Privatisation in today’s world is a common word, but its impact, especially in regions like Africa, is less known. With increasing globalisation, the scope to privatise enterprises has increased exponentially across the world. The beginning of the decade saw great economic promises from Africa, but the transaction value of privatisation in Sub-Saharan Africa declined by 29% between 2007 and 2008. Can this dip be attributed only to recessionary pressures? Why do African nations want to privatise? What are their reservations and how can these be overcome?

This CAI paper explores the trends in the recent past and the reason why governments are on the look-out to privatise their enterprises. It also sheds light on the impact of privatisation and the factors that can lead to a successful privatisation programme.

What it means to go private

Privatisation can be defined as “either the sale to private parties of a controlling interest in the share capital of a public enterprise or of a substantial part of its assets”, or “the transfer to private parties of operational control of a public enterprise or a substantial part of its assets.”⁽²⁾ In other words, privatisation is the transfer from the public to the private sector of assets in terms of ownership, management, finance and/or control. In its narrowest sense, it is the sale of public assets to the private sector, but it has also been linked to a reduced regulatory role of government and policies of liberalisation and deregulation.⁽³⁾

The privatisation of an enterprise can be in the form of a management contract, lease, concession, divestiture, joint venture or an asset sale. The extent of ownership, control, transaction value and monetary benefit that lies with the state is largely dependent on the form of privatisation that has been chosen.

Trends in the recent past

During the 2000-2005 period, Sub-Saharan African countries raised US$ 11 billion in privatisation proceeds, representing 3% of the global total for developing countries.⁽⁴⁾ A total of 960 transactions were conducted in 37 countries of the region, and this represents the fourth highest number of transactions, behind Europe, Central Asia and Latin America.⁽⁵⁾ However, 70% of the transactions were low-value firms in competitive sectors. Four countries, namely Ghana, Nigeria, South Africa and Zambia, were the largest contributors. South Africa alone has accounted for up to 40% of the region’s privatisation proceeds in recent years.⁽⁶⁾ Going private has not been an opportunity for all African countries and all industries.⁽⁷⁾

The total value of privatisation transactions in the Middle East and North Africa dropped by 45% to US$ 1.9 billion in 2008, but two countries reported gains.⁽⁸⁾ Egyptian value nearly tripled to US$ 926 million thanks to sales of a mobile licence, several manufacturing companies, and government stakes in 17 joint ventures. Tunisian value jumped from US$ 61 million to US$ 480 million, most of it from partial share sales in three financial companies. Moreover, privatisation transaction value in Sub-Saharan Africa declined by 29% to US$ 1.7 billion. The number of transactions in Ghana and Kenya cumulatively fell from 28 in 2007 to 3 in 2008. Nigeria had no transactions, after having 17 for US$ 1.4 billion in 2007.⁽⁹⁾

Why privatise? And why now?

Over the years, governments have emphasised opening up their economies to allow private investors to enter markets. The policy statements issued by governments that clearly state the objectives of their privatisation programmes have time and again emphasised the need to decentralise industries and consequently allow market forces to take their economies forward.

As shown in Figure 1, the reasons stated by the countries are numerous, ranging from broadening ownership, developing the private sector to increasing economic efficiency and reducing financial burden. However, how many have taken effective steps to fulfil those very objectives is a question that still remains unanswered. In some countries, such as Zambia, the privatisation programme is self-standing and has its own set of objectives. Elsewhere, for example in Benin, Cameroon, Ghana, Kenya, Nigeria and Tanzania, privatisation has been included as part of broader programmes of public enterprise reform, and objectives have been set collectively for commercialisation, restructuring, and privatisation. In 1993, six years after initiating privatisation, the Government of Ghana issued a policy paper in which the privatisation programme was stated to be “an ambitious attempt to unlock the economic potential of the country by permitting resources of people, money, and technology to be put to their best use and by increasing efficiency to achieve better living standards for all.”⁽¹⁰⁾ These statements, though clear in their intent, have not managed to provide a way to measure the extent to which privatisation has been successful in the region.

If the objectives mentioned by African nations are analysed carefully, two points seem to stand out very starkly. Firstly, West Africa makes no mention of broadening ownership as opposed to East and Southern Africa, where ownership is given prime importance. Secondly, not many countries make mention of raising revenue for their treasuries. Generally, raising revenue and decentralisation are seen as prime reasons for any form of privatisation. Can the absence of these objectives be attributed to sheer ignorance, or is it just a form of denial?⁽¹¹⁾

Figure 1: Country specific objectives for privatisation ⁽¹²⁾

One important factor that has not been considered by any country in its totality is competition. Though competition in essence can be seen as a derivative of many of the factors mentioned, only Ghana explicitly mentions competition.  Ghana also stands out as the first African country to have licensed a second general telecommunications operator, and is doing so at the same time as introducing a core investor into the existing utility. The government's policy is to stimulate investment and improvements in telecommunication services by introducing competition as early as possible. This is in contrast to other countries that prefer to privatise but continue with a telecommunications monopoly for some time in order to maximise proceeds. For example, Côte d'Ivoire has recently concluded a privatisation deal for its telecommunications company. Under the contract, the company will have a monopoly for seven years.⁽¹³⁾

Anti-privatisation: The naysayers

Proponents of privatisation constitute only one side of the story. The other comprises individuals who label privatisation as nothing short of a peril. Some African researchers and officials believe privatisation will concentrate power in the hands of a few, leaving the locals vulnerable. Clearly, a protectionist mind-set owing to their past, which was full of war, violence and social injustice, clouds their judgement and prevents them from accepting any form of change, whether good or bad.

Domestic private sectors usually have cosy supply relationships with public enterprises. These relations tend to be threatened by privatisation, given the more aggressive, quality-conscious, cost-cutting tendencies of private owners. Or there may even be cases wherein large conglomerates lobby with the government to reap monetary benefits of a tender or a project even if it is not in the favour of a national. In 2005, a Nigerian aluminium smelting company named ALSCON was up for grabs and only two companies, namely, BFIG Corporation of the United States (US) and Rusal of Russia participated. It was later reported that the interference of the Presidency in the sale of the company to Rusal, rather than to BFIG, the preferred bidder, was “fraudulent to the nation” as it caused the immediate loss of US$ 250 million, had Rusal paid the full amount it later accepted to pay.⁽¹⁴⁾  In African countries, several powerful groups exist that have material reasons to delay, dilute or sabotage public enterprise reform in general and privatisation in particular.⁽¹⁵⁾

Opponents of privatisation put forward their case by pointing to perceived economic, financial and social shortcomings. In the case of Zambia, a country which ran a privatisation programme described by the World Bank in 1998 as the most successful in Africa, many Zambians perceived privatisation as very negative, hence putting pressure on the government to rethink its policy.

The main concern is that choosing privatisation will benefit only foreigners, the upper class, and individuals who have well-established political clout. Also, many fear that these steps will automatically result in closure of local firms to give way to large foreign players, thereby worsening unemployment.

Impact of privatisation

Undoubtedly, the largest impact of privatisation is on two entities: the government, and the organisation, inclusive of its stakeholders. The biggest impact for the government is with respect to the revenues earned through privatisation. The sale proceeds are essentially incorporated by the governments of most African nations in their central budgets. This grants them ability to allocate funds in various projects simultaneously.⁽¹⁶⁾

However, changes in this cashflow trend will happen over a period of time, as illustrated in Figure 2. In the short run, the effect will be one-sided, either extremely high (shown in blue) or extremely low (shown in red) depending on the costs to be covered. By mid-term, the government will begin to ease off the amount of subsidies, leaving more disposable revenue for the government to hold. In the long term, the increased tax revenues from the privatised firms will lead to unconditional revenue gains for the government.

Figure 2: Government revenue from privatisation ⁽¹⁷⁾

On the other hand, the privatised organisation will see some drastic changes in its very foundation. With ownership structures changed, the performance of the organisation will follow a different trajectory altogether. Gauging the performance of an enterprise after its privatisation, especially in Africa, can, however, be a rather daunting task, given that these privatised companies are sought out by experienced investors. The results have generally been positive in the manufacturing, industrial and service sectors. Firms’ turnover and profitability have generally increased immediately following privatisation. Notwithstanding measurement problems, private investment has increased following privatisation relative to public investment.⁽¹⁸⁾

Monetary gains from privatisation account for only one side of the story. It has substantial impact on employment as well. The general trend remains that employment has been adversely affected in most areas. The workforce has diminished post privatisation, although the decrease has not been massive. In many countries, retrenchment packages have been taken very seriously.⁽¹⁹⁾

As mentioned earlier, although competition has not been mentioned explicitly as an objective in Figure 1, it is inevitable. With increasing numbers of private players attempting to enter markets, and with increasing demand, market aggression and competition will increase. Any company would wish to establish themselves first to gain competitive advantage, and as soon as one company is successful all others would choose to follow such a company’s footsteps.

Another issue is that of local versus foreign participation in privatisation deals, a highly political issue in many countries as it is linked both to the general public’s acceptance of privatisation policies and to transparency and governance issues. General findings show that local entrepreneurs have bought the vast majority of small and medium-sized enterprises. Large enterprises in strategic sectors, such as mining and public utilities, have invariably been taken over by foreign investors. As a rule, the larger the transaction value, the higher the involvement of foreign investors.⁽²⁰⁾ When nationals purchase public enterprises, they are more likely to buy on credit, and this has potential default implications. By comparison, foreign buyers favour cash.⁽²¹⁾

Factors behind the success of privatisation

Change, especially radical change, is bound to bring about a certain level of apprehension amongst the people of a nation and the state, and this reaction is valid. Where there is no precedent, privatisation can seem nothing short of a gamble. It is necessary for political leaders of a nation to have consensus on privatisation in order to ensure the sustainability of the programme, irrespective of the nation’s leadership changing hands. They must be prepared to defend their stance in favour of privatisation, notwithstanding pressure they might face from stakeholders. Nigeria, for example, has placed its privatisation programme under the office of the vice-president, which in some way is an indication of the importance the government attaches to the programme.

However, strong political will by itself is of no use. It must be augmented by establishing clear objectives. The reasons to privatise must be made clear before proceeding any further. Furthermore, these objectives must not be myopic in nature; else, they will be short-lived. Establishing short-term, mid-term and long-term objectives, with a mechanism for measurement, will ensure flawless execution and sustenance of any privatisation programme.

Stakeholders involved in privatisation programmes include trade unions, employees, consumers, government, the state, private entities and taxpayers. Each category of stakeholder has its own viewpoint and rationale, which could make or break the implementation of the privatisation programme. A participatory approach must be followed to ensure consensus prior to, during and after the programme, which will increase the chances of success.

Having a clear plan is of utmost importance, but even the best plan is incomplete without execution. In order to actualise the plan, a regulatory framework is necessary. Isatou Njie Saidy, current vice president of The Gambia, said in March 2004:

An effective regulatory framework, which is pro-competition, is essential as it serves as a signal and assurance to prospective and existing investors and firms about Government’s commitment to encourage market entry into a monopolistic market, by providing a level playing field. It deters both public and private monopolies from abusing their dominance to the detriment of new firms and eventually consumer welfare. Apart from its deterrent role, the regulatory framework mandates services providers to provide acceptable levels and quality of service through a performance incentive regime. It also gives them an incentive to deploy innovative and cost effective technologies to meet their licence obligations.⁽²²⁾

For all its pros, privatisation has a few cons as well. One of the biggest concerns in most nations is that privatisation will inevitably involve some form of retrenchment or layoff of employees. Hence, it is critical for governments to provide sufficient safety nets and cushions to soften the negative impacts. Labour fears can be overcome by a variety of measures and incentives, such as outplacement assistance, whereby assistance is provided through a third-party company and paid for by a former employer to help a laid-off employee find new employment; transitional training and educational programmes; and earmarked unemployment benefits.

Concluding remarks

Though a lot is being done by various nations to increase the extent of privatisation, there is still room for improvement to fine-tune the entire process as well as increase acceptability in most regions. The reservations of most critics within nations are mainly owing to job losses and the potential harm to domestic industries. However, increased competition could help to address these concerns by providing job opportunities slowly but steadily, coaxing existing players to better their business, and, more importantly, by developing the infrastructure of the region, and hence improving the standard of living.

Governments must put in place adequate measures that cater to all stakeholders when designing privatisation programmes. Public opinion is a challenge that governments must tackle carefully to avoid a snow-balling effect of negative sentiments. Lastly, much emphasis needs to be put on conducting empirical studies to understand the situation, identify problems and find solutions to make the process of privatisation hassle-free.

Written by Mridulya Narasimhan ⁽¹⁾

NOTES:

(1) Contact Mridulya Narasimhan through Consultancy Africa Intelligence’s Finance and Economy Unit (finance.economy@consultancyafrica.com). This CAI discussion paper was developed with the assistance of Gaylor Montmasson-Clair and Ingi Salgado, and was edited by Nicky Berg.
(2) Pamacheche, F. and Koma, B., 2007. Privatization in Sub-Saharan Africa - an essential route to poverty alleviation. African Integration Review, 1(2), pp. 1-22. http://www.africa-union.org.
(3) Martin, B., ‘Privatization of municipal services: Potential, limitations and challenges for the social partners’, International Labour Organisation (ILO) working paper WP.175, August 2001, http://unpan1.un.org.
(4) Ibid.
(5) Ibid.
(6) Ibid.
(7) Kikeri, S. and Burman, A., 2007. Privatization trends. Public Policy Journal, World Bank, https://openknowledge.worldbank.org.
(8) Kikeri, S. and Perrault, M., ‘Privatization trends’, International Finance Corporation (IFC), World Bank, May 2010, http://siteresources.worldbank.org.
(9) Ibid.
(10) Divestiture investment committee, Republic of Ghana, http://www.presidency.gov.gh.
(11) Bhatia, A. and White, O.C., ‘Privatization in Africa’, International Bank of Reconstruction and Development (IBRD), World Bank, 1998, https://openknowledge.worldbank.org.
(12) Ibid.
(13) Ibid.
(14) Nwoji, C., ‘Nigeria: A nation of failed privatization’, Daily Champion, August 2011, http://allafrica.com.
(15) Nellis, J., ‘Privatization in Africa: What has happened? What is to be done?’, Center for Global Development, October 2005, http://policydialogue.org.
(16) Bhatia, A. and White, O.C., ‘Privatization in Africa’, International Bank of Reconstruction and Development (IBRD), World Bank, 1998, https://openknowledge.worldbank.org.
(17) Author’s representation.
(18) Bennel, O., 1997. Privatization in Sub-Saharan Africa: Prospects during the 1990s. World Development, 2(11), pp. 1785–1803.
(19) Ibid.
(20) Craig, J., ‘Privatization and Indigenous Ownership: Evidence from Africa’, Center for Regulation and Competition working paper No. 13, January 2002, http://www.dfid.gov.uk.
(21) Bennel, O., 1997. Privatization in Sub-Saharan Africa: Prospects during the 1990s. World Development, 2(11), pp. 1785–1803.
(22) Pamacheche, F. and Koma, B., 2007. Privatization in Sub-Saharan Africa - an essential route to poverty alleviation. African Integration Review, 1(2), pp. 1-22, http://www.africa-union.org.