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Why privatise?

Emmanuelle Moors De Giorgio explains the pros and cons of privatisation and examines the advantages and the disadvantages of pursuing the process in Africa.

Since the late 1980s, few would deny that most African governments have played their own part in paying lip-service to privatisation. Apart from a few exceptions, such as reform pioneers like Ghana, the reversal of post-independence development policies has been pretty slow off the mark. At least, that was the case until the past 12 months or so when the process moved up a gear.

Today, Africa's private sector is increasingly present by virtue of market liberalisation. More and more countries are cementing their intentions to establish a private sector base.

Zimbabwe confirmed its commitment in May this year with the privatisation of Ziscosteel. In the same month, Zambia agreed to award the development of Konkola Deep Copper Mine to a consortium led by Anglo American. Even Ethiopia revised its Investment Act in June, giving real incentives to foreign companies.

On a global scale, the bulk of privatisations took off after the fall of the Berlin Wall. With such momentum pushing forth these trendy transitions, it is easy to lose sight of the actual advantages that such a policy boasts. A simple but vital question, therefore, warrants attention. Why privatise?

Mr Valentine Chitalu, Chief Executive of the Zambia Privatisation Agency (ZPA) states, "the most significant and lasting benefits will not be the cash received. Rather it is the capital investments, the jobs taken forward and the jobs created, the liabilities assumed, the transformation of inefficient, subsidised companies into profit-making, competitive businesses."

These economic advantages come through technology transfers and increased access to markets. In addition, explains Ms Cynthia Valianti Corbett, an investment banker, "wide-ranging privatisation programmes are necessary for local stock exchanges to really grow and create the liquidity needed for foreign investors."

The Comite de Privatisations in Cote d'Ivoire states that, with privatisations, "a government can refocus the activities of the state to those sectors traditionally under its responsibility - education, health, infrastructure, security and defense - and leave the private sector to produce goods and services for the market."

On a macroeconomic level, privatisations form a vital role in encouraging permanent growth. For example, fostering a free market, high saving rates, low taxes and primary education, together with maximising existing resources and technologies.

The International Finance Corporation (IFC) devotes much of its energy to advising governments in the early stages of privatisation programmes and investing in privatised companies.

One of the top four priorities of the African Development Bank is technical assistance in privatisations. In June, the UN Economic Commission for Africa held a conference, attended by the newly-formed African Capital Markets Forum, aimed at reviving private investment in Africa.

The privatisation process

With this in mind, let us now look at the privatisation process and explore some of the difficulties which pave its path.

Under the aegis of the World Bank, many African governments have already established privatisation agencies and obtained some form of technical assistance.

The first step, nevertheless, is the selection of a financial adviser. The ideal candidate has a thorough knowledge of markets and privatisation techniques, the ability to manage complex operations, an understanding of the key elements vital to sellers and buyers and the capacity to perceive national interest and public opinion.

A local presence is usually required as is a pioneer approach. The South African Standard Corporate and Merchant Bank, for example, wrote the entire procedures for receiving banks in the privatisation of Zambia's Chilanga Cement.

The ideal selection process is based on defined criteria, such as cost. African governments should strike a balance between paying the necessary fees and restraining the budget to the extent that advisers operate at a loss.

One solution is to assign most of the background work to development agencies.

Once mandated, advisers begin the assignment by analysing the elements of a privatisation framework. These include: The country, local capital markets, the specific industry, the privatisation programme, the company itself, and all the key issues and implications linked to the privatisation process and proposed structure.

This preliminary analysis is usually followed by the development of a strategy. At this stage, the core activities are in the following areas: Structuring or identifying both the government's and company's objectives; an analysis of priorities and unavoidable trade-offs; a demand assessment; preparation, including pre-privatisation measures; due diligence; and finally valuation, which is generally for political reasons although the eventual price will be governed by the market.

Of course, privatisations are never straight forward and, according to some, not always the best option. Listed below are a number of criticisms that are commonly launched against privatisations. To what extent can they be justified?

"Privatisations replace state monopolies by private monopolies?"

This is a possibility but one that can be mitigated. In Zambia, privatisation of the state-owned telecommunications company has involved opening up the sector to competition and appointing a regulatory authority.

Another solution is to break down a monopoly into several concessions before it is privatised. Again, Zambia's Konkolo North mine is up for competitive bidding because, says the Minister of Mines and Minerals Development, "it is not our wish to see one company acquiring the best ore body in the country."

According to the IFC, "even when monopolies remain, privatisations bring important economic gains especially in terms of services and coverage". Nonetheless, these may be obtained by opening the sector to competition.

"The sale of important companies to foreigners amounts to a new form of colonisation?"

The scarce amount of local capital in Africa puts it in a position where the level of foreign investment is likely to be high. However, this can always be restricted as in Tunisia and Zambia, where foreign investors were excluded from primary public share offers.

Yet the overwhelming aim of privatisations is to raise performance which requires know-how and market access. As a rule, this can only be found outside of the country. This year, for example, 26% of Kenya Airways was sold to KLM.

Generally, privatisations do increase direct foreign investment in developing countries, something which had been decreasing in Africa. In the 1970s, it stood at 15.4% but dropped to 8.7% in the 1980s and averaged at 3.4% during the first half of the 1990s.

Foreign investment is also coming from the multitude of recently-established Africa privatisation funds development finance institutions. Arguably, this is less constraining than aid money. National sensitivities may be mitigated by the increasing involvement of African Americans in privatised companies, such as the Calvert New Africa Fund.

On the other hand, the proposed conversion of external public debt into shares of newly privatised companies should be considered with great care. Such schemes may enable creditor countries to retain a strong economic influence over indebted countries, or to subsidise foreign investments by their own blue-chip companies through attractive debt-for-equity conversion ratios.

"Privatisations increase unemployment and thus threaten the stability of democratic governments?"

In the short term it is true that privatisation goes hand-in-hand with restructuring which generally means laying-off workers. On the other hand, it can be argued that privatisations allow governments to separate social and economic objectives. This would be entirely acceptable if governments could be relied upon to cushion the short-term social harm brought about.

"Privatisations mean losing control of key sectors of the economy?"

The very raison d'etre of privatisations is that the private sector is better at running companies than the government! Nevertheless, some governments insist on retaining an interest.

Inversely, strategic investors can be offered a controlling stake, as in Uganda. Countries can also adopt the strategy of Zimbabwe, which recently announced the privatisation of "loss-making national companies which are burdening the national budget."

Africa is not the only place where governments would rather own profit-making companies for as long as possible. The French Government is happy to rely on the profits of France Telecom in order to meet the budget deficit target set by the European Union for entry into the monetary union.

Further, control can always be exerted through regulatory bodies, especially for the infrastructure and media sectors.


To close this chapter, let's take a look at the factors that can have an impact on the success of African privatisations.

According to the IFC, public authorities should almost never invest before a sale except to complete existing programmes or to ensure effective business and management. On the other hand, who could argue that the extensive restructuring of Kenya Airways did not contribute to the success of its privatisation?

Secondly, for the World Bank, the more competitive the sector and the better the macroeconomic and regulatory framework, the higher the chances of success.

The Chief Executive of the ZPA says, "the success of [Zambia's] privatisation programme is due to the unwavering commitment of the government, a rare political consensus and the dedication of the professionals working at ZPA," while "the primary problem had been opposition to privatisation generated by vested interest in ZIMCO."

African privatisations will remain controversial because they represent a complete turnaround from the ideologies that shaped the liberation struggles. The positive aspect of this, however, is that it forces African leaders to tread the privatisation road with extra care.
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Title Annotation:advantages and disadvantages of privatization in Africa
Author:De Giorgio, Emmanuelle Moors
Publication:African Business
Date:Oct 1, 1996
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