Privatisation in Africa: The pace hots up.

While the rest of the developing world was busy privatising state-owned enterprises and reaping handsome rewards, Africa was dithering. Fortunately, the trend has now definitely changed and the pace of privatisation is gathering momentum.

Privatisation, a world-wide phenomenon, forms the centre piece of economic structural reforms both in the developed and developing worlds. Narrowly defined, it is the transfer of state assets to private investors. This is done through auctions, stock flotations, public offerings, voucher or coupon exchanges, negotiated sales, stock distributions, and management-employee buyouts.

More widely, it also covers the privatisation of the management of state activities through leasing contracts, joint ventures and the contracting out of traditional state functions. This is usually achieved through concessions and attracting private capital into infrastructural projects. Arrangements are based on a build-own-operate (BOO), build-operate-transfer (BOT) or build-own-operate-transfer (BOOT) basis. Joint public and-private investment based on BOO structures are particularly popular in Middle Eastern countries.

However, during the 1990s, the African continent remained slower to embrace privatisation compared with Latin America, East Asia and Central Eastern Europe. According to the World Bank, privatisation receipts in sub-Saharan Africa were $7,571m between 1990-98, equivalent to just 3% of the developing world's total divestment revenues which totalled $271.63bn. The main African countries to privatise were South Africa ($2,729m), Ghana ($893m), Zambia ($827m), Nigeria ($730m) and Cote d'Ivoire ($570m). These five countries are responsible for 76% of sub-Saharan Africa's (SSA) total privatisation proceeds.

The pace of African privatisation, though still in infancy, is set to increase in the coming years. Impact, the journal of the International Finance Corporation (IFC), reports that Ghana, Kenya, Uganda, South Africa, Tanzania, Mozambique and Zambia have launched ambitious divestiture programmes.

The Francophone countries are at mote advanced stages. Cote d'Ivoire, Gabon, Cameroon, and Senegal have almost completed privatisations of public utilities and banking sectors.

According to the World Bank, 41 of SSA's 48 countries had reported privatisation activity during the second half of 1990s. There is still considerable potential for privatisation across west-central, east and southern Africa, especially of the telecommunications, utilities and transportation sectors.

African privatisation objectives

For most developing countries, privatisation is linked to the type of economic policy advocated by the international financial institutions (IFIs), which lays emphasis on market forces, liberalisation, and deregulation, leading to an expanding role for the private sector. An increasing number of African governments accept that the heavy cost of maintaining massive public sectors are unsustainable and that consumers are demanding increased access to and a better quality of public utilities and transportation services. Most countries are in the process of restructuring and privatising parastatals which consume a large share of gross domestic product in Africa.

The aims of such policies are, firstly, to achieve improvements in productive efficiency of state-owned enterprises by reducing the scope for political interference in decision-making and increasing managerial incentives. By making management responsible to shareholders, pressure for financial discipline in private capital markets is imposed. It also promotes competition, for example when a large, single SOE is split into smaller units prior to privatisation.

Secondly, privatisation is a means to budgetary relief. Many parastatals are in dire financial straits. This imposes fiscal constraints upon the state in terms of annual subsidies and makes governments responsible for servicing huge SOE debts. In Nigeria, SOEs cost the federal government about $2bn in annual subsidies.

Asset sales provide a one-off addition to government resources which can be deployed to retire existing public debt. Thus public finances can be better targeted at improving a country's socio-economic infrastructure in such areas as health-care and primary education. Given declining trends in official capital flows and growing pressures on national budgets, privatisation remains a viable option for achieving financial stability and economic efficiency.

Thirdly, a comprehensive privatisation programme improves a country's profile in the international financial community, attracting a greater share of inward foreign direct investments as well as financial and technical assistance from the IFIs. The International Development Association has recently approved funding of $48.5m to assist Uganda in selling off its remaining SOEs and improving the fiscal position of remaining parastatals. Furthermore, strategic foreign partners provide both long-term capital investment and technological and managerial expertise, prerequisites for regenerating some of Africa's ageing industries and better securing the future of their workforces.

Fourthly, some countries lack capital resources to fund new infrastructure projects, like power stations, water desalination plants or telecommunication systems. In this regard, private capital is a viable channel to ensure that some essential projects are implemented. A German firm, Detecon, (a sub-sidiary of Deutsche Telekom), last February acquired a 51% stake in Uganda Telecoms Ltd for $33.5m and committed to investing $110m to expand the network by a further 100,000 lines within five years. Similarly, Camtel Mobile (Cameroon) was sold to Mobile Telephone Network of South Africa for $61m on condition that the SA operator invested an additional $225m over the medium-term. Since the partial privatisation of Telkom (South Africa) in 1997, 1.6m new lines have been added, mostly in poor areas, and overall telecoms efficiency has improved. In 1999, Telkom recorded a profit of R2.3bn on a total turnover of R22.6bn.

Lastly, wider share ownership spurs the development of domestic capital markets. The IFC suggests that extensive privatisation benefits capital markers in three ways. The sale of productive assets to private investors produces a significant wealth distribution effect, it injects greater depth and increases a market's capitalisation and liquidity, and public flotations of commercially oriented parastatals can induce more institutional investments from both domestic and foreign sources into African stock markets.

Labour unions' concerns

Labour unions are justifiably concerned over unemployment. Many countries, in response to these concerns, have allocated shares to company staff. In Senegal, following the strategic sale of power utility Societe Nationale d'Electricite (SENELEC) in 1999, 10% shares were offered to its employees and 15% to the general public.

The long-term aim of privatisation programmes is to foster a deregulated and efficient marker economy with vastly improved basic infrastructure, higher production capacity, and greater private capital inflows. But privatisation programmes must be transparent and accompanied by liberalisation to ensure genuine competition, and effective regulations to counter anti-competitive practices, especially of natural monopolies.

SA's renewed commitment

The South African government is showing a renewed commitment to kick-start its privatisation drive and a new policy framework has set 2004 as the completion date. The public enterprise minister, Jeff Radebe, expects a 70% increase in privatisation receipts to R4Obn over the next three years, though independent analysts estimate that the annual sell-off proceeds could total Rl5bn to R2Obn. The estimated worth of state assets is officially assessed at Rl7Obn.

However, after the partial divestment of Telkom, in which SBC Communications of the US and Telekom Malaysia acquired a 30% ($1,261m) stake in March 1997, progress in the programme has remained slow. Thus far, the only important deals have been a partial (20%) sale of the Airports Company South Africa in March 1998 for $245m to Aeroporti di Roma (ADR) -- the operator of Rome's airport -- and a 20% stake in South African Airways (SAA) to Swissair Group for $230m in November 1999. Both Swissair and ADR have options to increase their respective investments by a further 10% by the end of this year.

The policy framework unveiled last August focuses on the 'Big Four' parastatals -- Eskom (power utility), Telkom (telecoms monopoly), Denel (defence industry) and Transnet (air, road and rail transport). These entities are worth in excess of R150bn, equivalent to almost 90% of state-held assets, and account for over 75% of the employees of South Africa's SOEs. Their sell-offs, even in tranches, could attract substantial foreign inward investment. The US credit ratings agency, Standard & Poor's, comments: "Privatisation is important for the signal it sends in addition to helping liquidity."

Presently, the big four are undergoing comprehensive restructuring. Eskom will be broken up into three separate groups (generation, transmission and distribution) to promote competition and efficiency. Subsequently, strategic partners will be selected for generation and distribution businesses.

By the end of 2001, Pretoria has pledged to reduce its 70% stake in Telkom through an initial public offering and by allocating 10% shares for black empowerment groups and employees. In addition, Telkom's monopoly will be abolished and a second national operator will receive a government licence.

SAA, which ranks in the list of the world's top 50 national air carriers, is planning a flotation in 2001, with an expected listing on the London stock exchange. The government also intends to dispose of other Transnet portfolios, including Spoornet (rail operator), Autopax (inter-city service), Auronet (road business) and Translux (coach companies). The main obstacle to the privatisation of Transnet is the group's large debts, estimated at R27bn. Finally, Denel is to be unbundled into four separate corporate entities and strategic partners will be selected. BAE Systems (formerly British Aerospace) is expected to acquire a 20% stake.

Nigeria's strategy

The Nigerian government is keen to accelerate its privatisation programme as part of a wider diversification strategy. Abuja has embarked on a three-phase plan, with the aim of reviving a stagnant non-oil economy, securing new funding from the IFIs and attracting FDI into manufacturing and infrastructural development.

Phase one was largely completed by end-June and it raised naira N20bn. The government's shares in 11 enterprises were divested. They included West Africa Portland Cement, Ashaka Cement, Cement Company of Northern Nigeria, Benue Cement, National Oil & Chemical Marketing Company, Unipetrol, African Petroleum, FSB International Bank, International Merchant Bank, and NAL Merchant Bank. Blue Circle Industries (UK) acquired a majority stake in West Africa Portland Cement.

According to the Nigeria's Bureau of Public Enterprises, (BPE), Phase two will entail divesting shares in 39 companies engaged in motor assembly plants, insurance, sugar and paper mills, oil services and hotels. Phase Two is expected to raise N30bn. The programme is scheduled for completion by the end of 2000 or early 2001. The prominent names involved are Volkswagen of Nigeria, Peugeot Automobile of Nigeria, Sheraton Hotel (Abuja), NICON Insurance Plc, Nigeria Reinsurance Corp and Nigerian Aviation Company. The BPE estimates this year's privatisation proceeds at N45bn.

Phase three will attract much international interest. This involves the privatisation of huge public utilities such as telecoms plus four oil refineries. Others on the list for this round of privatisation include Nigerian Gas Company, National Fertiliser Company, Nigeria Airways and Nigerian Railway Corp. The government has pledged to make the bidding process more transparent and will sell 40% of the equity to core strategic partners with proven records of managerial, financial and technical expertise.

According to the BPE, which is advised by US investment bank Solomon Smith Barney, in March and November 2001 it will select core investors for the power and telecoms sectors; public offers for Nigerian Telecoms (NITEL) and the National Electrical Power Authority (NEPA) will begin by June 2002 and February 2003 respectively. NEPA will be restructured into between 24 and 32 companies, separately focusing on generation, transmission and distribution. Estimates for the sale of NITEL range between $3bn and $5bn.

Nigeria's telecoms sector is in dire need of massive long-term investment in order to increase Nigeria's teledensity ratio, currently just 0.45% compared to a world average of 10%. Fully deregulated energy and telecoms industries could attract $2Obn in FDI over the long term.

The country's crown jewel remains the Nigerian National Petroleum Corp (NNPC), which retains 60% stakes in seven joint ventures with foreign oil companies. According to estimates, NNPC's stakes in joint-venture oil exploration and production is worth over $8bn. But the group's managing director, Chief Gaius Obaseki, has ruled out privatisation for the foreseeable future.

Kenya's commitments

Kenya is committed under the terms of its IMF agreement to privatise 27 key SOEs over the next 12 to 18 months. Privatisation receipts are projected at Kenya shillings 26bn. Main candidates are Telkom Kenya, Kenya Commercial Bank (Absa, South Africa's second largest bank has expressed an interest in acquiring a 35% stake), Kenya Power & Lighting Company, Kenya Railways, Kenya Pipeline Company, the Mombasa Port (which handles 250,000 containers a year) and Kenya Petroleum Refinery (50% owned by the government).

Zambia improves investor confidence

The long-awaited privatisation of Zambia Consolidated Copper Mines last April has restored investor confidence. The Nampundwe, Nchanga and Konkola mines (which constituted 70% of ZCCM's assets) were sold to Anglo American with remaining assets acquired by Canada's First Quantum Minerals and Swiss-based Glencore International.

Foreign mining houses are committed to heavy capital investments over the medium-term, exerting favourable 'multiplier-effects' on the economy. Copper output is forecast to increase to 730m lbs a year by 2004, of which Anglo's share is projected at 60% plus of total.

The Outlook:

The trend towards privatisation is now becoming almost irreversible, as more governments realise potential benefits from privatisation-related FDI.

Over the next few years, more SOEs will be sold off, as authorities seek to improve operational efficiency and reduce fiscal burdens, especially in countries where the public sector still consumes a large portion of GDP, as in Nigeria

Unlike the early nineties, when privatisations and private investment in SSA were mainly focused on the primary sector (especially oil and mining), recent trends have become more diverse to include telecommunications (in the case of Uganda Telecoms), utilities (SENELEC), national airlines (Kenya Airways, Air Senegal International), banking (Commercial Bank of Zimbabwe and the National Bank of Commerce, Tanzania) and manufacturing.

African state assets, not previously mentioned, listed by sector and scheduled for privatisation over the next three years include:

Telecoms: Malawi Telecom, Sotelma (Mali), Lesotho Telecoms Corp (70% stake), Mauritius Telecom (France Telecom and Portugal Telecom have expressed an interest to acquiring a 40% stake for $200m), Tanzania Telecoms Company Ltd (35% stake), Niger's SONITEL (51% stake), Zambia Telecoms Company, Cameroon Telecoms (51% stake), Botswana Telecoms Corp., the Post & Telecommunications Office (Gabon) and Rwandatel (50% stake). Recently, Telekom Malaysia has signed an accord to purchase a further 15% stake in Ghana Telecoms Company Ltd for $100m (in addition to its 30% equity holding).

Public utilities: Zimbabwe Electricity Supply Authority, Tanzania Electric Supply Company, Dar es Salaam Water & Sewerage Authority, Companhia das Aguas e da Electricidade de Cabo Verde, Sociiti nationale des eaux du Cameroun (water provider), Zambia Electricity Supply Corp., Uganda Electricity Board, and National Power Authority (Sierra Leone).

Transportation: Air Madagascar, Air Ivoire, Ghana Airways, TACV-Airlines (Cape Verde), Air Zimbabwe, Affretair (Zimbabwean cargo carrier), Air Botswana, Air Afrique (owned by 11 Francophone governments, whose holdings will decline from 68% to 33%), Lesotho Airways, Air Malawi, National Railways of Zimbabwe, Botswana Railways, Sudan Railways Corp., Tanzania Railways Corp., Zambia Railways Ltd, Djibouti Port (the largest in the Horn of Africa), and the Maputo Port (Mozambique).

Oil: Societe Ivoirienne de Raffinage (Cote d'Ivoire), reputed as one of Africa's most sophisticated refineries, with a turnover in 1999 of CFA francs 365bn; and National Oil Company (Zimbabwe).

Agriculture: Kenya Tea Development Authority, Agriculture Development & Marketing Corp. (Malawi), Societe Nationale de Promotion Agricole (a cotton marketing company in Benin), Compagnie Ivoirienne pour le Developpement des Textiles, Societe de Developpement des Fibres Textiles (Senegal) and the Cameroon Development Corp.

Banking: Ghana Commercial Bank (divesting the government's remaining 46% stake), Zambia National Commercial Bank (10% may be sold with management control) and Agribank (Zimbabwe).

MAJOR EXPANSION AT JO'BURG INTERNATIONAL AIRPORT

Johannesburg International Airport, a division of Airports Company South Africa (ACSA), privatised in 1998 and with a 20% share held by Aeroport de Roma, is to invest some R283m ($40m) this financial year and R1.94bn over the next five years to meet anticipated traffic flows which according to Rory Mackey, JIA's general manager. are projected to rise from a current 1 im passengers per year to 18m over the next 10 years

JIA will spend most of the investment in creating a northern and southern terminal to increase capacity by 16 aircraft.

ACSA, which owns and operates nine airports in South Africa, has also given the go-ahead for a new domestic terminal building to be completed by 2002.

Mr Mackey stated: "These developments are major milestones in ACSA's process of upgrading facilities at JIA to world standards." To further serve passengers, ACSA has a new duty-free mall and is to build a R86m hotel at JIA to be known as the Airport Sun InterContinental and managed by Southern Sun hotels.

On the freight side, ACSA is building a R24m bonded warehouse to handle some of the 300,000 tons of cargo that passes through JIA each year.

Meanwhile, SAA and the rival BA/ Comair partnership have both announced increases to their flights from SA to sub-Saharan African destinations. SAA has also announced plans to increase international services with two additional flights a week to the US becoming operational next year, and two additional flights a week to London Heathrow added to its schedulewhen slots become available.

SAA seems intent on securing and strengthening its dominant position in Africa by entering flight and code share deals. It entered a one-year agreement with Nigeria Airways, operational from last month (October), as a codeshare partner on flights from Lagos to New York supplying equipment and flight crews. Half the cabin crew are Nigeria Airways personnel.

SAA would like to become a strategic equity partner with NA when the West African airline is privatised next year. This would allow SAA to develop Lagos as its West Africa hub. But SAA may face a challenge from Britain's Virgin Airlines which would also be interested in a partnership deal on the Lagos/New York route. Virgin, which serves both Johannesburg and Cape Town from London, had withdrawn from negotiations when arch-rivals BA were chosen to partner NA on the Lagos/London route, but have since signalled renewed interest after Nigerian authorities indicated the need for competition on the transatlantic route. -- Stephen Williams