Saíd El-Naggar
Published Date:
June 1989
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Samir A. Makdisi

The paper by John Nellis and Sunita Kikeri, dealing with the privatization of public enterprises, is highly instructive. It lays out the rationale for privatization as well as the constraints facing such a process and sheds light on the World Bank’s experience in this field. I should have liked to examine in depth a number of major issues raised in the paper. Limitations of space and time, however, will only permit me to raise a number of questions and make some brief comments on certain of the major points contained in the paper in the hope of providing an initial framework for the discussion it deserves. Let me first briefly summarize what I believe are the main findings of the paper.

Public enterprises, which play an important economic role in many developing countries, have emerged initially as inherited enterprises from colonial times; subsequently, new public enterprises were added for ideological and pragmatic reasons. A common distaste for direct foreign investment was evident.

The financial performance of public enterprises has been generally poor for various reasons, including constraints imposed by the governments on proper management as well as macroeconomic distortions emanating from inappropriate policies. Financial profitability, however, is not a complete measure of performance, as the issues of monopoly pricing and noncommercial objectives must always be taken into account. (In practice, financial losses of the public enterprises were the primary problem facing the countries concerned.) Where financial losses are persistent and other noncommercial objectives are not attained, the performance of the public enterprise can be judged to have been poor. This is evident in an increasing number of countries.

The question of efficiency is equally important. The performance of the public enterprise has generally been inefficient, although it should be borne in mind that efficiency is related to market structure and not to ownership. Although there appears to be a causal relationship between private enterprises and efficiency, some people counter-argue that if public enterprises were provided the necessary goals and proper management, privatization would become unnecessary. In practice, the record of public enterprise has been dismal.

The World Bank has encouraged privatization in the hope of promoting efficiency and productivity. It has attempted to encourage a competitive environment and to remove macroeconomic distortions so as to ensure the success of privatized firms. Often restructuring (financial and nonfinancial) of public enterprises is needed prior to privatization.

Assessment of post-privatization experience is difficult because the necessary data is lacking. Although headway has been made in a number of countries, the process of privatization has been slow and not up to expectations. Some of the issues involved include criteria for sale of a public enterprise, concentration of wealth in private hands, thin capital markets, and lack of transparency in making specific deals.

Privatization is not necessarily optimal for all countries. A primary consideration in this regard is the existence of the necessary preconditions, for example, competitiveness of markets, liberalization, enhanced capacity for management, all of which would ensure successful privatization. The authors note toward the end of the paper that creating competitive markets is a complex issue that is not easy to resolve.

With the above summary in mind—and I trust it is more or less accurate—I should like to submit to the authors the following three queries or points that I believe can stand further analysis or elaboration. They relate to the macroeconomic framework of privatization; the respective roles of private and public sectors; and World Bank experience.

The paper concentrates primarily on the financial performance and efficiency aspects of public enterprises and fails to address—or addresses only marginally—the relation between the microeconomic and macroeconomic aspects of privatization. This is an important issue that needs to be analyzed. Macroeconomic policy is undertaken in a given sociopolitical context. It is often concerned, particularly in developing countries, with the questions of equity and income distribution, which could have been important motives for the creation of public enterprises. What impact would privatization have on equity and income distribution and how would the governments concerned deal with them?

More generally, what are the broad effects of privatization on overall macroeconomic performance? Would the privatization process help or hinder the national authorities in their pursuit of macroeconomic goals? There is an implicit assumption in the paper that privatization would help. If so, the required conditions need to be spelled out. The question of privatization can only be considered in the context of the overall national economic performance.

Privatization, it is argued, would permit enterprises to become more efficient and productive. This is often the case. But where do we draw the line between the public and private sectors? Can we state, for example, that all income-generating public enterprises are candidates for privatization on the assumption that the private sector is more efficient than the public sector? One precondition put forward in this connection is that a competitive environment should prevail. Would oligopolistic enterprises fit into the process of privatization? What about situations where public ownership is maintained but management is entrusted to the private sector through leasing and management contracts? The authors state that privatization is not necessarily optimal for all countries, presumably because competitiveness of markets, among other criteria, are not guaranteed. Perhaps they can elaborate on this point in relation to the respective domains of the public and private sectors.

Finally, I refer to the World Bank experience. While headway has been made in a number of countries, Bank experience points to a relative slowness in the process of privatization. Was this all due to a lack of the necessary preconditions? Or could there also have been other factors that hindered the process and what were they? Does World Bank experience shed light on this question?

Furthermore, if it is true that the motives behind the emergence of public enterprises were also social and political and not simply economic, it follows that a change in the sociopolitical attitude of the countries concerned must take place to ensure the longer-term success of privatization. In other words, among the preconditions for success that the authors enumerate (prior restructuring, enhancement of managerial capacity, etc.), a change in the political environment may also have to be listed. Is this borne out by World Bank experience?

The paper notes the difficulty of assessing post-privatization experience owing to lack of data. This experience should be highly instructive for all those concerned with the impact of privatization. I should be interested to know whether the World Bank is currently studying, or plans to study this issue.

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