Turning to the private sector—slowly

Industrial and middle-income countries have had considerable success changing the ownership structure of public enterprises and involving the private sector directly in the construction, management, financing, and increasingly the partial or complete ownership of public enterprises. Low-income countries, too, have planned and embarked on a range of similar activities— but so far in a more restrained and limited manner and with far more limited results. In Kenya, only 5 of 200 public enterprises designated for privatization in 1991 had been sold by the end of 1993. In Bangladesh, of 40 firms slated for sale in 199.1, only 9 had been privatized as of March 1994. And while 29 reforming African countries have privatized a fifth of their nearly 3,000 public enterprises, the economic weight of those sold—measured by turnover, investment, or employment—was far lower. Privatizations almost everywhere take longer than planned. And many countries have scaled back optimistic ambitions in light of experience. But the process has been even slower and more problem-filled in lowincome countries, where caution, slippage, and delays in both enterprise reform and private sector development programs are common.

The reasons lie in a series of vicious circles common and powerful in lowincome countries. Because private sectors were weak, governments pinned their hopes on public firms. But as the shortcomings of public enterprises have become more evident, there still is no private sector of sufficient size, experience, and wealth to turn to—in large part because of the emphasis placed on public enterprises. Because the bulk of credit has been directed from state-owned banks to state-owned firms, capital markets suffered relative neglect. Now that divestiture is on the agenda, few low-income countries have more than embryonic equity markets (though, encouragingly, these are on the rise in a range of low-income countries: for example, China, India, Kenya, Pakistan, Sri Lanka, and Zimbabwe).

Public enterprises have provided bureaucrats politicians and regime loyalists with income supplements, power, and myriad opportunities for illegal gain

Policymakers in some low-income countries are reluctant to privatize or increase the role of the private sector because they mistrust the managerial capacity of the public sector. They resist private involvement and divestiture because they have little faith in the capacity of the public administrative system to conduct transparent transactions, to regulate private monopolies, to collect corporate taxes on privatized firms, and to adjudicate disputes and enforce contracts. Thus, the managerial weakness of the state is cited, paradoxically, to justify the state's continued direct involvement in managing productive entities.

The dominance of the state in the economy means that few good employment opportunities exist outside the state structure. And people within the state apparatus often lack the experience and skills that open doors in the private sector. Moreover, public enterprises have provided bureaucrats, politicians, and regime loyalists with income supplements (sitting fees for board membership, for example), power (to obtain and hand out jobs), and myriad opportunities for illegal gain. Those being asked to diminish state dominance are precisely those who will pay a high and direct material price if the policies are applied. Even when bold leaders overcome all these problems and put forward a comprehensive reform package, they frequently find they are not supported— administrative institutions are weak and understaffed, and implementation capacity is lacking. So, the reform founders.

It is hard in low-income countries to find a catalytic core of people not dependent economically on the state. In middle-income and industrial countries, state-diminishing reforms have been led by political figures relying on stakeholders whose economic base lay outside the state structure—on economic actors who saw the advantages of less-fettered private initiative. And in transition economies, radical reformers were able (at first) to tap a large vein of anti-state sentiment because the previous regimes were seen as foreign, repressive, or both.

Given the lack of a popular base with the power, the will, and the means to support reforms, liberalizing reformers in low-income countries have been fewer, their task more difficult, and their voices more muted. Workers and farmers, who will eventually reap the benefits of liberalization, are dispersed and unorganized. And their enthusiasm for the reforms is usually minimal— often because the benefits of reform are not fully passed on to them but siphoned off along the way. For the average citizen, the costs of reform are apparent and immediate, the benefits uncertain and future. All this means that reform and privatization are hard to sell (but see box 3. 1).

The upshot of all this is a major development dilemma. Low-income countries have the greatest need for increased private sector involvement in their enterprises. But the factors that produce that need are those that make it difficult to launch, hard to implement, and hard to bring to fruition.

The picture is not uniformly bleak. Some governments—often with the assistance of IDA operations—have applied the commercialization package of public enterprise reforms more rigorously than in the past (see box 3.3). And while efforts to involve the private sector in public enterprises have been difficult to launch in low-income countries, they have by no means been entirely absent. Many public enterprise sales have been completed in Benin, Mozambique, Nicaragua, Nigeria, Senegal, Sri Lanka, Togo, and other lowincome countries. Low-income countries actually pioneered some of the cutting-edge developments in infrastructure privatization outside Europe. For 30 years, the water supply of Abidjan in Cote d'Ivoire has been successfully managed by a private firm. Concession operations of this nature—now once again very much in favor worldwide—are in existence or in the advanced planning stage in several other lowincome countries, including Cape Verde and Guinea. .

What this shows is that the question for low-income countries is not what should be done—the "what" is fairly well known. The key question for lowincome countries is "how":

· How to apply more widely the methods and techniques working well elsewhere and already showing promise in low-income settings.

· How to protect the private investor against government's changing the rules halfway through the game.

· How to build up the regulatory and guardian institutions to protect the public against the abuse of private economic power.

· How to garner broadly based support, or at least build a powerful coalition of reformers, to initiate and push through reforms long enough to show positive results.