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close this bookPrivate Sector Development in Low-Income Countries - Development in Practice (WB, 1996, 188 p.)
close this folderChapter 3-Reforming public enterprise farther performing and faster
View the document(introduction...)
View the documentPublic enterprises are not performing well
View the documentTurning to the private sector—slowly
View the documentThe way forward—farther and faster


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 effective—and more enduring—when 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 waste—but 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 deployed.

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 benefits—but only when it is done right. Doing it "right" means:

· Devising sector-by-sector policies.
· Introducing and maintaining competitive forces.

Establishing and preserving a sound regulatory framework for the remaining monopolies, public and private.

Maintaining transparency in transactions.
Convincing investors that the probability of future expropriation is close to zero.
Negotiating, monitoring, and enforcing contracts with private suppliers of management and financing.
Devoting the resources from sales to productive uses.

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 arbitrating.

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 firms—the standard approach in many low-income countries—has 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 performance.


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 private sector.

· 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 reforms—and in rallying support for the necessary steps to complete them.

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 management-employee buyouts.

· 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.