Paper
Presentations Session
RESTRUCTURING STATE-OWNED ENTERPRISES
THROUGH PRIVATISATION
by
Lumbini
Kulasekera
Manager
Legal
Public Enterprises Reform Commission of Sri Lanka
INTRODUCTION
The
system of state enterprises was established to provide support. Support for
consumers in the form of better products and services at less cost. Support
for workers in the form of rewarding and meaningful employment. Support for
the government in the form of revenues. But many state enterprises can no
longer provide this support. In fact, they are in need of support
themselves. Support from the consumers who have to endure poor services and
poor value. Support from the workers who have to toil for low wages and poor
prospects. Support from the government that has to provide endless subsidies
and costly protection mechanisms.
In
many countries state enterprises are in very poor state. Political
interference, corruption, lack of vision, a dearth of skills, inadequate
investment, all these factors have lead to huge losses. They are being kept
on support, which comes in the form of state subsidies and protection. State
enterprises are fuelled by money. Governments spend millions subsidising
poor management. Consumers pay millions for the high price of inefficiency.
Workers lose millions as a result of low wages and poor prospects.
However,
many state enterprises can seem large, imposing and secure from the outside.
But a closer look and what do we see? Stalled production lines, crumbling
buildings, rusting vehicles, idle workers, unsettled overdrafts and unpaid
bills.
These
institutions in fact, should be productive national assets, making a
contribution to the progress and welfare of the country. But years of
politicisation, corruption, mismanagement, inadequate investment, lack of
vision and discipline have stripped them of their potential making them
colossal liabilities. Over the years enormous amounts of money have been
spent to sustain ailing state enterprises. Governments borrow heavily from
the state banks and from foreign financial institutions. Aid donors will no
longer support wasteful expenditure. Therefore, either unproductive state
enterprises will have to be shut down or the entire economy will go
bankrupt.
It
is these unsettling realities that makes a strong case for privatisation in
most developed and less developed countries. State enterprises have to be
energised such that they contribute to the economy. Privatisation therefore,
is a critical component of reform in most countries. The generally accepted
position on privatisation, currently derives from long experience with
failed attempts at reforming public enterprises. For years governments have
been taking effort to improve state enterprise performance with limited
success. The costs have been high. In many countries inefficient state
enterprises drain budgets, divert resources from health and education,
damage the banking sector, and limit the development of the private sector.
What
do Britain and China have in common? What do Russia and Germany share? How
are India and Pakistan united? After all, the differences are far more
obvious. Some of these countries are rich, and some are poor. Some are
large, some are small. Some have left-wing governments, others lean right.
The answer is privatisation. Between 1988 and 1993, roughly 2,700 state
owned enterprises in over 95 countries were transferred to private
ownership, raising over $ 270 billion. For so many diverse nations to adopt
a common policy, there must be a compelling reason for it.
In fact, there are many.
Privatisation is a means of raising much-needed revenue for
states. It brings in investment capital for the industry or company
being privatised. It reduces the often corrupting role the government plays
in the economy. It promotes wider share ownership. It exposes to market
competition and discipline and there by increasing efficiency and
productivity. And the increasing globalisation of the world economy have
made competitiveness in international trade an essential factor in a
nation’s ability to create jobs, raise wages and generate wealth.
The
Asian financial crisis that dominated economic events since 1998 also have
caused a considerable drag on the progress of emerging markets and
developing economies. Consequently they faced a serious economic recession
with negative growth, high unemployment, rapid inflation, sharp devaluation
and rising poverty. The repercussions of these events were the reversal of
capital flows, weakening of exchange rates, a fall in production and closure
of enterprises. The response to the economic fallout introduced a new wave
of reforms placing emphasis on prudent management of the capital account,
strengthening financial institutions, corporate governance and the
regulatory environment. These economies were also required to go through a
period of restructuring in order to reconsolidate their lost position in the
international economy.
SOE reform could be based on the level of productivity performance,
causes of increases in loss-making enterprises, macroeconomic contributions
of SOE reform, and increase of SOE sector’s debt-equity ratio.
Inefficiency and poor performance of SOEs
place enormous negative implications on the economy as a whole.
Privatisation therefore, is inevitable and / or necessary.
This
paper seeks to present an overview of state sector reform through
privatisation and identify the key policy and programme issues that should
be addressed in moving ahead.
REFORM OF THE ENTRPRISE SECTOR : AN EVOLVING PROGRAMME
Up
until the mid 1970s SOEs have been a key element in many economies. In turn
their reform became a critical component of the development strategy
necessitated by the market oriented development approaches adopted
thereafter. This section will examine the evolution of the SOE reforms.
The need for
public enterprise reform:
The
rationale for a SOE sector was constituted by a combination of strategic
arguments. In many economies government intervention was considered
necessary due to the weakness of the private sector. Larger number of public
state owned enterprises are engaged in commercial activities in many sectors
of the economy which suffer from institutional duplication, lack of
commercial practices, inflexible pricing policies, inadequate capital
investments and modern technology, lack of corporate vision, outdated
procurement systems and high debt.
The
presence of certain public enterprises may be necessary for strategic
intervention in the market. But in order to be effective, such enterprises
have to be more efficient than private enterprises and maintain an effective
market share. Often these enterprises, which are inefficient, have
contributed to providing protection to private enterprises instead of
creating price competition.
The Privatization Initiative:
Private
sector led development is the cornerstone of the economic development
strategy in many countries. For many nations privatisation has become the
only effective method of raising investment capital on favourabale terms.
High levels of past public sector borrowings have put many nations under
severe debt burdens. As a result these nations have been left with no choice
but to sell state assets to reduce debt, generate revenue, and raise
investment capital.
Although privatisation has been going on in developed countries since
the early 1980s, it is a relatively new phenomenon in developing Asia.
In transition Asian economies, privatisation forms the core of the
fundamental systemic changes in their transition to market economies. In
some Asian economies, the recent financial crisis has accelerated the
increase of private-sector involvement. With the globalisation of the world
economy, the global marketplace is becoming more competitive. This would
mean that in order to survive the developing countries would have to achieve
greater efficiency and increased productivity.
The
privatization initiative has as its objectives the following:
-
To reduce the fiscal burden and to permit industries to raise funds
from the capital market.
-
To increase competition and efficiency and induce technological
modernisation as well as provide better consumer services.
-
To encourage broad-based share ownership in the society.
-
To create an enterprise culture.
The
privatization of SOEs is complemented and supported by several other reform
measures, notably:
-
strengthening the capital market;
-
facilitating labour retrenchment and compensation;
-
reforming the taxation structure to create and maintain an
environment conducive to privatization; and
-
facilitating required regulatory activities.
PRIVATISATION AND ENTERPRISE SECTOR REFORM
Restructuring
and privatisation of state-owned enterprises (SOEs) are said to be
alternative, and often complementary, approaches to meeting the objectives
of national and international economic efficiency.. Privatisation and
enterprise reform has been identified as key element of structural reform in
many developed as well as developing and transition economies. By
restructuring through
privatisation, governments attempts to pursue many of its objectives.
The Scope and Impact of Privatization:
Privatisation
can rejuvenate ailing state enterprises, making them vigorous competitors
that provide better prospects for their employees, improved services for
consumers, and bigger contributions to the national economy. Privatisation
can liberate resources that the state can use to treat other urgent problems
– such as improving education, health and infrastructure, and paying down
the public debt. This will be in keeping with the global trend of moving
governments out of commercial activities.
However,
it is stated that the primary objective of privatisation is to promote
economic efficiency by fostering well-functioning and competitive markets
and internationally competitive enterprises and facilitating their effective
participation in a globalising and liberalising world economy.
Private
management can move in new capital, up-to-date technology, and modern skills
and expertise. Through privatisation state enterprises can also be freed
from political interference that hinders their progress.
Reforms
generate permanent revenue sources by way of lease rent, income tax,
indirect taxes and dividend. The divestiture of enterprises also improves
budgetary conditions by eliminating Government transfers to loss making
enterprises.
The
private sector’s commitment to invest in vital sectors such as gas, steel,
telecommunications and plantations, will enable public investment to
gradually move towards development activities such as education, health,
environment, rural development, essential infrastructure and poverty
alleviation. Therefore, privatisation requires strong political commitment
and leadership, an appropriate legal and regulatory framework, reforms in
other sectors and macroeconomic stability.
Methodology and Procedure in Privatization:
It
is important to identify objectives and benefits of privatization.
Efficiency, investment, output, fiscal contributions, cost- recovery based
resource allocation, infrastructure for industrial investment, and domestic
capital market development. There are microeconomic aspects as well as
macroeconomic issues of privatisation.
The
SOE enterprise reform strategy must provide for the adoption of consistent
processes and procedures in transactions making for greater transparency of
privatisations and should not pursued in a hurry. Privatisation is
essentially a political process, however inappropriate institutional
frameworks and lack of technical capacity often slow the progress of
privatsation. Regulation, corporate governance, workers welfare and social
impacts are most important issues
Techniques
of privatising SOEs, could include contracting management, leasing, transfer
of ownership through tender, sale of minority shares with management,
management by-outs, establishment of joint ventures of private- public
partnerships and public offers on the stock market. Corporatisation of
public enterprises is also an option. An approach favouring one technique
over another is not pursued and each divestiture must be studied in the
context of national, economic and sectoral policies, before a decision is
made on the reform strategy.
Thus
several reform strategies are available depending upon the nature of the
privatization. Each has its own advantages and disadvantages These include:
-
The sale of the enterprise wherever it was no longer relevant and
meaningful for the enterprise to function under government ownership.
-
Transfer of minority ownership shares in the case of economically
strategic enterprises or the divestiture with the government retaining a
"golden share" in order to safeguard national interests.
-
Transfer of ownership through tender where it is important to bring
strategic investors into commercial activities of the economy.
-
Sale by public offer through the Stock Exchange wherever feasible.
-
Concessions and Licenses.
-
Leases.
-
Management Contracts.
-
Employee Stock Option Program (ESOP).
Specific issues in divestiture
process are complex and often require outside foreign assistance for
managing the reform process. They
are,
-
Selection of enterprises for reform.
-
Determination of reform options.
-
Recommendation of the reform strategy to Government.
-
Marketing the transaction.
-
Pre-qualification and execution.
-
Monitoring, performance and evaluation.
Regulatory Reform Initiatives:
In
order to carry forward the public enterprise reform it must run parallel
with macroeconomic reforms, successfully, it is necessary to strengthen
existing regulatory arrangements and establish sector specific regulatory
authorities wherever necessary. Tariff revisions, consumer interest, social
obligations, licensing procedures, intermediation and dispute settlements
are major responsibilities of this regulatory authority.
The Securities and Exchange Commission is responsible
for stock market regulation. Close surveillance of listed companies to
safeguard shareholder interest, development of securities and debt markets
and further promotion of public ownership, are important responsibilities of
the Commission.
Legislation
to safeguard consumer interest, fair trading and forming consumer
associations also needed in order to promote reforms.
Institutionalising Privatisation and Reform of the
Enterprise Sector:
An
important aspect of reform process is the establishment of an effective
privatisation agency to advise and assist the Government in the reform of
public enterprises. Constitutional, statutory, regulatory and bureaucratic
factors can either hamper or make impossible the privatisation process. As
the focal point for enterprise reform, such an agency bring together the key
policy actors and expertise relevant to the process. The reform procedure
and workplan incorporates consultation and discussion with the employees,
unions and the public.
KEY ISSUES : CHALLENGES OF PRIVATISATION AND ENTERPRISE SECTOR REFORM
There
are many practical obstacles and challenges to the privatisation and public
enterprise reforms that has to be addressed, to build on its successes and
move ahead in achieving the expected results. This section will examine key
issues and challenges of the privatization and enterprise reform programme.
Privatization and Enterprise Reform Strategy:
Linking
the privatisation programme to the national development strategy is
necessary to give greater coherence to privatisation as a reform strategy.
Thus a medium term privatisation framework preferably as a component of a
broader national development plan, incorporating clear policy objectives for
private sector infrastructure as well, which addresses clearly the economic
and social objectives of Governments, and achieves the necessary longer term
political endorsement is the necessary way to move forward.
Enabling Legal Framework:
The
need to amend and strengthen privatisation related legislation. Corporate
restructuring following privatisation usually involves retrenchment. It is
therefore a clear disincentive to potential buyers and the SOEs if there is
no clear legal mandate to make prudent adjustments to their labour force.
Hence the laws relating to termination of employees and payment of
retrenchment benefits need to be reviewed in order to ensure consistency in
retrenchment and establish a minimum and acceptable methodology to the
parties concerned. It is also necessary to Improve the effectiveness of the
court system in implementing liquidations in a timely manner.
Retrenchment Benefits and Welfare:
There
are no defined formulas for determination of redundancy payments to be made
to the retrenched workers resulting from corporate restructuring. An agreed
upon formula-based minimum compensation package is necessary not only to
better estimate costs relating to privatization in both pre and post
privatization phases. Such a formula-based minimum package will permit
eliminate uncertainty as far as both parties are concerned in the
negotiation phase.
Accounts and Audits of Government Entities:
Pre-privatisation
restructuring initiatives have been usually hampered by the lack of updated
audited accounts. This makes sectoral or individual company assessment
difficult. Usually SOEs are two or more years behind in the preparation of
their mandated accounts. Hence there is a need for a comprehensive programme
for updating audits of the SOEs that have been earmarked for divestment.
Corporate Governance:
Standards
of corporate governance of SOEs are very much out of step with the practices
necessary to manage pre-privatization restructuring and divestiture. It is
necessary to initiate operational changes and improve control over resources
to prevent losses and generally to prepare the SOE for privatisation at the
best price. It is therefore necessary to introduce corporate governance best
practices into SOEs ear marked for divestment. This is a further area of
pre-privatization restructuring necessary to make the privatisation
programme more effective.
Public Awareness and Support:
Privatization
is socially and politically sensitive. While a good results oriented
programme is a necessary condition for successful privatisation, it is not a
sufficient one. The support of the stakeholders is especially important.
Therefore while it is important to involve the stakeholders as far as
possible in the privatisation programme, it is also important to get the
privatisation message across to the unions and workers, public officers, the
media and the people at large. Informing and making people aware about the
benefits of privatisation to the economy can in most of the cases be a
pre-condition for success.
Support to the Private Sector:
The
success of a privatization is not only the revenue accruing to the
government as a result of the divstitutre, but also being able to attract
good investors and the technical and managerial efficiency of
post-privatization management of the enterprise. It is therefore necessary
to incentivise the private sector (domestic and regional, in particular) to
purchase and restructure SOEs by providing post privatisation support to the
divested enterprises. The new owners of SOEs should be encouraged in the
general restructuring, systems and capital expenditure, employment focussed
re-training, and implementation of retrechment
or recruitment plans;
Post-privatization Monitoring and Performance
Assessment:
Post-privatization
monitoring is as much a critical element in a successful privatization
programme as is the efficient and speedy conduct of the privatization
transaction. Important aspects of post-privatization monitoring will
include;
-
enforcing sale and purchase agreement terms and conditions;
-
review of business plans to ensure compliance with proposal, or in
the case of non-compliance, review of current plans;
-
facilitating the implementation of the business plans;
-
ensuring compliance with regulatory aspects of the transaction; and,
-
ensuring that government interests are protected where it continues
to own shares.
CONCLUDING REMARKS
Reform of SOEs is urgently warranted to help the desired switch-over to
a market economy. However, institutional weaknesses dictate a slower
approach. It is increasingly difficult for governments to provide subsidies
to loss-making SOEs, since fiscal resources are shrinking as a share of
national output. It is difficult where the state after having been in direct
control of the "commanding heights" of the economy for a long
period must now restructure its role and functions in managing the economy
where the private sector takes the lead role. Privatisation therefore is
critical transferring SOEs to private owners to bringing about expanded
competition and productive efficiency. The issues and challenges noted above
are reform imperatives in order that privatisation stimulates efficiency,
encourages investment and thereby lead to growth and employment.