5. The adoption of large-scale privatization programmes gained considerable momentum worldwide in the wake of the British experiment of the early 1980s. This phenomenon has changed the respective roles of the public and private
sector worldwide. Projects and activities in sectors which were formerly government monopolies, including physical infrastructure and social services, are being increasingly financed and/or managed by private firms under negotiated programmes and contracts. There is a spectrum of disengagement by governments and engagement of private firms in productive activities, including contracting out (also called outsourcing, service contracting or alternative delivery) (see paras. 16-21 below), turnkey construction, management contracts, leasing, concessions/build-operate-transfer, partial disinvestment/joint ventures, and full disinvestment. A particular type of disinvestment which is of central importance in post-conflict countries is the conversion of military installations, personnel and industries to civilian purposes (see paras. 22-28).
6. In terms of the percentage share of GDP produced by private firms, privatization has been most rapid in the countries of eastern and central Europe. The EBRD Transition Report (EBRD 1994) examined privatization in 25 countries of eastern and central Europe and central Asia. In these countries the share of the private sector had risen to about 40 per cent by mid-1994, with the Czech Republic leading the way at 65 per cent, up from 3 per cent in 1986 (see Milanovic: 1989 for other country estimates). The main source of the higher private share in the transitional economies has not been the disinvestment of public enterprises, as might be expected, but rather the faster growth of private enterprises compared with the public sector. Liberalization and the institution of a strong legal base for protecting private ownership have together paved the way for the rapid emergence of private enterprises in these countries.
7. A recent World Bank study (1995) confirms that private sector growth is the major modality of privatization in the developing countries also. Actual disinvestments have been few (less than three per country per year), so the rise in the private share has been due more to the faster growth of the private sector compared with the public sector than to the transfer of enterprises from public ownership to private ownership. This trend may be expected to continue as State-owned enterprises have been taking a smaller share of gross domestic investment.
8. For most developing countries, a clear enunciation of the goals of a privatization and private sector development programme is a necessary prerequisite to any programme implementation. To this end, a matrix of legislative, regulatory and institutional mechanisms directly related to the implementation of the programme needs to be put in place or established at the outset. Training of high-calibre national technical personnel in the oversight and guidance of privatization and private sector development programmes is another significant prerequisite to the implementation and backstopping of the programme. The cadre would be responsible mainly for the preparation of terms of reference for the valuation of enterprises to be privatized, and the selection of qualified personnel to carry out these privatizations and assessing the impacts of the programme, e.g. on employment.
9. Most governments view the provision of basic needs to the lowest income groups as a basic political and economic goal. Because economic re-balancing can worsen income distribution in the short run, the provision of safety nets helps to build public opinion in favour of the programme. The creation of well-targeted safety nets is an integral element in the economic development or transition of a country. In order for safety nets to be truly effective, they should not be regarded as a substitute for other more significant national policies targeting education, primary health care, and disease control. Rather, safety nets should offer only a temporary and limited relief in a time of structural unemployment.
10. A recurrent problem in privatization by disinvestment is undervaluation. Governments tend to undervalue and sell public enterprises too cheaply and, in some countries, this has been associated with corruption and given privatization a bad name. There are some legitimate reasons for undervaluation, as well as illegitimate reasons, so the problem is to know the difference. In uncertain capital markets, it is usual for the issue price of shares to be set below the expected market value after issue, so as to reduce the risk of failure and avoid the need for underwriting. Many governments have tried to sanitize privatization by broad-basing ownership. This partially corrects for any undervaluation (or overvaluation) and improves the equitable distribution of wealth and subsequent income. On the other hand, it tends to dilute the control of those who have the best ideas about the future directions of the enterprise. This reduces the efficiency dividend. In Sri Lanka, the Government preferred to sell 60 per cent of the equity in each enterprise to a single well-qualified buyer, and broad-base the ownership of only the minority equity, neatly balancing both efficiency and equity objectives.
11. How to reconcile efficiency with equity remains a leading issue in the transitional economies. Equity calls for the distribution of public assets to the people at large, not to those who are able to pay the most for them as a consequence of their (often illegal) amassing of wealth in an earlier regime. This implies free or near-free distribution of shares, as has happened in several voucher schemes. Efficiency, on the other hand, requires that effective control of assets is in the hands of those who have entrepreneurial vision of how they can be most productively used. For this to take place, enterprises must be offered to the highest bidders and potential entrepreneurs must be able to borrow. If vouchers are tradeable and the trading machinery is in place, it can be expected that property rights will eventually gravitate to those who value them most highly. Though this reconcentrates ownership, the equity goal is still served as the initial holders of vouchers sell them at higher prices which final holders are willing to pay. In theory, everyone gains from this process of concentration of property rights. However, the model depends on good company law and capital market regulation: in practice, managers block the emergence of strong external governance. Poland is attempting to establish effective governance over corporate managers through professionally managed national investment funds.
12. Studies of the process of privatization have shown that there are two common reasons for the slower rate of privatization in poorer countries:(a) the relatively higher difficulty of privatization where domestic savings are low; and (b) undeveloped banking, managerial, accounting and legal skills and institutions. This constrains the transitional economies and the least developed countries in proportion to the imbalance of needs and capacity. In effect, the rate of development of this institutional infrastructure determines the optimal rate of privatization (Metcalf and Ambrus-Lakatos 1991). If the rate of privatization is forced beyond the institutional and professional capacity of a country, it is likely that it will not result in the intended benefits or that it will not be sustainable. The early experiences of Chile and Bangladesh are examples of this. It is now well recognized by the international community that policy reform has to be accompanied by institutional and human resource development, and that this is a medium- to long-term process (see paras 59-64 below).
13. The pace of privatization in some countries, such as Sri Lanka, has been determined mainly by pressure from international donor agencies (where aid has been conditional on privatization) and from domestic capital market interests. This has had unfortunate negative consequences, such as lower prices from purchasers and little attention paid to transparency. In Sri Lanka this led to allegations of impropriety, public protests and a slow-down in the privatization programme in mid-1992 (Kelegama 1997).
14. Lack of transparency, of course, is more of an issue in trade sales to a single buyer than in stock market issues where elaborate rules of disclosure usually apply. Trade sales have had a political price in Sri Lanka, Mexico and other countries. Governments typically start with a tender procedure which is intended to give all potential purchasers adequate and equal opportunity to make their independent bids, then an award is made to the highest bidder who meets all the prescribed conditions. Even if this works as intended, it is usually only the starting point for protracted negotiations leading to a final settlement and transfer of the enterprise. This is the point where transparency may be lost, as the conditions attached after the bids are invited may entirely negate their ranking. There are many cases of governments modifying the conditions laid down at the point of tender, or giving undertakings as to protection of the company's domestic market, guaranteed sales, or other policy sweeteners. The fact that these negotiations are always carried out behind closed doors does not create public confidence that the best possible deal has been made.
15. A campaign to inform and educate the public on the privatization programme is an important component in its overall success, but not a sufficient condition for public acceptance. Transparency relates to the terms of individual transactions. A simple requirement that the final contract be published, omitting any commercially sensitive data, together with all bids and the criteria of evaluation (as is done in Ghana, for instance), has important advantages: first, it would protect the negotiators from charges of impropriety (or alternatively, provide a clear basis for their accountability); second, it would avoid unnecessary suspicions, charges, investigations and delays.