Privatisation in Developing Countries

V. V. Ramanadham

• Publisher: Taylor & Francis
• Year: 2019
• Print ISBN: 9780367187231
• eBook ISBN: 9780429582653
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

It is widely felt that the public sector in many developing countries is too large, and that privatisation would benefit both the users of individual services and the economy in general. However, enthusiasm for private enterprise solutions is not always matched by the requisite financial and economic technology. The sort of schemes appropriate for a country like China, with its highly planned public sector economy, and Jordan, with its dominant private sector, are unlikely to be the same. Privatisation without reference to these differences will be an economic, administrative and organisational chaos rather than a panacea.

Originally published in 1989, this book starts with an analysis on the concept, rationale and fundamental issues of privatisation, with reference to both developed and developing countries. There follows a critical scrutiny of the privatisation programmes of countries in Asia, Africa and Latin America, written by contributors actively concerned with public enterprise and privatisation at the time. It examines the role of international aid agencies, including the World Bank, in promoting the schemes and it details the positive impact of them as well as their pitfalls. These country accounts are complemented by a concluding chapter giving an overview of the substantial issues raised.

Part I

Background Material

1

Privatisation: the UK Experience and Developing Countries

V.V. Ramanadham*

Synopsis

I Privatisation: The Concept and the Case

1. What does privatisation signify?

(a) Ownership measures

(b) Organisational measures

(c) Operational measures

2. The Case for Privatisation

II Privatisation in the UK: An Outline

III Inferences from UK Privatisations and the Developing Country Context

IV Developing Countries and Privatisation

1. Losses and accumulated losses

2. Policy statements

3. Criteria

4. Implementation

5. Problems from the buying side

6. The efficiency of private enterprise

7. The development strategy

V A Select List of Issues

1. Country experiences

2. Macro issues

3. Privatisation and the exchequer

4. The modalities of privatisation

5. Financial and legal processes of privatisation

6. Competition and regulation

Appendices Numbers 1–15

* Templeton College, Oxford

The purpose of this chapter is not to offer opinions nor canvass policies but to present analyses and suggest options. It is developed on the basis of the experience of both developed and developing countries. The chapter keeps away from direct reports on individual developing countries, since the country papers are expected to cover that task.

The chapter is in five parts. The first reviews the connotation of the term ‘privatisation’; the second contains a synoptic account of the UK experience in privatisation, on which the recent publication Privatisation in the U.K. (London: Routledge, 1988) provides a detailed survey; part three contains inferences on what developing countries may learn from the UK experience; part four outlines some major issues that attempts at privatisation have raised in a number of developing economies; and the last part selectively lists the important facets of the problem of privatisation which merit the attention of the Workshop.

In preparing this chapter I had the benefit of first-hand discussion with government officials, public enterprise executives, private industrialists, stock exchange officials, and academic experts in many countries.

I PRIVATISATION: THE CONCEPT AND THE CASE

1. What does privatisation signify?

‘Privatisation’ is a term that is employed to convey a variety of ideas. (Some fifteen connotations were cited in a recent European symposium, as shown in Appendix 1.) In the UK, the idea that it most prominently suggests is ‘denationalisation’ (in the sense of transferring the ownership of a public enterprise to private hands). Another idea in vogue is ‘liberalisation and deregulation’, which unleash forces of competition.

The concept of privatisation is, in fact, far wider. It is to be understood, not merely in the structural sense of who owns an enterprise, but in the substantive sense of how far the operations of an enterprise are brought within the discipline of market forces.

Privatisation covers a wide continuum of possibilities, between denationalisation at one end and market discipline at the other. Figure 1.1 contains a diagrammatic representation of the continuum.

Figure 1.1 Continuum of possibilities in privatisation

(a) Ownership measures

These are the most obvious. There can be a sale of the enterprise in full; or, private capital may be introduced in a public enterprise either through a sale of some government equity or in the course of its expansion. The larger the private equity proportion, the greater the degree of privatisation (subject to one qualification, namely, that the government’s impact as a shareholder might, in practice, tend to be out of proportion to its ownership interest).

Liquidation represents the ultimate step in the arsenal of the owner. It may imply, in practice, a sale of the assets to someone that uses them again in the same activity or moves them away from their erstwhile activity. This measure is ordinarily a response to the financial failure of the enterprise.

A management buy-out is a special version of denationalisation. It represents the sale of the assets to the employees who, with appropriate loan provisions from banks, take over the ownership. This could be a co-operative, if the distinctive legal features of a co-operative society are satisfied by the organisation that buys the enterprise or the assets.

Mention may be made of the ‘special share’, a UK term, which signifies that the government is allotted a share in an otherwise privatised enterprise, under the arrangement that it undertakes not to participate actively in the company’s directoral or management processes, except in certain extreme circumstances (e.g. where an undesirable share concentration is manipulated). This can be a helpful device in sectors where some residual public vigilance is necessary and where governmental protection of the ‘national’ interest is a vital consideration.

(b) Organisational measures

These can be of several kinds:

1. A holding company structure may be so revised that the government limits its control interventions to the apex level, leaving the operating companies to function under a high degree of market discipline. It is true that the very existence of a ‘family’ structure involves some demarketisation; but, as in the Italian IRI, substantial market freedoms can be conceded to the subsidiaries.¹ It is desirable that holding companies which operate as massive controllers of subsidiaries undergo a change in organisational outlook on these lines.

2. A monolithic organisation (such as British Steel Corporation, Bharat Heavy Electricals Ltd., or Electricité de France) can be subjected to two kinds of organisational change. For one thing, it may be broken into smaller units without loss of scale economies; such units bring in certain merits of competitive behaviour. For another, the major product lines or regional operations may be converted into independent companies, though they are allowed to stay in the same family (i.e. the monolith improves into a holding company, with some corresponding reduction in centralised managerial behaviour).

3. A public enterprise may adopt the method of leasing out large chunks of its assets to the best bidders, so that it retains the benefits of ownership in the sense that it enjoys profits as per the agreement; at the same time there is some prospect of improved efficiency or lowered costs of operations on the part of the private bidder. This method can also be used as a step towards further, if not total, privatisation in ownership terms, gradually.

4. The promotion of competition is of obvious importance in ensuring results of improved efficiency, lowered cost structures and declining prices.² This would be possible in three ways: first, by breaking big public enterprises into less big units which have a reasonable chance of competing with one another, as mentioned earlier; second, by promoting conditions of internal competition within a large public enterprise organisation; and third, by deregulating the activities in a given sector, thereby improving the prospects of entry and exit.³ It will then be possible for private units to establish themselves in areas where a public enterprise operates; and the more efficient units in the sector will eventually attract consumer patronage, assuming that the conditions of competition are fair.

5. In the case of certain public enterprises, restructuring would be a desirable step in bringing them under market disciplines. This can take one of two forms, or both on occasion. There can be a financial restructuring, in the sense that accumulated losses, if any, are written off and the capital composition is properly rationalised in respect of the equity-loan ratio. There can also be a basic restructuring of the functions of the enterprise such that it will be confined to a homogeneous segment of commercial activities. The rest may be hived off or transformed into ‘projects on government behalf’ or ‘earmarked funds’ (as in the case of Nacional Financiera’s activities for promoting small-scale industry, mineral development, etc.).

(c) Operational Measures

These are the least spectacular, but very meaningful, measures of privatisation. In many circumstances and in centrally planned economies in particular, they have an important place among the options open to the government. In a mixed economy these could even constitute an appropriate first step in eventual denationalisation; and in some cases these may be all that would be necessary or desirable for a long while.

1. ‘Contracting out’ involves the decision of an enterprise to acquire an input across the market, instead of producing it from within itself.⁴ In the process it can derive benefits of scale in the supply of the input by an outsider who organises the activity concerned in conformity with its scale economies. If the in-house provision of a given input rationalises itself into being more economical than a purchase from outside, the result is good from the standpoint of the enterprise and the consumer. The ancillary units which public enterprise in certain countries are promoting as suppliers of selected spares and parts needed by them,⁵ represent a modality of privatising selected activities undertaken by public enterprises.

2. Rewards, not only to the blue-collar workers but to the white-collar employees in terms of incentives, help to introduce into public enterprises a normal and fruitful feature of the private sector.⁶ Incentive payments in the shop-floor context area are quite common; but compensations for managerial motivation and proven m...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Half Title
• Original Title Page
• Original Copyright Page
• Dedication
• Contents
• Tables
• Figures
• Foreword
• Preface
• Part I: Background Material
• Part II: Country Papers
• Part III: Concluding Review
• Index