: A Theoretical Treatment”, Clarendon Press, Oxford, 1991, p. 5. 10. “What is Privatization & How it will be Successful (1993)” Parliament & Research Journal, the First Year, the Second Issue, Tehran, Iran, May and June 1993. 11. Hashemi, Abolghassem, (1993) “Privatization, Making Market – Oriented and Mechanism of Prices in Iran”. Tadbir Journal, the Fourth Year, Tehran, Iran, Dec. 1993.


34

privatization presented by the World Bank, i.e. “Transferring ownership or control

of the state-owned enterprises from government to private sector.”12

Velja Nowski considered privatization as “The accomplishment of

economic operations by the private sector or transfer of ownership of assets to

private sector.”13

“Privatization is a process through which the government, in any level,

examines the possibility of transferring its own duties, facilities and installations

from the public sector to the private one; if it deems advisable and suitable, it takes

the necessary measures for such transfer.”14

Starr15 gives the meaning of privatization as an idea, he says “when we

speak of public opinion, public health or the public interest, we mean the opinion,

health, or interest of the whole of the people as opposed to that of apart, whether a

class or an individual. Public, in this sense often means Common, not necessarily

governmental.”

Summarizing the above definitions, it can be said that privatization is a

process through which the market mechanism is revitalized, the economic

operations of government is challenged, therefore, the government decides to

restrict the scope of its activities and entrust the “ownership or management” of

some of its own economic units to the market mechanism.

12. National Industries Organization of Iran, (1994), “The Journal for Assignment of Government Movements”, the Second Year, No. 9, Tehran, Iran, Feb. 1994. 13. Motevasseli, Mahamood, (1994), “Privatization: A Desirable Combination between State & Market”, the First Ed., Tehran, Islamic Republic of Iran: Institute of Commercial Studies, P. 196. 14. Gharebaghian, Morteza, (1993), “Privatization as a Tool for Economic Adjustment”, Parliament & Research Journal, the First Year, the Second Issue, Tehran, Iran, May and June 1993. 15. Starr, Paul (1988), “The Meaning of Privatization” Yale Law and Policy Reviews, 6:6-41, in Alfred Kahn and Shelia Kamerman eds., Privatization and the Welfare of the State (Princeton University Press, 1989), pp. 1-2.


35

Objectives of Privatization Countries depending upon their own economic structures pursue different

goals by privatization. Their goals are determined with respect to the policies,

economic plans and general objectives. Therefore, the instruments used for

privatization are determined with regard to the goals. For example, in East

European countries, privatization is implemented with the objective of changing

the economic system from a centralized system to a liberal economy. In these

countries, privatization needs an extensive transformation that includes all the

areas such as legal and political ones. The emergence of institutions and

organizations as well as the revision in principles and fundamentals of foreign

trade are among the necessary reforms in this kind of economy.

In industrial countries, which have been developed economically, the

process of privatization pursues goals such as increasing the efficiency, acquiring

revenue and reducing the financial load of government.

In developing countries, privatization is a reaction to the expansion of the

scope of economic operations of government and taking measures for accelerating

the process of economic development. These countries consider privatization an

appropriate opportunity for activation of economy and allowing the market forces

to have a share in economic decision-making. However, the fact that no

reformation or unique privatization plan can be presented for these countries

because it may be claimed, without any exaggeration, that there are as various

economic statuses as the number of transitions in terms of historical, political and

geographical conditions of every country. Another point is that among these

countries, there are many different economic systems which are considered within

the extensive range of liberal economy to centralized economy. Considering the

problems of developing countries, the privatization pursues more extensive

objectives and should be responsive to more problems and bottlenecks. In these

countries, increasing the allocation of resources, optimal application of financial


36

resources of companies, reducing the intervention of government in economy,

assigning the allocation of resources to market mechanism, campaign against

wandering liquidity in the economy, creating competitive and safe circumstances

for long-term investment, access to the modern techniques of management, access

to foreign capital and technology and finally, the goals of distributing wealth and

income are among the most important objectives which are pursued in

privatization.

Based on the aforementioned cases, there are a series of general objectives

that are stated in privatization plans which are referred in the following two

categories:

A. The Primary Objectives of Privatization

Reducing the scope of direct operation of government in economy.

Increasing the capacity of job creation and the efficiency of state-owned

enterprises.

Developing the internal capital markets and access to foreign capital,

technology and financial resources.

Obtaining revenue for the government in order to cover the budget

costs, releasing the budget from the financial load of the companies

which bring loss and reducing the amount of domestic and foreign

liabilities of the public sector.

B. The Secondary Objectives of Privatizations

Increasing the participation of people in economic affairs and

appropriate decision-making as well as the distribution of incomes

through distributing shares among people.

Developing job creation and creativity to prepare the grounds for

promoting the production capacity of the country’s economy.


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Reducing the budget costs of the government concerning the payment of

subsidies as well as reducing the capital costs for the under coverage

units.

Allocating more optimally the resources of the country based on the

market function.

Improving the trading conditions through developing the enterprises

owned by private sector and finally, promoting know-how in the

national level.

Supplying the capital resources for economy and establishing balance

between saving and investment.

Thus, the final message of the objectives of privatization is competent and

efficient use of resources through assigning the allocation of resources to market

mechanism, to achieve the efficiency in competition and decrease financial load of

government.

PART-B

Theoretical Framework of Privatization &

Evolution of Privatization Phenomenon

Privatization is not a new word either for the world economy or for the

Iranian Economy. Theories of free market economy have been central section of

discussion in the literature of free market economy. In this part, we recapitulate

the school of thought, the ideas and their implications for free market economy,

which provide a theoretical base for privatization.

The important and perpetual question has been the optimal combination

between public sector services and the operations of private enterprises. The

economists deem the maximum efficiency and welfare as two indices for the most


38

ideal combination of government and market, although economic judgments and

ideals have not always governed the economic and political fate of societies.

Different economic-political powers have always pursued an ideal

combination of government and market, at least from theoretical point of view.

The theorists’ efforts in different periods concentrated on interpreting their

own methods as the best choice for achieving the social, economic and political

objectives of the communities. Different attempts have mainly led to inclination

towards one of the two poles including “Market” or “Government”.16

Studying economic theories and attitudes in different stages of history

indicates the delimitation between role of the government and private sector in

management of the community affairs administration. This topic has never been

clearly expressed and in any age with consideration to the conditions and

necessities of time mainly one of these two attitudes, i.e. the focus on public sector

or private sector (market) has governed the procedure of administering the

community affairs. Through deep study of the economic history of countries, it

seems that the ideal and optimal combination of government and market in

management of the community affairs administration has never been realized.17

Aristotle’s Theory According to many of the social theorists, Aristotle is the greatest thinker of

the ancient world. Aristotle considered the middle-class government as the ideal

government. According to his attitude, private ownership is desirable and he

criticized collective ownership. He believed that profitability may be a false

objective, but if the private ownership and the governing laws exist, the life would

16. Motevasseli, Mahmood, (1994), “Privatization: A Desirable Combination between State & Market”, the First Ed., Tehran, Islamic Republic of Iran: Institution of Commercial Studies, p. 188. 17. Heydari, Gholamreza, (2001), “Designing Privatization Model in Iran”, Iran Khodro Message Publications, Tehran, Iran, p. 3.


39

be full of more tranquillity and the people will have less time for challenging each

other. Based on Aristotle’s opinion, the optimal situation is when the wealth and

assets are private and the ground is prepared for all people to benefit from them.18

Physiocracy In the 18th century, the Physiocracy was founded in France after the

downfall of the economic system of Mercantilism in Europe. Upon the emergence

of this school, the fundamentals of economic thought were changed.

Physiocracy means governing on the basis of natural law. According to this

principle, the natural law constitutes the basis for the scientific thought.

Physiocrats express that natural laws are the ideal assumed laws for the welfare

and prosperity of the human society. Hence, the free man who follows his personal

interests naturally causes that a natural system resulted from the public freedom

and competition is created in the society in such a way that encourages different

individuals to respect the situation of each other.

The physiocrats’ reasoning has led to Individualism. They believed in

economic liberalism and emphasized that the society should be fully free so that

any individual can pursue his objectives on the basis of his interests.

In spite of the fact that the “physiocrats were interested in reducing the

intervention of the government in individuals’ economic affairs as much as

possible and in all their works, the legislators eliminated useless laws, but it

should not be concluded that physiocrats were against the existence of

government.”

18. Tafazzoli, Freydoon, (1993), “The History of Economic Opinions”, Nay Publications, Tehran, Iran, pp. 25-29.


40

The point which is confirmed by the physiocrats is the fact that the

government does not violate its natural duties and coins the complied laws. The

physiocrats believe that the preservation of natural system entrusts the following

duties to governments:

1. Campaigning against all the elements which transgress the principles of private

ownership.

2. Educating and training the individuals are among the most important duties of

the government because it makes the individuals become familiar with the

secrets of natural system and it prevents from the possibility of changing the

dictatorship of the natural system into personal despotism.

3. Implementing the public-interest projects and building roads, digging

subterranean canals for using the resources of the country.

Therefore, duties of the government are limited to the above mentioned

functions and except these points, the ideal government of physiocrats should

not do anything else.19

The Stand of Government and Market in Classic School (Adam Smith) In coincidence with the emergence of the Industrial Revolution in the

second half of the 18th century, the idea of inclination towards market and

minimum intervention of the government was reinforced and Adam Smith

established the School of Economic Freedom in 1776, when he published his

“Wealth of Nations”.20 Adam Smith summarizes the duties of government in

defence, the establishment of justice and doing some public services.21

19. Ibid, pp. 68-79. 20. Motevasseli, Mahmood, (1994), “Privatization: A Desirable Combination between State and Market”, the First Edition, Tehran, Islamic Republic of Iran: Institute of Commercial Studies, p. 4. 21. Mohandes, Abootaleb & Taghavi, Mehdi, (1992), “Public Finance”, Publishing House of Farvardin Library, Tehran, Iran, p. 22.


41

Smith was inspired by the philosophy of physiocrats especially, the

philosophy of Individualism introduced by Dr. Kane in the domain of natural

world and the economic activities. According to Smith, the economy should be

free so that it can supply the public welfare. In that situation, the main stimulus of

economic operations of any individual is his personal interest. Based on this

motivation, any individual in a society tries to use his capital as optimal as

possible without being aware that his action is useful for the society either.

Therefore, in a free economy, pursuing personal interests is in compliance with the

public interest, the result of which is the welfare of the society.22

The system suggested by Adam Smith is based on Natural Liberty. When

all the optional and incomplete systems are put aside, the simple system of natural

freedom is emerged based on its regulations. In a free and unrestricted market

(unregulated), the members establish a self-control system due to the competition

among them for their economic interests and meeting the consumers’ demands in

which no individual can misuse the others’ interest for a long period. Only in such

a system, the balance between personal interest and the competitive productive

market provides economic welfare for all people of the society, even the

individuals who have not been active in the competitive market.23

This is a simple axiom that according to which and with regard to the

principles of absolute Individualism, a special social system is established in the

society through an invisible hand and concerning these points, Smith States:

“…necessarily, anyone tries to maximize his income as much as possible.

In this process, he and other people do not have intention to increase the interests

of the society and are not aware that to what extent the society benefits from their

22. Tafazzoli, Freydoon, (1993). “The History of Economic Opinions”, Ney Publications, Tehran, Iran, p. 86. 23. Motevasseli, Mahmood, (1994), “Privatization: A Desirable Combination between State & Market”, 1st Ed., Tehran, the Islamic Republic of Iran, Institute of Commercial Studies, p. 21.


42

activities. People of the society are directed by an invisible hand and their main

intention is not supplying the community’s interests. We should pay attention to

the fact that any individual who pursues his private benefits causes no loss to the

social interests because in this process, he often increases the interests of the

community much more effective than when he is going to do so intentionally.” 24 David Ricardo & his Laissez-fair Policy: According to which, there shall

not be any government interference and the economy operates automatically

through perfect competition. He is also in favour of free-trade and market

mechanism to ensure optimum utilization of resources.

John Stuart Mill: Assigned a minimum role to the state in economic affairs.

John Bob Say & his Law of Market: Every supply creates its own demand.

Government’s Role in Management of Privatization

A. The Interpretation of Warhan Warhan’s interpretation of the basic principles of Smith’s theory is very

optimistic. He says from Smith’s point of view, “…social obligation is as

important as personal interest for a society.” Smith’s book entitled “Wealth of

Nations” expresses the task of a stable political economy is not only supplying the

welfare for the community, but also providing the conditions and grounds

necessary for economic liberation and full guarantee of the individual rights within

the framework of Justice.25

24. Heydari, Gholamreza, (2001), “Designing Privatization Model in Iran”, Iran Khodro Message Publications, Tehran, Iran, p. 8. 25. Motawasseli, Mohmoud, (1994), “Privatization: A Desirable Combination between State & Market”, 1st Ed., Tehran, the Islamic Republic of Iran, Institute of Commercial Studies, p. 28-29.


43

A. The Stand of Government and Market in Historical School

(Freidreich List)

Pursuant to the inefficiency of the economics which Adam Smith claimed

its universality and with consideration to the situation of Germany in the 19th

century, Freidreich List established his historical school through publishing his

book entitled “National System of Political Economy” in 1840-1844, for

administering his country as better as possible.26

The main discussion raised by Freidreich List is the development in a

country which is underdeveloped from the technical and technological points of

view and the fact that private sector is not able to compete with foreign products

within the country and abroad.27

According to Freidreich List, the on time and appropriate intervention of

government is the certain prerequisite of successful development. On his opinion,

the government can realize two important factors of development through its

intervention. Firstly, he propounded the measures taken by the government for

adjusting the internal policy which included extensive legal and administrative

reformations as well as the measures taken for developing infrastructural facilities.

Secondly, he thought that more protective measures by the government for

confronting the harmful effects of pioneer economy is necessary, but he deemed

the role of nation in economic development is also important.28

Freidreich List, enjoying this perception, considered the conscious and

planned movement of the government, private sector and other walks of people a

national task for development not only in a short period but also during several

generations.

26. Heydari, Gholamreza, (2001), “Designing Privatization Model in Iran”, Iran Khodro Message Publications, Tehran, Iran, p. 18. 27. Razzaghi, Ebrahim, (1997), “A Critical Appreciation to Privatization of Iran” Resa Institute of Cultural Services Publications, Tehran, Iran, p. 21. 28. Ibid, p. 25.


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Marx’s Socialism Principally, Marx is not the founder of the economic theory of Socialism

but he is a critic of Capitalism since its emergence until the stage of its fall and

emergence of Socialism.29 According to Marx, Capitalism has one economic task

which is industrialization of the society. This system carries out this function due

to its historical evolution, but gradually it creates class conflicts which have led to

labourers’ revolution. The Capitalism is eradicated and replaced by Socialism. But

in reality Marx’s theory did not sustain for long, rather, the Socialism is

eradicated. Perestroika and Glannost in USSR in early 1980s have proved the way

for disintegration of former USSR leading to the emergence of Federal Republic

Russia which believes in market-mechanism rather than Socialism.

Neoclassicism

In 1870, William Stanley Jevons used the principle of “Utility” in his

economic analysis and published his book entitled “Political-Economic Theory” in

1871. His objective of publishing this book was revising the economic principles

of Classicism by using the concept of Marginal Utility (MU) and the related

mathematics.30

At the same time, another economist named Carl Manger in Austria

surveyed economics on the same basis and published the book entitled “Principles

of Economics” for which he is well-known as the initiator of Austrian School.

The first generation of Austrian School who were scientists such as Boehm

Bowerk and Wiser like Carl Manger, followed the Aristotle’s attitude until an

29. Tafazzoli, Freydoon, (1993). “The History of Economic Opinions”, Ney Publications, Tehran, the Islamic Republic of Iran, p. 157. 30. Heydari, Gholamreza, (2001), “Designing Privatization Model in Iran”, Publications of Iran Khodro Message, Tehran, Iran, pp. 23-24.


45

intellectual renaissance occurred in this school and outstanding figures such as

Schumpeter, Misses, Schonfeldilly and Rosenstein-Rosen and others emerged.31

According to Austrian School of thought, the primary conditions and

principles of market which were presented by Classicism are acceptable. Market

and its proper and unbounded process were severely emphasized and the prices

and economic calculations were considered as the basis of efficiency. It is

interesting that the intervention of government is considered not only permitted

but also obligatory until the prerequisite conditions are provided for competition.32

At last, in 1874, the French economist named Leon Walrus, in Switzerland

introduced the scientific ideas of Jevons and Figer to the economic circles of that

country. Walrus is the first economist who has tried to demonstrate how the

society is in general equilibrium based on the special assumptions through using

the mathematical equations. These three scientists are the founders of a school that

is called Neoclassicism in the history of economic theories.33

Alfred Marshal is also one of the outstanding representatives of neoclassical

economists. He presented his theory through publishing his book entitled

“Principles of Economics” in 1890. He considered free-market system as an

accurate tool that could be a means for effective allocation of resources; he also

deemed this tool to be improved gradually.34

Scully Studies

On the basis of the studies done by Scully, about 115 countries during

1960-80 in the world that enjoyed one of the basic characteristics including

political openness, dominance of individual rights and market-dependent economy

31. Motevasseli, Mahmood, (1994), “Privatization: A Desirable Combination between State and Market”, 1st Ed., Tehran, the Islamic Republic of Iran, Institute of Commercial Studies, p. 40. 32. Ibid, p. 25. 33. Heydari, Gholamreza, (2001), “Designing Privatization Model in Iran”, Publications of Iran Khodro Message, Tehran, Iran, p. 24. 34. Razzaghi, Ebrahim, (1997), “A Critical Appreciation to Privatization of Iran” Resa Institute of Cultural Services Publications, Tehran, Iran, p. 26.


46

or all these three, the rate of per capita increase is more than the ones with

contradictory characteristics.

As reflected in the following table, the rate of per capita enhance in

countries that have had one of the characteristics including political freedom,

economic liberation and the dominance of the individual rights, or all these three,

the rate of per capita increase has been two or three folds more than the same rate

in the compared group of countries.

Table-2.1

The mean rate of increase in per capita from gross national product

of the countries on the basis of basic characteristics

Basic characteristics

Rate of per capita

increase (in

percent)

Basic characteristics

Rate of per capita increase

(in percent)

Difference in rate

increase (in

percent) Political openness(liberation)

2.53 Political closeness 1.41 1.12

Dominance of individual rights

2.75 Dominance of government rights

1.21 1.52

Free market 2.76 Normative economy

1.1 1.66

Political liberation, dominance of individual rights and free market

2.73

Political closeness, dominance of government rights and normative economy

0.91

1.82

Source: Heydari, Gholamreza, (2001), “Designing Privatization Model in Iran”, Iran Khodro Message Publications, Tehran, the Islamic Republic of Iran, p. 35.

The Influence of the Ratio of “Capital to Work” on Production Increase Scully has also devised a standard method for relative efficiency the range

of which is 0-1. He found that the economies which are open (liberal) politically


47

and rights of the individuals are preferred to the government’s rights had a mean

efficiency of 74%-77%. On the other side, there are economies which are closed

politically, the rights of government dominate the individual rights or there are

limitations and impediments for private ownership and market allocation of

resources, the mean efficiency was 34%-36%. In other words, such economies

can produce twice of the present rate with the same resources and facilities if they

increase the political freedom and respect the individual rights.35

Structuralism and Plans for Structural Adjustment

The emergence of structuralism was a natural reaction to the theories and

patterns dominated the west economy and imbalance of these theories in solving

the economic problems of the Third World Countries. After the World War II, the

international organizations began extensive attempts for removing the obstacles

and initiation of economic movement in underdeveloped countries.36

Structuralism is basically an approach and method of research, which

criticizes the assumptions of Empiricism and Positivism. The basic characteristics

of Structuralism are that this school considers the target for research a system, a

system which examines the mutual relationship among the components of a

collection and not the components individually. In a more exact meaning,

Structuralism includes theories that consider a collection of economic and social

structures as the cause of the socio-economic phenomena. In other words,

Structuralisms attempt to justify and interpret the social phenomena with respect

to the structure and method of production and in relation to them.37

35. Heydari, Gholamreza, (2001), “Designing Privatization Model in Iran”, Iran Khodro Message Publications, pp. 34-35. 36. Motevasseli, Mahmood, (1994), “Privatization: A Desirable Combination between State & Market”, 1st Ed., Tehran, the Islamic Republic of Iran, Institute of Commercial Studies, p. 121. 37. Ibid, p. 122.


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The Structural Adjustment Plan can be divided into 4 sections of

Stabilization, Liberalization, Deregulation and Privatization. In other words, the

above mentioned policies are the same economic reforms which are considered as

the adjustment and stabilization of some part of the economic reform. But

economic reform implies the extensive basic changes, especially the increase in

flexibility or development of the capacity of economy to respond the different

questions. For example, hardening the conditions for increase in supplying

national currency is one of the components of establishing plans, but when the

government considers the central bank as an independent organ and allows it not

to supply the finance for removing deficit of inflationary budget. This measure is

another reform in economy which includes deregulation, decrease in size of the

government through privatization of numerous state-owned companies, foreign

currency reforms and full revision of the tax system.38

The Outline of the Policy of Structural Adjustment The latest dimension to privatization started with the policy of Structural

Adjustment, which was recommended to the countries especially under-transient

ones by the International Monetary Fund (IMF) and World Bank which includes

the following:

1) Adjusting the Government Budget: Through decreasing expenses of

government, transfer of state-owned enterprises to the private sector, reduction

or elimination of subsidies, clarification of government expenses the result of

which is facilitating the decision making about the government expenses,

increasing tax incomes through expanding tax base, financial liberalization,

etc. 38. Rahimi Boroujerdi, Alireza, (1994), “Policies of Macroeconomics and Structural Terminology” Institute of Business Studies and Research, Tehran, the Islamic Republic of Iran, p. 4.


49

2) Adjusting the Balance of Payments: Through reducing the value of the

national currency which causes the encouragement of export and limitation of

imports, encouraging export subsequently liberalization of import, correcting

the internal price in such ways that they display the conditions of market,

making the relative prices reasonable, using the foreign and international

resources and savings, eliminating the quantitative and non-tariff restrictions

and using the tariff restrictions instead of the quantitative and non-tariff

restrictions, reducing the number and level of tariff rates and making them

reasonable and trade liberalization.

3) Monetary Liberalization: Through applying indirect monetary controls and

elimination of direct monetary controls.

4) Privatization: As a process that reduces involvement of the state or the

public sector in the nation’s economic activities.

5) Deregulation: Deregulation of the domestic market and liberalization of

economic operations and allowing market-mechanism to establish balance

between supply and demand as well as price determination.39

39. Ibid, pp. 4-5.


50

Similarly, the “Dead Weight Loss Theory”40 of monopoly strongly argues

in favour of privatization, as the following illustration shows:

Illustration-2.1

Dead Weight Loss under Monopoly

The “Dead Weight Loss” under monopoly is shown in the above

illustration. Output is represented by horizontal axis OX and price is shown on the

vertical axis OY. QM and QC represent the outputs of monopoly and competitive

market respectively. PM and PC represent the price of monopoly and competitive

markets. Similarly, MR and MC show marginal revenue and marginal cost

whereby AR indicates average revenue. The darkened part ABC in the figure

shows the “Dead Weight Loss” under monopoly situation. QM is less than QC

and PM is greater than PC. The illustration shows: PC=AR at point C, where

MC=MR at point B. It finally concludes the P=MC in the monopoly situation.

40. Baumolin, W.J., (1982), In his contestability theory argues that the production efficiency is more under competition that under monopoly. In particular, monopoly leads to “Dead Weight Loss” to the society.

QM = Monopoly Output

QC = Competitive Output

PM = Monopoly Price

PC = Competitive Price

ABC = Dead Weight Loss

QM QC X O

Y

A

C

B MR

AR

MCC

PM

PC

Output

Pric

e


51

Cross-section Studies Studies for a wide range of countries show that privatization improves

enterprise performance. For firms in competitive markets, profitability usually

increases, often substantially, as do efficiency, output and investment. These

outcomes are seen in cross-section studies covering both developed and

developing economies, as well as in case studies of developing and transition

economies.

(Megginson and Netter),41 survey cross-section studies that evaluate the

impact of privatization on firm performance. The most comprehensive studies use

a similar methodology to compare performance measures pre & post privatization

(over at least three-year periods) for large numbers of companies in developed and

developing countries, privatized mainly through public share offerings.

(Megginson, Nash and Van Randeborgh)42 & (D”Souza, Nash and

Megginson).43 These studies find similar results, weighted averages of the mean

values show that profitability, defined as net income divided by sales, increases

from an average of 8.6 percent before privatization to 12.6 percent afterward.

Efficiency rises from an average of 96.9 percent in the year of privatization to

123.3 percent in the period after privatization. Between 70 and 86 percent of firms

see increases in output per worker. Most firms achieve economically and

statistically significant increases in output after privatization and significant

decreases in leverage. Capital investment spending increases slightly, whereas

employment changes are ambiguous. Accounting for most of the performance

41. Megginson, William L. and Jeffrey M. Netter, (2001) “From State to Market: A Survey of Empirical Studies on Privatization”, Journal of Economic Literature, 39(2): pp. 321-389. 42. Megginson, William, Robert Nasha and Matthias Van Randenborgh (1994) “The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis”, Journal of Finance 49(2): pp. 403-452. 43. D”Souza, Juliet, Robert Nasha and William L. Megginson, (2000), “Determinants of Performance Improvement in Newly Privatized Firms: Does Restricting and Corporate Government Matter?” Working Paper, Oklahoma State University, Norman.


52

Improvements are changes in the incentive and management structure, along with

improved corporate governance.

Boubakri and Cosset44 analyze the performance of 79 newly privatized

firms in 21 developing economies between 1980 and 1992; their sample was well

diversified with wide geographical coverage, countries of different levels of

development and firms of different sizes and in different industries and market

structures. They find significant increases in profitability (124 percent higher on

average after privatization), operating efficiency (real sales per employee up to 25

percent on average and net income per employee up by 63 percent), capital

investment spending (up to 126 percent) and employment (up to 1.3 percent) and a

decline in leverage. The changes in profitability and efficiency were larger in

middle-income countries than in low-income countries.

One study that looks at the incidence and importance of selection bias finds

no evidence of it in a set of privatizations in Central Europe (Freedman and

others).45

Impact of Privatization The vast majority of economic studies praise privatization’s positive impact

at the level of the firm’s financial and operational performance, the efficiency of

resources employed and returns to shareholders (Micro-economic Impact), as well

as the broader fiscal, macro-economic and welfare impacts of privatization.

44. Boubakri, Narjess and Jean-Claude Cosset, (1998), “The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries”, Journal of Finance, 53(3): pp. 1081-1110. 45. Freedman, Roman, Cheryl Gray, Marek Hessel and Andrej Rapaczynski (1997), “Private Ownership and Corporate Performance: Some Lesson from Transition Economies”, Policy Research Working Paper, 1830, World Bank, Washington DC.


53

Impact of Privatization: Micro-economic The micro-economic studies show improved post-privatization performance

in both industrialized and developing countries and in most manufacturing,

commercial, industrial and service sectors. An Inter-American Development Bank

(IADB) review of privatization in six Latin American countries (Argentina,

Brazil, Chile, Colombia, Mexico and Peru) found an average increase in profits

(return on sales) of 29.8 percent in a large sample of privatized firms. Efficiency

gains as measured by output per worker or ratio of costs to sales, increased on an

average by 67 percent. Output increases averaged 34 percent regardless of the

indicator used. 46

Privatization is almost never introduced as a stand-alone reform. It is

usually part of a package of liberalizing policy changes that increase openness and

competition at the same time that private ownership is introduced. This makes it

hard to determine the extent to which ownership change in and of itself accounts

for the improvements seen. It may be considered that increased competitive

pressures are an equal or better explanation for the altered behaviour. Whatever

the underlying cause is, the fact remains that firm performance most often does

improve.47

Megginson and Netter48 estimate that these positive effects occur in from

two-thirds to three-quarters of privatization assessed, as remarkably high rate of

success.

46. Inter-American Development Bank (IADB), (2002), The Privatization Paradox, Latin American Economic Policies, 18, Second Quarter, p. 3. 47. Tandon, Pankaj (1995), Welfare Effects of Privatization: Some Evidence from Mexico, Boston University International Law Journal, 13, 2: pp. 329-349. 48. Megginson, William L., and Jeffrey M. Netter, (2001) “From State to Market: A Survey of Empirical Studies on Privatization”, Journal of Economic Literature 39, No.2: pp. 321-389.


54

Impact of Privatization: Macro-economic, Fiscal & Welfare Effects The macro-economic effects of privatization have been less studied than

other aspects. One of the few such studies, by (Davis and others)49 calculates

significant and positive benefits. Governments tended to be financially better off

after privatization than before. Gross proceeds from privatization were substantial,

amounting up to 2 percent of GDP in a sample of 18 countries and the fiscal

situation of governments that saved rather than spent privatization proceeds

improved over time. (Most of the countries covered in the study had an

International Monetary Fund Program in place, with limitations on the deficit that

may have influence this finding). Privatization produced other positive impacts on

government revenue. Not surprisingly, government transfers to state enterprises

declined substantially following privatization. The following figure shows this:

Illustration-2.2

Gross Budgetary Transfers and Subsidies to State Enterprises for Select Countries (Percent of GDP)

Excludes Petroleum Mexicans & includes some decentralized government agencies. Source: Davis and others (2000).

49. Jeffrey Davis, Rolando Ossowski, Thomas Richardson and Steven Barnett (2000), “Fiscal and Macro-economic Aspects of Privatization”, IMF Occasional Paper, No. 194, International Monetary Fund, Washington DC.


55

The study also finds out a positive correlation between privatization and

overall rates of growth. The authors argue that although privatization is not the

sole cause of subsequent increases in growth rates, it is a good proxy for the range

of structural reform measures that contribute to the overall result. Investors and

markets view privatization as an indicator of reform credibility, a less tangible but

important macro-economic effect.

Sheshinski and Lopez-Calva50 also find that privatization improves the

public sector’s financial health. Budget deficits decline during the reform period.

Low-income countries that are less aggressive privatized, have a large deficit on

average. In high and middle income countries, privatization reduces net transfers

to state enterprises and transfers become positive when the government starts

collecting taxes from privatized firms (another contributor to positive macro-

economic effects).

The European Bank for Reconstruction and Development (EBRD) detects

a strong correlation between the total amount of privatization and the rapidity and

strength of the return to growth.51

Campos et al.52 finds out that the effects of privatization of infrastructure

on regional GDP per capita are “… neutral at worst and most probably positive.”

Knight-John and Athukorala53 in the case of Sri Lanka’s use of privatization

proceeds, noted that after 1995 government began using privatization revenues to

retire debt rather than add to current consumption.

50. Sheshinski, Eytan and Luis Felipe Lopez-Calva (1998), “Privatization and Its Benefits: Theory and Evidence”, Consulting Assistance on Economic Reform, 2nd discussion, Paper No. 35, Harvard University, Centre for International Development, Cambridge, Mass. 51. European Bank for Reconstruction and Development (EBRD), (2004), Fifteen Years on…, European Bank for Reconstruction and Development, London. (http://www.ebrd.com/pubs/tr/04/15yearsinsert. pdf) 52. Campos, Javier, Antonio Estache, Noelia Martin and Lourdes Trujillo (2003), Macro-economic Effects of Private Sector Participation in Infrastructure in William Easterly and Luis Serven, Eds., The Limits of Stabilization: Infrastructure, Public Deficits and Growth in Latin America, World Bank, Washington, p. 165. 53. Knight-John, Malathy and PPA Wasantha Athukorala (2005), Rethinking Privatization in Sri Lanka: Distribution and Governance in John Nellis and Nancy Birdsall, Editors, Reality Check: The Distribution Impact to Privatization in Developing Countries, op. cit.


56

McKenzie and Mookherjee note that the government spending on health

and education in Mexico increased by 50 percent in the period of peak

privatization revenues; that similar social spending in Argentina also increased

following privatization (and the reduction of spending on debt servicing) and that

Bolivia earmarked a portion of privatization revenues to capitalize a national

pension fund and make special payments to all citizens over 65 years.54

A seminal study by Galal, A. and others estimates the welfare consequences

of privatization in 12 infrastructure enterprises in one developed and three middle-

income countries, looking at the effects on enterprise efficiency, subsequent

investment and consumer welfare. Employing a modified form of cost-benefit

analysis, the study examines the impact on all factors, compares performance pre

and post privatization and contrasts performance after privatization with a

hypothetical scenario of reformed state-ownership with new technology and more

rational procedures. The conclusion shows privatization substantially improved

economic welfare in 11 of the 12 cases, mainly due to a dramatic increase in

investment, improved productivity, more rational pricing policies and increased

competition and effective regulation. 55 The figure in the next page shows this:

54. McKenzie, David and Dilip Mookherjee (2005), Paradox and Perception: Evidence from Four Latin American Countries in John Nellis and Nancy Birdsall, Editors, Reality Check: The Distributional Impact of Privatization in Developing Countries, op.cit.p.72. 55. Galal, Ahmed, Leroy Jones, Pankaj Tandon and Ingo Vogelsang (1994) Welfare Consequences of Selling Public Enterprises: An Empirical Analysis, New York: Oxford University Press.


57

Illustration-2.3

Welfare Effects of Privatizing 12 State Enterprises

Note: Welfare gains are presented as a percentage of annual sales in the last year before privatization. Source: Galal and others (1994).

A number of other studies demonstrate that privatization has put substantial

resources in the hands of privatizing governments. They conclude that it provides

an opportunity for governments to put their fiscal houses in order and redirect

expenditure from non-productive subsidization to more socially beneficial uses.

Thus, briefly, the intervention of the governments in economy and the

consequent implications such as improper allocation of resources, monetary,

financial and managerial problems and the prevalence of various kinds of

economic favour and financial corruption during the recent decades have caused

the expansion of privatization in many countries including the developed and

underdeveloped ones.


58

PART-C

Empirical Perspective of Privatization

Empirical Perspective of Privatization reflects the global scenario of

privatization. Globalization, which believes in the efficiency of free market

mechanism, is sweeping across the world economies. This economic idea

considers globalization as an instrument of greater economic prosperity regardless

of their status, dimension and sharply divergent economic policy environment.

During the last two decades more than one hundred countries across every

continent have privatized some of their public enterprises.

A brief empirical analysis of privatization in developed and developing

countries provides a global scenario of privatization.

Privatization Trends in Developed Countries

Privatization in England

Privatization and sale of the state-owned enterprises in the United Kingdom

was commenced when Margaret Thatcher came into power in 1979. Many of the

important and great companies were sold to the private sector till 1998. During the

first round of administration of Thatcher as a prime minister, the annual incomes

resulted from selling state-owned enterprises were less than 500 million pounds.

But, after her re-election as the prime minister in 1983, the privatization

accelerated significantly. After the election held in 1987, the annual income of

privatization reached about 5 billion pounds per year.56 The privatization strategy

of Lady Thatcher’s Government pursued two general objectives:

56. Sameti, Morteza, (1992), “A Case Study on the Way Towards Reducing Economic Activities of Government”, Ministry of Economic Affairs and Finance, pp. 6-7.


59

1. Improving the Function of the Privatized Enterprises According to the advocates of privatization in England, the intervention of

government in controlling prices (especially by the Labour Party) and

prevention from firing surplus personnel as well as coining protective laws

impeded more profitability in increasing of competitive power of the state-

owned enterprises similar to the ones belonging to private sectors.

The results achieved after privatization were the same as what the British

government expected; since in most situations the private enterprises

succeeded in improving their economic and financial outcomes and had more

profitability.

2. Reducing the Role of Government in Economy Relying on this theory, the increase of the role played by the government in

the economy will have negative influences on economy. Since 1979, the

Thatcher’s government in coincidence with its privatization plans took the

necessary measures for implementing the methods of deregulation and

reducing regulations in order to meet the following aims:

To economize the Government Expenditures.

To reduce the taxes.

To return a part of the operations done by the public sector to the

market.

In execution of the first policy, i.e. reducing the expenditures, the government was

not so successful.

Since the government expected that the subsidies and government aids to

public sector decreased by privatization, but only the profitable enterprises were

sold and the non-competitive enterprises and the ones that were consumers of the

governmental aid remained for the government.


60

On the contrary, concerning taxes, the influence of privatization was

positive. For example, the income amounting to 2 billion pounds obtained from

selling the enterprises in the year 1984, prepared the ground for the government to

reduce the tax pressure significantly without being forced to increase budget

deficit. Concerning the procedure of privatization in England, the sale of these

enterprises is mainly in one of the following two methods:

A. Offering the enterprises in sale tender

B. Suggesting sale in a fixed price which was more used

Both the aforementioned procedures of sale have confronted with problems.

No reasonable price was achieved through sale in tender and the suggestion of

selling in fixed price had no customer for more than the issued shares which

caused a large discount for the primary purchasers in the market. The other matter

was the fact that the market price determination for the state-owned enterprises

before sale was very difficult.

The experience of England in other forms of selling assets is limited and

they have not been used significantly.57

Privatization in France

In the early years of 1980s when the socialist government led by Francoie

Mitterrand came to power in France, the nationalization of big private enterprises

developed extensively. But, through execution of this policy the efficiency of

nationalized enterprises reduced severely and the profitability of these enterprises

decreased.

The main factors of reducing the efficiency of these enterprises may be

considered capital flight from the country and employers’ distrust on the executive

policies of the government. Therefore, in the middle of the year 1986, the French

57. Ibid, pp. 7-9.


61

government designed a five-year plan for privatization of the state-owned and

nationalized enterprises. The plan included 35 companies in different sections of

banking, insurance companies, financial and industrial groups through

implementation of which a significant progress was seen in privatization.

Since October 1986, about 13 companies were sold which brought an

income about 55 billion francs. The country’s main TV channel was also

privatized. In France, the profit and economic performance has improved after

privatization.58

Privatization in Germany & Italy The French privatization programme was a successes effort, which

encouraged Germany and Italy for privatization. Both of them followed the French

model.

Privatization in USA, Canada and Japan

The Grace commission has recommended privatization in USA, besides the

Congressional Joint Economic Committee had held a series of hearing of

privatization of Federal Government. In Canada, privatization is also on the

move, steps have been taken to sell shares in the state-owned Airlines and in

Transportation sector. Furthermore in Japan, deregulatory steps were taken

(Liberalization of Economic Operations) to allow the business to make medium

and long-term loans in Euro market and to allow the Japanese companies to issue

bonds secured by collateral or otherwise.

58. Ibid, pp. 10-11.


62

Privatization in East-Europe 59

Privatization of tens of thousands of manufacturing firms in Eastern Europe

during the 1990s represented a gigantic experiment in corporate ownership and

performance.

The following table shows the percentage of privatization progress during

one decade since 1992-2002 in Eastern Europe.

59. Brown J. David, Earle John S. Telegdy Almos, (December 2004), “Does Privatization Raise Productivity?”, Evidence from comprehensive panel data on manufacturing firms in Hungary, Romania, Russia and Ukraine, Institute of Economics, Hungarian Academy of Sciences, Budapest, Discussion papers, MT-DP.2004/25, pp. 1-3, 17.


63

Table-2.2

Percentage of the Sample Privatized Firms, Total Foreign and Domestic

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Hungary

Private 43.0 68.3 79.5 86.8 91.2 94.2 94.7 94.7 95.7 95.7 96.1

Foreign 9.2 11.8 13.4 15.6 16.7 17.9 18.4 19.1 20.1 20.8 21.6

Domestic 33.8 56.5 66.1 71.2 74.5 76.3 76.3 75.6 75.6 74.9 74.5

Romania

Private 0.2 3.0 8.0 20.3 42.3 46.8 56.1 70.6 79.1 86.4 90.6

Foreign 0.0 0.1 0.2 0.2 0.4 1.1 2.8 4.2 5.2 5.6 5.9

Domestic 0.2 2.9 7.8 20.1 41.9 45.7 53.3 66.4 73.9 80.8 84.7

Russia

Private 0.0 49.6 84.9 82.7 75.4 75.4 73.9 70.6 69.5 70.2 73.9

Foreign 0.0 0.2 0.4 0.2 0.2 0.5 0.6 0.5 0.6 1.2 1.0

Domestic 0.0 49.4 84.5 82.5 75.2 74.9 73.3 70.1 68.9 69.0 72.9

Ukraine

Private 0.0 0.2 8.2 17.7 27.8 45.1 57.2 65.5 68.4 84.2 77.1

Foreign 0.0 0.0 0.1 0.1 0.2 0.6 0.8 0.9 1.0 1.4 0.8

Domestic 0.0 0.2 8.1 17.6 27.6 44.5 56.4 64.6 67.4 82.8 76.3

Note: “Private” refers to firms with more than 50% privately held shares. “Foreign” refers to

privatized firms with more than 50% foreign-owned shares. The residual category of privatized firms that are not majority foreign are labelled “Domestic”.

This study analyzed the impact of privatization on Multi-factor Productivity

(MFP) using long panel-data for nearly the universe of initially state-owned

manufacturing firms in four economies. Controlling of firm and industry year

fixed effects and employing a wide variety of measurement approaches. The study

estimates that majority of privatization raises MFP about 28% in Romania, 22% in

Hungary and 3% in Ukraine, with some variation across specifications, while in


64

Russia it lowers it about 4%. Privatization to foreign rather than domestic

investors has a larger impact (about 44%) and is much more consistent across

countries.

Privatization in Poland Poland was among the First East Block towards privatization, nine out of

every ten small-scale enterprises are now under private ownership in Poland. By

the mid 1992, 1249 SOEs were either liquidated or privatized, 286 joint stock or

limited liability companies were in the form of SOEs, 178 SOEs were

commercialized for mass privatization and 43 medium and large SOEs were

offered to the public foreign investors. In spite of such large-scale privatization

drive, many SOEs are still left to be decided.

Privatization in Russia60

Privatization in Russia unfolded rapidly following the collapse of the Soviet

Union in 1991 and its centrally planned economy. By the late 1992, about 150

million privatization certificates (vouchers) were distributed which gave the bearer

the right to buy small-scale business or shares at auctions, as well as to pay for

housing. To get the plan through parliament, the reformers agreed to allow

managers and workers to buy 51 percent of shares in business, rather than the

maximum 40 percent originally proposed. This often kept enterprises in the hands

of “insiders”, Soviet-era bosses with little idea of how to run private business,

creating a delay in the influx of new management and the shake-out of inefficient

companies. The voucher-based scheme ended in the mid 1994, marking the

beginning of the second stage of the privatization process, the loans-for-share

scheme.

60. Privatization Link.com and Financial Times.com (May 6, 2005)


65

By then, 75 percent of small-scale enterprises had been privatized, along with over

80 percent of the industrial workforce. Overall, 15000 companies were privatized

using vouchers, which accounted for 60 percent of industrial assets. Cash

privatizations or the loans for shares scheme resulted in a compromise where

businessmen would bail out the government with loans and in return would

receive shares in big enterprises as collateral. This was attractive as many crown

jewels of Russian Industry-oil companies, Metal smelters and Mines had been kept

back from voucher privatization. In 1997, the privatization process entered the

third stage, case-by-case privatization. In this phase, financial, insurance,

aluminium and coal companies were sold. By the end of the year 2001, 129811

enterprises had been sold, representing about 66 percent of the entire inventory of

enterprises at the beginning of privatization. About 700 enterprises and packets of

share were sold in 2001.

More recently, international attention has been drawn to the partial re-

nationalization of Yukos (the oil and gas giant) which had been privatized as part

of the 1990s program when majority stakes in lucrative mining and energy

enterprises were sold. This occurred when Yukos’ main subsidiary,

Yuganskneftegaz, was auctioned off to a little known company which was quickly

taken over by a state-owned firm, Rosneft. The future of Yukos itself is uncertain

because of the large tax liability Russian authorities has imposed on it in the form

of back taxes. The president of Russia recently promised an end to legal

challenges to the results of the privatization program, suggesting there would be

no repeat of the Yukos case, which had damaged both investment and economic

growth.

Privatization in East-Germany Privatization in East-Germany is considered as one of the special cases,

because its neighbour was a great and wealthy country like West-Germany. The


66

organization in charge of privatization was named “Treuhandanstall-THA” that

managed this process. Privatization was not done through selling enterprises in

auction, but it was implemented on the basis of the negotiations made between

THA and the bidders and three issues must be clarified exactly:

1. Property rights: Does the previous partner have any property claim?

2. Environment protection.

3. Liability of enterprise to the government.

The THA made agreements with the investors about the risk of property

and the issue related to environment, partnership and cooperation, even about the

previous liabilities of the company. Such transfer and privatization was carried out

through guaranteeing investment and job creation. Some punishments were

determined for the companies which did not respect the prescribed standards.

The objective of the abovementioned policy was preventing from applying

this thought that some of the investors who were often from West Germany would

purchase the companies merely for selling the lands and belongings related to

them, therefore, finally, East Germany was changed into the warehouse of the bid

and developing companies of West Germany.61

THA caused the transfer of one million jobs from the whole four million

ones into the private sector. The official indices of THA concerning the promised

rate of employment and investment in sale contracts as well as the rate of gross

income were remarkable.62

THA implemented the greatest part of privatization of about 13,000

companies which constituted the main body of the East-Germany’s industries

extraordinarily during a short term of four years vague.

61. Motevasseli, Mahmood, (1994), “Privatization: A Desirable Combination between State & Market”, the First Edition, Tehran, Iran, Institute of Commercial Studies, p. 241. 62. Vander Howon, Roelf & Siratski, Georg, (1998), “Lesson of Privatization with Emphasizing on Work Market in Developing & Transitional Countries” Translated by Dini, Ali, Program & Budgeting Organization Publications, pp. 266-267.


67

However, one of the mistakes of the authorities of this company was their

emphasis on keeping the contracts confidentially. But, the THA operation had

valuable aspects such as the power of decision-making and its stable situation

which are imitable. In many of the countries, the responsibility of privatizing the

state-owned enterprises is distributed among two or more ministries which slow

down the privatization process.

In spite of the interventions of politicians in its internal affairs, THA has

had a full control on the majority of its companies and has preferred wisely the

rapid privatization to obtaining financial interests.63

Privatization in Czech & Slovakia

Before 1989, the number of private enterprises in Czechoslovakia was

limited and the Constitution Law recognized only governmental and co-operative

ownership. The nationalization movements in the late 1940s and the early years of

1950s left little space for the operation of private enterprises.

The Velvet Revolution in November 1989, during which millions of

demonstrators chant slogans in Prague has led to the establishment of democratic

government and President Havel came into power in Castle Palace.

This revolution was the beginning of some expansive political and

economic changes. Dividing Czechoslovakia in tow independent governments of

the Republic of Czech and the Republic of Slovakia on January 1st, 1993 had a

critical influence on a majority of the population of the two parts and had a

negative effect on their economic growth. During 1990-1994, many private

enterprises in small and medium sizes developed successfully.64 63 Mesgarian Haghighi, Davood (1994), “End of Privatization in East-Germany”, Tadbir Journal, Vol. 44, Aug 1994, pp. 58-59. 64. Vender Howon, Roelf & Siratski, Georg, (1998), “Lesson of Privatization with Emphasizing on Work Market in Developing & Transitional Countries” translated by Dini, Ali, Program & Budgeting Organization Publications, pp. 291-292.


68

Among the reformations done in Czechoslovakia, there was a revision in

the law for state-owned enterprises in such a way that the ground was prepared for

privatizing the state-owned companies in the future by virtue of which in some

cases the interventions of the government in state-owned companies’ affairs were

prevented.

Different methods have been used for privatization of the state-owned

enterprises. One of those was the method of Title-deeds Plan. Title-deeds Plan was

implemented in Czechoslovakia in three stages: in the first stage, the restaurants,

workshops and other small retailer’s shops were sold to the private sector. The

second stage of privatization included the state-owned enterprises in large scale. In

this stage, the Title-deeds were distributed among all the citizens of

Czechoslovakia through which finally the shares of state-owned enterprises would

be exchanged. Of course, the government retained the possession of 20-30% of

these shares due to financial and/or political reasons. The third stage of

privatization plan included the assignment of a group of the enterprises

administered by the government and changing them into joint stock companies.65

The general procedure of transfer was the Voucher Booklet System. For the

first time, in October1991, the Voucher Booklet was sold to the people in very low

prices (about the workers’ wage during a week) who were not warmly welcomed.

In the next stage, a private investment fund entitled “Harvard’s Consultation and

Capital Fund” was established which guaranteed the value of the booklets up to

ten folds of the purchased price after one year and other organizations followed

the same procedure. Thus, the purchasers of Voucher Booklet increased to 8.6

million, i.e. 3.4% of the eligible individuals. In this system, the fund or

organization that sold voucher booklet has awarded full power to purchase the

shares of companies or do investment. The transactions are done in a complicated

65. Sameti, Morteza, (1992), “A Case Study on the Way Towards Reducing Economic Activities of the Government”, Iranian Ministry of Economic Affairs and Finance, pp. 13-14.


69

auction. Although, the success of this system has been guaranteed in a high rate,

but it will causes some problems in macro-economic level, including the increase

of liquidity.66

Privatization Trends in Developing Countries 67

The reasons for privatization are well established and are not covered in

any great detail here. In developing countries privatization is as a tool to improve

the productivity, to access capital investment and to progress service delivery of

high cost critical sectors and reduces the fiscal burden of loss making firms. The

analysis of overall developing country trends shows that: (I) privatization activity

dropped off after 1997 but picked up, albeit modestly in recent years, (II) the

average size of a transaction increased over the years as countries moved towards

privatizing larger firms and (III) while a large number of countries are involved in

privatization, proceeds are highly concentrated in a handful of countries. In the

early mid 1990s, privatization proceeds in developing countries averaged from

$20 to $30 billion on the annual basis. Proceeds peaked sharply in 1997 to almost

$70 billion. The sudden and one-time jump resulted from increased activity in

large infrastructure and energy (oil and gas) transactions across virtually all

regions, with the largest share coming from three countries in Latin America,

Argentina, Brazil, Mexico, Kazakhstan, Russia and China. Revenues declined

thereafter as Argentina’s stock of enterprises dwindled and as activity in Asia and

Europe slowed down following the East Asian financial crisis of 1997 and the

Russian debt crisis of 1998. By 2001 activity had reached the level of 1990, but

starting in 2002 proceeds began a modest pickup and is slowly creeping back up to

66. Motevasseli, Mahmood, (1994), “Privatization: A Desirable Combination between State and Market”, the First Ed., Tehran, Iran, Institute of Commercial Studies, pp. 241-242. 67. Kikeri, Sunita and Kolo Fatima, Aishetu, (November 2005), “Privatization: Trends and Recent Development”, World Bank Policy, Research Working Paper No. 3765, pp. 3-5.


70

pre-levels. The recent increases resulted mainly from share sales in Telecoms,

power and banking in countries such as China (additional share offering of China

Telecom), the Czech Republic (partial sale of Trans-gas), Slovakia (partial sale

of Electricity Company), India (Telecoms), Pakistan (United Bank) and Saudi

Arabia (Telecoms).

Scope of Privatization in Developing & Transition Countries Since 1990

The following illustrations 2.4, 2.5, 2.6 and table 2.3 indicate the scope of

privatization in developing and transition countries since 1990. In these regions

total revenues from privatization topped $400 US billion. The number is

impressively large.

Illustration-2.4

Privatization Proceeds: Developing & Under-transition Countries

ECA (Europe / Central Asia) - LAC (Latin America / Caribbean)

Source: World Bank Privatization Database, Compiled by Kikeri and Kolo, 2005, p. 5.


71

Illustration-2.5

Source: Kikeri and Kolo, 2005, p. 6. (Note: the transaction numbers refer to the firms sold for cash)

Illustration-2.6

Regional Distribution of Privatization Proceeds: 1990-1999 & 2000-2003

Source: World Bank, 2005, LAC = Latin America/Caribbean; ECA = Europe/Central Asia; EAP = East

Asia/Pacific; MENA = Middle East/North Africa; SAS = South Asia; SSA = Sub-Saharan Africa. p. 9.


72

Table-2.3 Privatization Numbers & Proceeds by Region during 1990-2003

REGION # TRANSACTIONS PROCEEDS

(US $ BNS.) Middle East, North Africa 302 $18.9

South Asia 399 $15.4

East Asia/Pacific 417 $65.8

Sub-Saharan Africa 981 $11.5

Latin America, Caribbean 1,265 $195.1

East & Central Europe,

Central Asia

5,634 $104.1

Totals 8,998 $410.8 Source: World Bank Privatization Database, Compiled by Kikeri and Kolo, 2005.

Regional Trends68

Proceeds are highly concentrated in a few countries in three regions.

Regional shares have changed over time with Latin America declining sharply

and both Europe/Central Asia and East Asia increasing their shares in recent

years.

Latin America

Latin America is the biggest contributor to developing country proceeds,

raising $195 billion or 47 percent of total proceeds from 1,300 transactions over

the entire time period. But its share fell dramatically over time from almost 60

percent in the 1990s to under 20 percent between 2000 and 2003 and to only two

68. Kikeri, Sunita and Kolo Fatima, Aishety, (November 2005), “Privatization: Trends and Recent Development”, World Bank Policy, Research Working Paper No. 3765, pp. 8-12.


73

percent at its lower point in 2003. The decline is largely attributable to the drop-

off in activity in Argentina and Mexico, which together with Brazil accounted for

over 80 percent of regional proceeds in the 1990s, mainly from telecoms and

electricity (65 percent of regional proceeds) and energy (20 percent). As the

activity in Argentina and Mexico tapered off due to the dwindling stock of

enterprises and/or political will, Brazil became more or less the only active Latin

American country after 2000 large transaction in electricity (CELPE), energy

(Petrobras), and banking (Bane spa) accounted for its 85 percent shares of regional

proceeds and made it the number two revenue generator among all developing

countries since the year 2000.

Privatization in Mexico69

Role of the SOEs in the Mexican economy had dropped dramatically over

the last two decades. In 1982, there were 1155 SOEs that accounted for 4.4

percent of the labour force and 14 percent of GDP. By 1990, the number of SOEs

had dropped to 418 accounting for 3.7 percent of employment and 10.1 percent of

GDP. These figures decreased even further during 1990s when the government

continued to withdraw from many economic activities, including strategic and

priority areas. The privatization process included ports, several airports and

railroads. Progress was also made in allowing private participation in secondary

petrochemicals and electric power generation.

69. Organization for Economic Co-operation Development (OECD), 2005, “Regulating Market Activities by Public Sector, February 1st 2005.


74

Illustration-2.7

Source: OECD, 2005.

In 2001 there were 205 SOEs accounting for 3 percent of GDP and 1.5

percent of employment. In this year 20.3 percent of the federal budget was

assigned to subsidies and transfers of which 31.4 percent was accounted for by

SOEs. Three major SOEs in the energy sector accounted for 2.9 percent of GDP,

0.62 percent of employment and contributed about 55.9 percent to the federal

budgetary income. By the end of the year 2003, about 80 of the 210 remaining

SOEs performed commercial activities in the following areas: petroleum,

electricity, transport, communications, postal services and the commercialization

of basic or mass consumption products. The rest were financial and social

institutions with programs in health, housing, education, culture, food and other

products and services. SOEs still maintain control over important industries such

as petroleum (Pemex) and electricity (CFE and LFC) that remain reserved areas

for the state. In Brazil, privatization also improved the efficiency and profitability

of the state enterprises.70

70. Mace do, Roberto, (2000), “Privatization and the Distribution of Assets and Income in Brazil”.

Working Paper No. 14, Carnegie Endowment for International Peace, Washington DC.


75

A similar methodology to analyze the performance of 50 Brazilian state

enterprises, pre and post privatization concludes that privatization significantly

improved performance.71

Europe and Central Asia (ECA)

Europe and Central Asia--with $101 billion or 25 percent of total proceeds

from 4,620 transactions--grew its share over time, raising double the proceeds of

Latin America since 2000 and making it the leading revenue earner since then.

The early to mid-1990s focused on small-scale privatization, with large telecoms,

power, oil and gas deals in the mid 1990s taking place in a relatively small number

of countries (Hungary and Russia). During this period, tens of thousands of

enterprises were transferred to the private sector using the small-scale or

“voucher” method or through management-employee buyouts (as these did not

involve any cash transactions or very little in the latter method they are not

included in this paper). These forms of divestiture fundamentally altered the

ownership structure of former Soviet Union Economies. In Russia alone, over

15,000 companies were privatized using the mass privatization method.

East Asia and the Pacific (EAP)

East Asia and the Pacific with $66 billion or 16% of total percent from 420

transactions also increased its shares over time, almost doubling revenues between

1990-1999 and 2000-2003. One country alone (China) accounted for nearly 90

percent of regional proceeds in the past four yeas, compared to 50 percent in the

1990s when Indonesia and Malaysia were other major contributions (with

transactions in transport, electricity, energy and telecoms). China’s recent share

sales in large central enterprises in telecoms and energy made it the top revenue

earner among all developing countries after the year 2000.

71. Pinherio, Armando Castelar (1996), “Impacts Micro-economics de Privatizacao no Brazil”. Pesquisa e Planejamento Economico, 26(3): pp. 357-398.


76

Privatization in China72

A study by Daqing Qi et al in China, investigated whether and how the

corporate performance of listed Chinese firms is affected by their shareholding

structure. The sample consists of all firms listed in the Shanghai Stock Exchange

from 1991 to 1996. It is found that firm performance is positively related to the

proportion of legal person shares but negatively related to the proportion of shares

owned by the state. Additional analyses indicated that firm performance increases

with the degree of relative dominance of legal person shares over state shares.

Moreover, for the sub-sample of firms that do not have both state and legal person

shares, the Return of Equity (ROE) of firms with legal person shares but no state

shares is higher than that of firms with state shares but no legal person shares by

3.84 percent and this difference is statistically significant. These findings suggest

that the ownership structure composition and relative dominance by various

classes of shareholders can affect the performance of SOEs transformed and listed

firms.

In China, the state’s economic role declined dramatically from 80 percent

of GDP in 1978 to 17 percent in 2003, but state enterprises still remain a dominant

economic force, employing half of China’s 750 million workers, controlling 57

percent of its industrial assets and dominating key industries such as financial

services, power and telecommunications.73

Only recently, China has started restructuring its medium and larger state

enterprises, but largely through minority share sales or new share offerings via the

capital market which come to be viewed as a new source of funds for state-owned

companies given the growing strains in the banking sector. Government ownership

72. Daqing Qi, woody Wu and Hua Zhang, (1997), “Shareholding Structure and Corporate Performance of Partially Privatized Firms: Evidence from listed Chinese companies”, The Chinese University of Hong Kong, Shatin, Hong Kong, 1st Draft, July 1997, current version: December 1999. 73. Mac Kinsey Quarterly (2004), Corporate Governance in China, October 2004.


77

still remains dominant in these firms and non-tradable state shares account for

about two-thirds of equity in listed state-owned companies.74

Middle East and North Africa (MENA)

The Middle East and North Africa region raised $19 billion or 5 percent of

the total proceeds from 310 transactions. In 1990s, activity was concentrated in

two countries: Egypt (with 50 percent of regional proceeds) and Morocco (nearly

40 percent). Transactions in both countries were mainly in manufacturing,

although Morocco’s programme was more diversified with transactions in energy

(oil refining) and banking. In 2000, Morocco Telecom was the first telecoms

privatization in the region, raising $1.4 US billion. This transaction together with

the partial sale of Jordan Telecoms ($508 US million) later in that year and the

partial sale in 2003 of Saudi Telecom ($4.1 US billion) made the telecoms sector

the region’s leading revenue generator in recent years, accounting for nearly 65

percent of regional proceeds since the year 2000 (compared to less than 1% in the

1990s). Among the other recent large transactions in the region, the sale of

Morocco’s Regie de Tabac (tobacco manufacturing) in 2003 for $1.6 billion and

chemicals and cement companies in Egypt can be mentioned.

South Asia (SAS) South Asia with 4 percent of total proceeds or $15 billion from nearly 400

transactions remains at the same levels as in the past. India and Pakistan together

account for 75 and 15 percent respectively of South Asian proceeds. Indian

revenues were generated largely from minority share sales in banking, oil and gas,

with only a few recent manufacturing sales transferring strategic control through

majority or full share sales and the divestment of the telecoms company in 2002.

74. Financial Times, March 29, 2005.


78

Pakistan privatized enterprises in a wide range of sectors, including telecoms,

banking and manufacturing. Sri Lanka had an active program but its share of

regional revenues remained small, given the size of its economy while

Bangladesh recently closed a number of large loss-making just and textile mills,

enterprise sales proceeded at a slower pace.

Privatization in India In recent years, the operations of the public sector were severely criticized.

The efficiency of state-owned enterprises was questioned. This subject attracted

the attention of planners and policy-makers, specialists and mass media and

privatization was focused as a method for confronting the inefficiency of the

public sector.75

Passage of time has also resulted in significant changes in Indian policy-

makers and citizens’ attitudes regarding the relative effectiveness of state and

markets in commercial activities as well as their assumption about the Indian state

being a “guardian of the public interest”.76

One dimension on which countries’ privatization programs can be

compared is the speed with which they are implemented. The vast majority of

countries (including India) have implemented privatization gradually.77

A few countries, such as Argentina or the Czech Republic, implemented

privatization programs rapidly with large portions divested within 3-5 years of

launching the effort 78 but, such rapid privatization is the exception rather than the

international norm.

75. Ta’ati, Aram, (1994), “Privatization in India”, Management Studies Quarterly, pp. 68-81. 76. Kapur, Devesh and Ramamurti, Ravi (2003), “Privatization in India: The Imperatives and Consequences of Gradualism”, Edited JSW, October 2003, p. 1. 77. Ramanurti, Ravi (1999), “Why Haven’t Developing Countries Privatized Deeper and Faster?” World Development, 27(1): pp. 137-155. 78. Alexander, M. & Corti, C. (1993), “Argentina’s Privatization Program”, World Bank, Washington DC.


79

In India, the government’s privatization programme began with a

divestment program since 1990. The policy aim was merely to reduce the

government’s holdings by 20 percent, principally to raise resources to reduce the

budget deficit. The program was accordingly labelled “disinvestment” and the

term “privatization” assiduously avoided. The next stage of escalation included

raising the amount that would be divested, while still retaining control. This did

not alter the fundamental character of the enterprise but mobilized more resources

to reduce the large budget deficit that, at the onset of the reforms, exceeded 9

percent of GDP. In the next stage, the government decided that it would sell up to

74 percent of the equity, since that would leave it with 26 percent, a level high

enough to give it a strong voice in the enterprises. Finally, outright divestment

became acceptable, initially for loss-making enterprises and later even for

profitable enterprises. The government escalated its commitment from merely

privatizing ownership to privatization control. It was not until 2000-2001, nearly a

decade after the onset of the reforms, that the Finance Minister Yeshwant Sinha

actually used the term “Privatization” (during the budget debate) to describe the

government’s program for reforming SOEs.79

In India, starting in the late 1990s and early 2000s, a few centrally owned

enterprises were fully or majority divested to private investors, but these were

small compared to the value of the assets of the public sector. The momentum

picked up in 2002 with the sale of telecoms shares to a strategic partner, but the

program came to a stand still alter that year when the proposed sale of two oil

companies was postponed. Meanwhile, at the sub-national level as well there are a

large number of enterprises in sectors such as manufacturing, agro-processing,

power and transport which continue to remain in state hands.80

79. Kapur, Devesh and Ramamurti, Ravi (2003), “Privatization in India: The Imperatives and Consequences of Gradualism”, Edited JSW, October 2003, p. 2. 80. Kikeri, Sunita and Kolo Fatima, Aishetu, (November 2005), “Privatization: Trends and Recent Development” World Bank Policy, Research Working Paper No. 3765, pp. 17-18.


80

“More than 40 percent of India’s capital stock is still state-owned.”81

A recent analysis by Oxford82, about privatization in India shows that

between 1991 and 2004, only 28 percent of planned privatizations were achieved

and the most successful period has been during (2001-2002) in which 47 percent

of privatization targets were met.

Sub-Saharan Africa (SSA)

Sub-Saharan Africa with $11 billion or 3 percent of proceeds and some 960

transactions had the third highest number of transactions (after Eastern Europe and

Latin America) but, 70 percent were mostly small and low-value firms in

competitive sectors. While 37 countries were engaged in privatization, the bulk of

regional revenues in the 1990s were accounted for by a few large transactions in

Ghana (Ashanti Goldfields and Consolidated Diamond Mines), South Africa

(telecoms, steel, and petrochemicals) and Nigeria (selected oil fields). South

Africa was by far the biggest contributor to regional proceeds starting in 2000,

accounting for nearly half of all regional proceeds, mainly due to additional share

sales in Telecom, the sale of South African airways, and sales in the

petrochemicals sector. Other recent large transactions in the region are: the partial

divestitures of Mauritius Telecom (for $261 million) and the Cotton Company of

Zimbabwe ($93 million).

A number of privatized companies in Sub-Saharan Africa increased

capacity utilization through new investments, introduced new technology, and

expanded markets.83

81. Mac Kinsey Global Institute (2001), India Country Study. 82. Oxford Analytical, March 29, 2005. 83. Campbell-White, Oliver and Anita Bhatia, (1998), “Privatization in Africa”, Washington DC, World Bank, Chisari, Omar, Antonio Estache and Carlos Romero, (1999), “Winners and Losers from Utility Privatization in Argentina: Lessons from a General Equilibrium Model”, Working Paper No. 3, Centro de Estudio Economicos de la Regulation, Buenos Aires.


81

Several recent examinations of country privatization programs in Ghana84,

Mozambique85 and Tanzania86 report strong performance improvements in

privatized manufacturing, industrial and service firms.

Global Scenario of Privatization

Trends in Privatization Privatization started slowly. Through most of the 1980s, there were only a

few divestiture transactions a year. The number of transactions peaked in the mid-

1990s and then declined after 1997. Between 1990 and 1999, global proceeds

totalled $850 billion, growing from $30 billion in 1990 to $145 billion in 1999,

shown in the following figure:

Illustration-2.8

84. Appaiah-Kubi. K. (2001), “State-Owned Enterprises and Privatization in Ghana”, Journal of Modern African Studies 39 (2), pp. 197-229. 85. Andreasson, Bo (1998), “Privatization in Sub-Saharan Africa: Has it worked and what lessons can be learnt?”, Swedish Development Advisers, Gothenburg, Sweden. 86. Due, Jean. M. and Andrew Temu (2002), “Changes in Employment by Gender and Business Organization in Newly Privatized Companies in Tanzania”, Canadian Journal of Development Studies 23(2), pp. 317-333.


82

Organization for Economic Co-operation and Development (OECD)

countries, along with Brazil, account for the overwhelming bulk of the proceeds,

mainly from public offerings of large firms in countries of European Union

(EU).87

Privatization Proceeds by Sector & Region during 1990-1999

Privatization by Sector 88

In Non-OECD countries, privatization activity grew rapidly through the

mid 1990s with tens of thousands of enterprises sold and roughly $50 US billion in

revenues raised during 1990-1999. Proceeds peaked at $66 US billion in 1997 and

then fell, following the Asian and Russian financial crises and the ensuing general

economic downturn. Revenues during 1990-1999 were accounted for largely by

infrastructure privatizations, mainly in telecommunications and power industries,

followed by petroleum, mining, agriculture and forestry. Manufacturing sales

accounted for about 16 percent of developing economy of privatization proceeds,

mainly from sales in Eastern and Central Europe and Latin America. By the

end of 1990s, privatization revenues were concentrated in oil and gas sectors in

Argentina, Brazil, India, Poland and Russia. Following figure in the coming

page will exhibit this point.

87. Mahboobi, Ladan, (2000), “Recent Privatization Trends”, Working Paper, Organization for Economic Co-operation and Development (OECD), Paris. 88. World Bank (2001), “Global Development Finance”, Washington DC.


83

Illustration-2.9

Privatization Proceeds by Sector 1990-99 ($ US billions)

Source: World Bank (2001), Global Development Finance, Washington DC.

Privatization by Region89

By region, Latin America and the Caribbean accounted for the largest

share of privatization proceeds with the largest contributions coming from the sale

of infrastructure and energy firms in Argentina, Mexico and Brazil. Eastern

Europe and Central Asia sold the largest number of firms, mainly through mass

privatization voucher programs before 1995 in Russia, the Czech Republic,

Slovakia, Kazakhstan, Lithuania, Ukraine and Moldova. Sales proceeds were

low under the giveaway voucher schemes, but revenues grew after 1995, as

countries such as the Czech Republic, Estonia, Hungary and Russia began or

expanded case-by-case sales, including large firms in banking, transport, oil and

gas and infrastructure. The figure in the next page indicates this point.

89. Ibid, World Bank (2001).


84

Illustration-2.10

Privatization Proceeds by Region, 1990-2000 (US $ billions)

Source: World Bank (2001b).

Before the financial crisis of 1997, East Asian countries generally

concentrated on opening up their economies to new private entry rather than on

privatizing enterprises. This approach was workable, given the region’s smaller

reliance on state enterprises as agents of economic policy (except in the People’s

Republic of China and a few other Asian socialist states), the success of China’s

evolutionary approach to property reform and the relatively sound financial and

fiscal position of most Asian states.

China stands out over a 25 year period; Chinese governments created or

allowed forms of industrial ownership, particularly at the sub-national level that

successfully combined elements of collective and private property. Later, new


85

private entry and foreign direct investment were permitted and encouraged. By

1998, the non-state sector (including private agriculture) accounted for 62 percent

of GDP, whereas state enterprises’ share in industrial output declined from 78

percent in 1978 to 28 percent in 1999.90

In Sub-Saharan Africa91 sales rose from 175 in 1990 to more than 400 in

1996 and then jumped to more than 2,200 by 1998, with sales concentrated in

Mozambique, Angola, Ghana, Zambia, Kenya, Tanzania and Guinea.

The small size of the most divested firms limited the financial impact.

African sales accounted for 3 percent of total developing country proceeds during

1990-1999. Estimated revenues over the decade for 37 Sub-Saharan state totalled

$9 billion, less than the amount raised by sales in New Zealand alone and about a

third of the value of two Brazilian telecommunications auctions in the mid

1990s.92

In the Middle East and North Africa, privatization revenues have been

modest, below even those of Sub-Saharan Africa. Revenues grew in the late

1990s, largely as a result of Morocco’s telecommunications sale and the

privatization of cement and other large and medium-size companies in Egypt. In

South Asia, Sri Lanka has had an active privatization program covering virtually

all sectors (including infrastructure), but India has accounted for the bulk of

regional proceeds through sales of minority shares in large companies and the

recent sale of controlling stakes in a few large firms.93

90. Zhang, Chunlin (2001), “Privatization in China”, World Bank, Washington DC. 91. Campbell-White, Oliver and Anita Bhatia, (1998), Privatization in Africa, Washington DC, World Bank, Chisari, Omar, Antonio Estache and Carlos Romero (1999), “Winners and Losers from Utility Privatization in Argentina: Lessons from a General Equilibrium Model”, Working Paper No. 3., Centro de Estudios Economicos de la Regulacion, Buenos Aires. 92. Nellis, John. (2003), “Privatization in Africa: What has happened? What is to be done?”, Working Paper No. 25, Centre for Global Development, Washington DC. 93. Kikeri, Sunita and Nellis, John (2004), “An Assessment of Privatization”, the World Bank Research Observer, Vol. 19, No. 1, p. 92.


86

Summary

There is a strong theoretical justification and hardly few evidences at the

beginning of the 1980s to privatization. Thus, the bulk of privatization before

these years took place in the absence of empirical support.

During the 1990s, privatization assessment industry grew rapidly. The

studies conclude that privatization improves performance and increases the return

to new owners and shareholders.

There has been much concern about the employment, broader distributional

and welfare effects of privatization. Studies indicate that privatization is not a

prime contributor to the large recent increases in general unemployment rates in

developing economies, but they generally indicate that in the proper policy and

regulatory settings, privatization substantially improves employment generation.

Analyses of the fiscal and macro-economic effects of privatization show

fiscal benefits and a positive correlation between privatization and growth.

The costs of No or Slow privatization can be high. There should be a

strengthening and redoubling of efforts to privatize correctly. This means more

advance analyses and better tailoring of privatization to local conditions.

With regard to the global scenario of privatization, the transactions reached

peak during mid 1990s and then gradually started declining. Infrastructure sector

accounted for 50 percent of global privatization proceeds and Latin America and

the Caribbean Islands regions contributed to 55 percent of global privatization

proceeds.

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