POORLY performing public enterprises are a drain on the budget,
a destroyer of banks, and an obstacle to private business. If lowincome
countries in Africa are to make a significant and rapid breakthrough into higher
growth rates, if South Asian countries are to consolidate the gains they have
made in liberalization, and if China is to maintain its rapid growth, they will
all have to move farther and faster in solving the problem of public
enterprises, especially the largest firms.
The choice is not a simple one between privatizing all public
enterprises and reforming them without changing ownership. Simultaneous action
is required on both fronts. But public enterprise reform is more
effectiveand more enduringwhen the private sector is involved as
manager, investor, financier, and increasingly as part owner. And liquidating
industrial public enterprises that cannot be sold, but that persistently perform
poorly, not only stops wastebut also gives the assets a chance for a
second life. Admittedly, there are serious obstacles to privatization in
lowincome countries. But mechanisms to overcome them are being devised and
Even as the involvement of the private sector in public
enterprises increases, the role of government remains crucial. Privatization,
whether of management or ownership, yields substantial and enduring
benefitsbut only when it is done right. Doing it "right" means:
· Introducing and
maintaining competitive forces.
Establishing and preserving a sound regulatory framework for the
remaining monopolies, public and private.
Maintaining transparency in transactions.
investors that the probability of future expropriation is close to
Negotiating, monitoring, and enforcing contracts with private suppliers
of management and financing.
Devoting the resources from sales to productive
Managing the inevitable political and social tensions that arise
as reforms in enterprises are implemented, especially the critical issues of
foreign ownership and labor layoffs.
All these are largely a matter of government functioning in an
effective and farsighted manner. IDA has long provided member governments with
assistance to improve policymaking and administrative functions. But these
efforts will need to be redoubled as governments in low-income countries move
from directly productive roles to those of conceiving, facilitating, and
New in the equation is the realization that, even for donors,
the task is not purely technical. The processes of adjustment and liberalization
in general, and increased private participation in particular, have been poorly
explained to the people whose lives are affected by these programs. Governments,
with donor assistance, could do much more to make the public aware of the high
cost people pay because of poor public enterprise performance. Governments
should also calculate and make better known the price of inaction. And donors
could spend more time describing the benefits of reform, not only to officials
in ministries of finance, but also to legislators, academics, and opinion
leaders. The process of privatization is inevitably intensely political. Where
it has succeeded, it is because a consensus has been structured among enough
interested parties to push it through (box 3. 1).
The essential message of this chapter is that low-income
countries cannot maintain "business as usual" for their public enterprises. Past
reforms not involving private participation have produced only modest results.
Privatization of a few small industrial firmsthe standard approach in many
low-income countrieshas not had a major impact on the macroeconomic front.
Nor has it served to signal government commitment to fundamental change and
reform. Problems and losses in public enterprises continue to mount so rapidly
that if they are not dealt with immediately, they will threaten or cancel most
other reform efforts in many low-income countries. Nonetheless, there is reason
for optimism. The perception of leaders and officials about the usefulness of
public enterprises has changed greatly in the light of continuing poor
BOX 3.1 PRIVATIZATION IN CAPE VERDE: A PARTICIPATIVE APPROACH
The government of Cape Verde has successfully mobilized public
support for the need to reform its public enterprise sector and implement its
divestiture program. This has been achieved by:
· A well-conceived, aggressive,
and sustained television and radio information campaign on the theme "Let's
modernize Cape Verde," highlighting opportunities for higher growth led by the
· The involvement of local
consultants, alone or in joint venture with respected foreign firms, in
designing the program and assisting in its implementation.
· The sensitivity to local
constraints and conditions and sense of ownership generated by the fact that the
privatization agency is staffed entirely with Cape Verdean nationals, including
one resident adviser of Cape Verdean origin.
Once the program got under way, public anxiety nonetheless built
up regarding the impact of-the program on an already difficult unemployment
situation. In response, the government, with the support of IDA, organized a
series of eye-opening visits to countries that had gone through a similar
economic reform and opening-up process, such as Mauritius. Participation in
these sensitization programs was targeted to such opinion leaders as
journalists, union leaders, local elected officials, local business
representatives, and key civil servants. During these trips, meetings and
discussions were arranged with labor leaders, local entrepreneurs and foreign
investors, managers of free-trade zones, and government officials in such
ministries as justice, labor, industry, tourism, economy, and planning. The
visits proved instrumental in convincing a large segment of the public of the
potential of the reformsand in rallying support for the necessary steps to
The privatization agency has tried at every step to ensure that
the needed liquidations, restructuring, and privatizations are carried out with
a minimum of labor unrest and social disruption. For instance:
· Its approach to the whole
process has been participatory, with constant efforts to involve the persons
most affected (workers and managers) in the discussion of divestiture options.
· Its creativity led to the
design of socially acceptable solutions, mainly through the use of
· And its proactive provision of
support to the newly privatized enterprises identified potential domestic and
foreign sources of technical assistance and financing.
The way forward is:
· To sell what can be sold,
particularly the large industrial firms formerly classifed as strategic, the
banks, and the functions of crop marketing boards and distribution companies.
· To involve the private sector
as much as possible in enterprises in which outright sale is not (or not yet)
feasible, particularly infrastructure firms and utilities.
· To redouble efforts to
commercialize any remaining state-owned firms and strengthen government's
essential supervisory and regulatory roles.
· To liquidate unsellable
persistent loss-makers in the industrial sector.
None of this work will be easy. But, as will be shown, it is
essential that steps be taken to stop the hemorrhaging of wasted resources.