Back Matter

Back Matter

Jeffrey Davis, Thomas Richardson, Rolando Ossowski, and Steven Barnett
Published Date:
June 2000
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Appendix I Factors Affecting the Sale Price of State Assets

This appendix discusses elements of the privatization process that have a bearing on the sale price of assets and consequently on the resources that might be available to the budget. The material draws on the World Bank’s experience and recommendations regarding privatization procedures (World Bank, 1995), and (Lieberman and Kirkness, 1998). The factors that influence the sale price of assets may be classified into three broad categories according to the stage of the privatization process in which they may arise: actions taken prior to the sale of the asset, the sale process itself, and the postprivatization regime (see Table 10). Box 5 discusses related governance issues that may occur at each of these stages of the privatization process.

Actions Prior to Sale

The preparatory phase prior to privatization may include the restructuring of public enterprises. This may involve legal restructuring (e.g., clarification of titles and legal changes that may be required to permit private investors to acquire shares in a public enterprise); organizational restructuring (demonopolization or breakup); financial restructuring (e.g., assumption of the enterprise’s debts by the government and cleanup of balance sheets); operational restructuring (e.g., increased investment to revamp the capital stock or closure of certain activities); and labor restructuring.

Legal, organizational, and financial restructuring may in some cases be essential to ensure that privatization takes place or to forestall the emergence of private monopolies. For example, the clarification of enterprise debts and legal obligations including labor issues will increase the chance of sale. The breakup of very large enterprises is sometimes needed to promote greater competition. In a number of transition economies, divestiture of social overhead functions, such as schools, clinics, and housing, was required before sale. Whether public enterprises are sold with or without their liabilities need not change government net worth. However, this could have implications for the composition and maturity profile of the public debt and for the cash flow generated by the privatization and, therefore, for government liquidity.

Decisions on whether to operationally restructure public enterprises prior to privatization need to take into account the likely effect on the liquidity position of the government and on government net worth. The private sector may well be able to restructure public enterprises more efficiently than the government. Thus, preprivatization restructuring, while conceivably raising the sale price, may actually reduce government net worth.40 Hence, additional investments to undertake the physical restructuring of public enterprises should, in general, be left to private owners once a decision has been made to privatize the enterprise (World Bank, 1995, and Lieberman and Kirkness, 1998). To the extent that a government decides to restructure firms before sale, it is important to ensure that the funds invested are subject to the same standard as for the use of any other public funds.

The issue of whether labor restructuring should be carried out by the government or left to the new owners involves difficult tradeoffs. While cases involving the need for limited restructuring are best left to the private sector, governments may consider handling large-scale redundancies prior to sate to reduce labor resistance and enhance the likelihood that a social safety net will be provided, and possibly increase the sale value. Government restructuring, however, is likely to entail fiscal costs because there may be a tendency for the state to be generous in the terms offered to the labor force to make restructuring politically and socially more acceptable (Kikeri, 1998).

The Sale Process

The state, as seller of an asset, is most likely to maximize the sale price when there are no restrictions on the number of potential bidders. This would involve permitting nonresidents to participate on equal terms with residents, particularly because quite often in developing and transition countries the number of potential domestic purchasers, or the financing available to them, is limited. However, countries have sometimes placed limitations on the participation of nonresidents in the privatization process (see Table 10). In some cases, nonresidents have not been allowed to bid, or have been allowed to do so only for minority stakes in firms, while in others equity participation by foreigners has been restricted to “nonstrategic” firms. Yet “strategic” has often been defined fairly broadly, effectively serving to limit the set of potential buyers to domestic residents. Whether nonresidents are allowed to bid or not, the process should be sufficiently open and nondiscriminatory so as to prevent noncompetitive arrangements, as occurred. For example, in the Russian loans-for-shares scheme (see Box 6).

Table 10.Factors Affecting the Sale Price: Country Illustrations
Actions prior to sale
Legal restructuring
EgyptLegislation passed to authorize the privatization of public insurance companies.
RussiaPresidential decree issued reducing the list of “strategic” joint-stock companies that were banned from privatization.
UkraineParliamentary approval required to privatize certain monopolies.
Organizational restructuring
Argentina, BoliviaBreaking up of some public utilities into smaller units.
Transition countries (various)Divestiture of social overhead functions
Financial restructuring
ArgentinaTreasury assumed debt of enterprises to be privatized.
EgyptAbout one-third of the proceeds of privatization in FY 1996/97 and FY 1997/98 was devoted to financial restructuring costs.
Operational and labor restructuring
Argentina1Rationalization of employment of the state oil company.
Mexico, MozambiqueSubstantial investment and modernization drives.
PeruReduction of payroll of public enterprises and tight control of wages.
The sale process
Egypt, Mongolia, Russia, UkraineLimitations on the legal or effective participation of nonresidents.
KazakhstanHigh auction floor prices for small enterprises (eliminated 1996).
MongoliaLegal restrictions established high reservation prices (abolished 1997).
The postprivatization regime
ArgentinaThe telecom monopoly was largely preserved.
BoliviaEntry to provision of long-distance and international services prohibited.
Côte d’IvoirePrivatized telecom company granted a seven-year monopoly on some services.
Czech RepublicA 27 percent stake in SPT Telekom was sold to a consortium. SPT Telekom will maintain its monopoly status until end-2000.
Postprivatization commitments
Argentina, Bolivia, Hungary, PeruRequirements on the amount of investment to be undertaken by the buyers.
HungaryPurchasers required to take responsibility for environmental costs.
MongoliaNew owners required to maintain staffing levels (lifted in 1999).
VietnamInvoluntary layoffs not permitted in first year after privatization.
Sources: Azpiazu and Vispo (1994), López-de-Silanes (1997); IMF staff.

In the initial stages of the privatization process, the government placed emphasis on the speed of divestiture, and operational and labor restructuring was limited.

Sources: Azpiazu and Vispo (1994), López-de-Silanes (1997); IMF staff.

In the initial stages of the privatization process, the government placed emphasis on the speed of divestiture, and operational and labor restructuring was limited.

Governments may sometimes privatize through mechanisms, such as retail offerings that may be generously priced, aimed at generating strong demand from domestic retail investors, in order to foster domestic participation in, and support for, the privatization process; create a new class of savers; and contribute to the development of the domestic capital market. In some cases, this has also involved giving preferential subscription rights to employees and other stakeholders of the public enterprises to be privatized. The pursuit of these wider objectives entails fiscal costs that need to be considered; it should also be consistent with the key objective of efficiency gains.41

Box 5.Governance Issues in Privatization

Privatization has been invoked as a means to combat corruption. However, the privatization process itself has often proved to be a significant source of corruption. Corrupt systems have tended to engender corrupt privatization processes and, unless accompanied by significant institutional reform, transparency has usually not benefited from privatization.

Governance issues in public ownership. Corruption, defined as the abuse of public power for private benefit, has been argued to increase with the extent of government intervention in the economy, die degree of discretion of government officials in applying regulations, the weakness of institutions and rule of law, and poor and unsystematic accountability of public officials (Rose-Ackerman,1997). Public enterprises have been a major source of corrupt activities in many developing and transition countries (Tanzi, 1998). Such activities have included overinvoicing, accepting bribes for contracts, rationing be low-market-priced goods and services through bribes, and awarding workers and managers excessively high wages and fringe benefits.

Privatization and corruption. Countries with a tradition of strong institutions, rule of law, and judicial accountability, as in western Europe, have generally engendered transparent privatization processes. In countries where privatization has been part of a comprehensive change in regime, institution building, and reorientation of the economy toward the market, such as a number of Latin American countries in the 1990s, the change in the rules of the game has, on the whole, been credible and the privatization process reasonably transparent. However, corrupt practices associated with privatization have been reported, particularly where there has been limited oversight from other branches of government (Manzetti, 1998). Where the institutional framework and rule of law have been weak, strong and well-organized interest groups have tended to “hijack” the privatization process to their advantage. This has occurred in several of the transition economies, perhaps most notoriously in the case of Russia (Åslund, 1999). The proposition that it does not matter much who gets the assets during privatization because the market soon reallocates them to efficient owners does not seem to work in practice, partly because of the lack of capital market development in these countries.

Privatization and regulation. Since the early 1990s, a growing number of countries have started to privatize “strategic” or “core” public enterprises, such as utilities, telecommunications, transport, and energy enterprises. Problems have arisen, however, where issues related to the structure of postprivatization markets and the creation of sound regulatory regimes have not been adequately addressed prior to privatization. The major problems fall broadly into the following categories: inadequate competition, or die preservation of monopolies with no economic justification and insufficient attention to antitrust issues both before and after privatization; poorly designed regulations, or ambiguities in tariff-setting mechanisms and in the regulatory framework; and weak regulatory institutions, or the failure to prevent abuse of market power by dominant enterprises, to foster competition through the entry of new operators, and to create a favorable investment climate.

Possible lessons. First, privatization is no alternative to regulation, nor has it proven to be an impediment to rent seeking. Second, the policy of “privatizing now and regulating later” has often failed because early privatization has created strong vested interests to block the later attempts at regulation. Third, corruption significantly endangers the legitimacy of the privatization process and, more generally, weakens support for market-oriented reforms.

Therefore, privatization would be most efficient if it were preceded by institution building and the establishment of an appropriate regulatory framework and the rule of law. If the institutional underpinnings are missing but the government is making progress toward establishing them, delaying privatization until they bear fruit may be a desirable strategy. In those difficult but frequent cases where the government is unwilling or incapable of taking the necessary prior steps, the best course of action may be a cautious case-by-case, tender-based privatization with the assistance of internationally recognized financial advisors (Nellis, 1999).

The choice of sales method, for example, auctions, initial public offerings, and trade sales to strategic investors, and its transparency can have important implications for the number of bidders and for the sale price. In general, auctions and initial public offerings have served to generate higher returns than bilateral trade sales (Berg and Berg, 1997). Initial public offerings are the more common sales mechanism in industrialized countries, whereas trade sales have been more frequently used in developing countries. However, the latter are less transparent and less open to public scrutiny than more competitive processes. Moreover, they are more likely to involve significant elements of restructuring at the expense of the state as seller. On balance, therefore, it would seem preferable to rely on open auction mechanisms subject to public oversight whenever possible. Also, the reservation prices for assets should not be set so high that privatization is effectively foreclosed.42

Box 6.Loans-for-Shares Privatization in Russia

Following a mass privatization campaign during 1995, significant share holdings in some of Russia’s largest companies—Norilsk Nickel, Yukos (oil), LUKoil, Surgutneftegaz (oil), Novolipetsk Iron and Steel, and Novorossiisk Shipping—were assigned to commercial banks as collateral for a loan to the federal government. The banks had to compete for the right to manage these assets by bidding at auction on the size of a loan to the government, but in practice only a few banks won: Uneximbank, Menatep, Stolichny, and Imperial, all of whom had close relations to the government. In most cases, the banks bid for the assets as part of a consortium, of which there were two, with the group that was politically less well connected winning none of the auctions. Foreigners were technically allowed to bid, but in practice the auctions were often set so as to ensure that the favored banks won.1 The winner had the right to run the company until it would be sold, again at auction, though in practice the banks themselves were generally able to acquire the assets they were managing through insider means. Six of the twelve companies were bought by the banks, which acted as auction managers, and four more were won by corporate affiliates of the firms being sold. Many of the banks that won the loans-for-shares auctions were politically active in supporting the government through the election campaigns of 1995 and 1996, while the firms that they acquired—particularly those in the energy sector—soon came to head the list of Russia’s largest lax debtors.

A number of large stakes in Russian industry, particularly in the oil sector, were sold at prices that seem below their market value and in auctions that were not truly competitive. The perception that the loans-for-shares program was corrupt has weakened popular support for the privatization program overall, as well as for other market-oriented reforms.

1 In the case of Surgutneftegaz, the auction was announced for the distant city of Surgut, when; the airport was closed for two days before the auction, purportedly for weather-related reasons. Similarly, a large stake in the Norilsk Nickel conglomerate was won by a subsidiary of Uneximbank, which also managed the auction, and which, on a technicality, had excluded a key competitor offering twice the winning bid (Lieberman and Veimetra, 1996).

A number of transition countries attempted to accelerate the privatization process and overcome the shortage of domestic capital by mass privatization. This mechanism involved the use of one or another form of vouchers in lieu of money. Assets were divested at little or no cost to the population, some or all of whom received a form of privatization money with which to bid on the assets for sale (Havrylyshyn and McGettigan, 1999). This form of mass privatization did not generate significant cash receipts.

The Postprivatization Regime

The key importance of setting up appropriate regulatory frameworks and institutions prior to the privatization of public enterprises with substantial monopoly power, including enterprises with network or natural monopoly characteristics, is widely recognized (World Bank, 1995). Expectations as to the extent of such postprivatization regulation can be important in determining the sale price. Firms with monopoly power that are likely to be regulated only lightly should sell for a better price than those that will be more heavily regulated. However, artificially inflating the sale price by precommitting to a lax regulatory regime would lead to a higher price at sale at the expense of potentially large efficiency costs in the rest of the economy and lower social returns over time. Moreover, countries have sometimes found it difficult to implement adequate regulatory restrictions not put in place before the firms were sold.

There is evidence in some case study countries of weak regulatory frameworks and the granting of monopoly rights in the telecommunications sector (see Table 10), These actions might have been aimed in part at enhancing privatization proceeds.

The placement of requirements on the new owners at the time of sale in the form of regulatory commitments, particularly in the case of public utilities and monopolies (for example, minimum operating standards, service levels, safety requirements, and measures to foster competition), is often warranted. Governments have sometimes placed additional requirements on buyers related to investment conditions, environmental clean up, purchase from certain vendors, and labor hoarding. Such additional requirements may reduce the sale price and could make the process less transparent. Generally, they may not be a cost-effective means of pursuing public policy goals.

An important factor affecting the amount of proceeds is the terms of payment, which may involve an extended settlement period and raise liquidity and risk management issues. In some cases, governments have not obtained payment for assets privatized in a timely fashion from buyers. This may be related to an inadequate degree of risk transfer from the government to the private sector because of the provision of generous credit terms. For example, in Uganda amendments to the Public Enterprise Reform and Divestiture statute introduced in 1997 sought to restrict extended terms of payment for enterprises privatized because of problems of nonpayment. Failure to impose discipline in this area, besides raising governance concerns, affects the effective price eventually received for the assets sold.

Appendix II Privatization and Fiscal and Macroeconomic Developments

This appendix uses data from the case study countries to investigate the empirical relationship between privatization and various fiscal and macroeconomic variables.43 The issues examined are whether privatization proceeds transferred to the budget are used to finance a larger deficit (spent) or to reduce other sources of financing (saved), and whether the total amount of privatization receipts is correlated with changes in macroeconomic or fiscal performance.

The sample is comprised of annual data from the 18 case study countries, using the period of active privatization for which the necessary data are available. The sample, therefore, varies between regressions due to data availability. All variables are expressed as a percent of GDP, with the exception of real GDP growth and the unemployment rate. Unless otherwise noted, the data are from the corresponding country authorities and staff estimates; the unemployment rate is taken from the IMF World Economic Outlook database. Finally, the country data are pooled to form the unbalanced panels that are used in the regressions.

Proceeds Transferred to the Budget

The contemporaneous relationship between privatization proceeds transferred to the budget and different fiscal variables is examined using regressions of the following form:

where ∆ is the first difference operator, yi,t, pi,t, xi,t and ui,t are, respectively, the dependent variable, privatization proceeds, an additional explanatory variable (if included), and the residual; subscripts refer to the value for country i in period t. The parameters to be estimated are μi, which is the country-specific or fixed effect, δ and β. The hypothesis that privatization proceeds transferred to the budget are spent is tested by examining the statistical significance of 5 using the overall balance, total expenditure and net lending, and total revenue as the dependent variables. The saving hypothesis is tested using domestic financing, external financing, and government debt as the dependent variables.

The empirical results are consistent with privatization proceeds being saved, specifically that they substitute one-for-one with domestic financing (see Table 11). This conclusion is robust and is not fundamentally altered by changing the sample or adding explanatory variables. Moreover, it is supported by the findings that privatization proceeds are not used to increase the deficit, increase spending, or lower revenue.44 For the nontransition sample, there is some evidence that about one-fifth of privatization receipts are used to reduce external financing, with the rest offsetting domestic financing. These results need to be qualified by recognizing that the regressions are based on a limited sample, largely comprised of observations that coincide with periods when the country had an IMF-supported program;45 and, by design, only budgetary privatization proceeds are included, leaving open the question of what happens to amounts not transferred to the budget.

Table 11.Contemporaneous Impact of Budgetary Privatization Proceeds on Domestic Financing 1
Full SampleNontransitionShort Sample 2
(Dependent variable: first difference of domestic financing)
∆ Budgetary privatization (t)–1.14*–.97*–1.19*–.85*–.79*–1.03*–1.20*–1.12*–1.21*
∆ Overall balance (t)n.a.–.74*n.a.n.a.–.90*n.a.n.a.–.46*n.a.
∆ External financing (t)n.a.n.a.–.65*n.a.n.a.–.96*n.a.n.a.–10
(Dependent variable: first difference of the overall balance)
∆ Budgetary privatization (t).
∆ Real GDP growth (t)n.a..03n.a.n.a.–.02n.a.n.a..09n.a.
∆ Unemployment (t)n.a.n.a.–.24***n.a.n.a.–.20n.a.n.a.–.44
Sources: Data provided by country authorities; and IMF staff estimates.

Standard errors are in parentheses and based on White’s (1980) Heteroskedasticity-consistent covariance matrix. Asterisks indicate significance levels:’ Is 1 percent level;** is 5 percent level:*** is 10 percent level. Except for the short sample regressions. in which a constant is included, the regressions include a complete set of country-specific dummies for which the estimates are not reported. All variables are expressed as a share of GDP.

Comprises observations corresponding to the two largest movements in privatization proceeds for each country.

Sources: Data provided by country authorities; and IMF staff estimates.

Standard errors are in parentheses and based on White’s (1980) Heteroskedasticity-consistent covariance matrix. Asterisks indicate significance levels:’ Is 1 percent level;** is 5 percent level:*** is 10 percent level. Except for the short sample regressions. in which a constant is included, the regressions include a complete set of country-specific dummies for which the estimates are not reported. All variables are expressed as a share of GDP.

Comprises observations corresponding to the two largest movements in privatization proceeds for each country.

Total Amount of Privatization

The correlation between the total amount of privatization receipts, which better indicates the switch from private to public ownership, and variables, such as growth, unemployment, and tax revenue, is examined using regressions of the following form:

where the notation is the same as before. In equation (2), the First difference of the dependent variable is run on the level of privatization.46 The dependent variable, therefore, is assumed to follow a random walk with drift during the sample period, and privatization is now allowed to have either a lasting or one-period (δ=–γ) effect on the dependent variable.

There is some evidence of a positive and lasting impact of privatization on tax revenue for the non-transition sample, but not for the full sample (see Table 12). This may reflect higher collection rates from the privatized firms, a shift in the structure of GDP toward sectors paying more taxes, or a general improvement in macroeconomic management. Privatization receipts are also found to be strongly correlated with a lasting improvement in macroeconomic performance, as manifested in higher real growth and lower unemployment. Given the simple specification that is used, the results should be interpreted cautiously and not construed to imply causation. Moreover, the privatization variable is likely capturing the positive impact of a general regime change toward better economic policies. Finally, the evidence from regressions (results not shown) using fixed investment as the dependent variable suggests that it is not correlated with privatization.

Table 12.Structural Relationship Between Total Privatization Proceeds and Selected Variables 1
Full SampleNontransition
(Dependent variable: first difference of tax revenue)
Privatization (t).16.16.15n.a.n.a..28**.27**.26**n.a.n.a.
Privatization (t–1)n.a.–0.15–.23n.a.n.a.n.a..05–.02n.a.n.a.
∆ Privatization (t)n.a.n.a.n.a..16.18n.a.n.a.n.a..11.14***
∆ Unemployment (t)n.a.n.a.–.11n.a.–.10n.a.n.a.–.24**n.a.–.24**
(Dependent variable: real GDP growth, in percent)2
Privatization (t)1.07**1.01**.37*.55*1.96*1.82*.72*1.11*
Privatization (t–1)n.a..71**n.a..35*n.a.1.09**n.a.1.12*
Real GDP growth (t–1).05.01.15*.13*–.35*–.41*–.25*–.26*
(Dependent variable: first difference of the unemployment rate)
Privatization (t)–.27***–.25***–.21**n.a.n.a.–.12–.28**–.27**n.a.n.a.
Privatization (t–1)n.a.n.a.–.50*n.a.n.a.n.a.n.a.–.16n.a.n.a.
∆ Privatization (t)n.a.n.a.n.a..14.13n.a.n.a.n.a.–.08–.06
Real GDP growth (t–1)n.a.–.03.02n.a.–.04n.a..13*.14*n.a..10***
Sources: Data provided by country authorities; and IMF staff estimates.

Standard errors are in parentheses and based on White’s (1980) Heteroskedaticity-consistent covariance matrix. Asterisks indicate significance levels: * is 1 percent level; ** is 5 percent level; *** is 10 percent level. The regressions include a complete set of country-specific dummies for which the estimates are not reported The Anderson-Hsiao estimator, however, takes first differences to remove the country dummies prior to estimation. Except for real GDP growth and the unemployment rate, all variables are expressed as a share of GDP.

The combination of a lagged dependent variable and country-specific dummy (i.e fixed effect) may lead to estimates that are biased using ordinary least squares (LSDV). Although the Anderson-Hsiao estimator avoids this problem, such alternative estimators may not provide better estimates of the coefficients on the privatization terms, and thus both results are reported (Judson and Owen, 1997).

Sources: Data provided by country authorities; and IMF staff estimates.

Standard errors are in parentheses and based on White’s (1980) Heteroskedaticity-consistent covariance matrix. Asterisks indicate significance levels: * is 1 percent level; ** is 5 percent level; *** is 10 percent level. The regressions include a complete set of country-specific dummies for which the estimates are not reported The Anderson-Hsiao estimator, however, takes first differences to remove the country dummies prior to estimation. Except for real GDP growth and the unemployment rate, all variables are expressed as a share of GDP.

The combination of a lagged dependent variable and country-specific dummy (i.e fixed effect) may lead to estimates that are biased using ordinary least squares (LSDV). Although the Anderson-Hsiao estimator avoids this problem, such alternative estimators may not provide better estimates of the coefficients on the privatization terms, and thus both results are reported (Judson and Owen, 1997).


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1An excellent survey of the microeconomic literature is provided in Megginson and Netter (1999). Heller (1990) and Hemming and Mansoor (1987) provide examples of earlier discussions of fiscal and macroeconomic issues, and Hachette and Lüders (1993), Pinheiro and Schneider (1995), and Larrai’n and Winograd (1996) offer examples of more recent empirical work in this area. World Bank (1995) discusses many aspects of international privatization experience.
2For a discussion of issues in the privatization of financial institutions, see Beyer, Dziobek, and Garrett (1999): and Ver-brugge, Megginson, and Owens (1999).
3The sample comprises 18 countries and includes 10 nontransition economies (Argentina, Bolivia, Côte d’Ivoire, Egypt, Mexico, Morocco, Mozambique, Pent, the Philippines, and Uganda) and 8 transition economies (the Czech Republic, Estonia, Hungary, Kazakhstan, Mongolia, Russia, Ukraine, and Vietnam).
4These data underestimate the extent or state divestiture of assets to the extent that noncash methods of privatization—such as vouchers in transition countries—were used.
5Appropriate regulatory frameworks should, however, be set up prior to the privatization of public enterprises with substantial monopoly power.
6Section 2.1.1 or the Code of Good Practices on Fiscal Transparency—Declaration of Principles states: “The annual budget should cover all central government operations in detail and should also provide information on central government extrabudgetary activities.”
7If the amount of public enterprise liabilities assumed by the budget is large, it might be appropriate to show a deficit including and excluding this amount.
8This assumes that such transfers cease after privatization.
9The sale of a productive asset, which would have yielded a certain rate of return in the form of dividends or social benefits had it remained in public hands, may be compared to that of a government bond. In cither case, the state receives liquid assets that, were they to be used to finance current expenditures, would require higher taxes or lower spending in the future. However, the one-off nature of privatization is an important feature that distinguishes it from the issuance of bonds.
10lf the source of the privatization receipts is domestic, the excess demand for money resulting from the purchase of the asset by the private sector would be expected to lead to capital inflows that would be similar to an inflow of privatization proceeds from abroad. However, this requires well-functioning domestic financial markets.
11The actual impact on interest rates will depend on the subsequent use of the proceeds and the degree of openness of the capital market.
12Estimates based on World Bank data suggest that, on average, close to 40 percent of privatization receipts were paid in foreign exchange in the case study countries.
13Foreign-financed investment programs in privatized enterprises may contain a large import component—particularly if obsolete technologies need to be modernized—and, to that extent, the inflows would be “sterilized” through a deterioration in the external current account.
14Assessment of whether privatization receipts were actually used in additive fashion for the intended purpose requires consideration of the counter) actual situation, for example, the amount of spending in the absence of such receipts.
15The impact of using privatization proceeds to reduce taxes would be comparable to that of raising current spending, though clearly the distribution of the benefits would be different. If over time privatization leads to higher tax receipts, this might, however, provide an opportunity to reduce rates (see Section IV).
16In China, the implicit pension debt has been estimated at just under 50 percent of current GDP, and settling it has complicated efforts to reform or divest public enterprises that have substantial pension obligations to current workers or pensioners. The World Bank has suggested that one method of financing these obligations could be to use the assets of the state enterprises themselves, arguing that a portion of the implicit pension debt was accumulated as a way of financing the creation of these enterprise assets. This practice has already been implemented in a few Chinese localities (World Bank, 1997).
17However, some analysis, citing evidence mainly from Latin America, have argued that privatization has done little to alleviate fiscal crises (Pinheiro and Schneider. 1995).
18Given the limitations of data and the problem of specifying a counterfactual, only a few studies have attempted to measure the impact of privatization on government net worth, and then only at the firm level. For the most part these have found that government net worth was increased by privatization, particularly when efficiency gains are factored in (Hachette and Lüders, 1993, and White and Kelegama, 1994). While studying the concept of social welfare, Galal and others (1994) found that in 11 of the 12 firms considered, the impact on net wealth was positive.
19The inadequacy of data on public enterprise operations in many countries has been documented in other studies by IMF staff as hampering analysis and policy advice. See Schadler and others (1995), and Bredenkamp and Schadler (1999).
20Evidence based on comparisons between the situation before and after privatization is subject to the important qualification that other events might affect the relevant variables.
21This reflects results from a regression with external financing as the dependent variable and is consistent with the size of the coefficient in the regression for nontransition countries in the equation for domestic financing.
22For a discussion of tax issues arising from privatization in transition economies, see Kodrzycki and Zolt (1994).
23Several factors make it difficult to directly measure the extent to which privatized firms have actually paid higher taxes once divested: firms often change form—merge, restructure, disappear—after privatization; and few tax services collect information specifically on taxes paid by previously state-owned firms.
24Transfers made 10 divested enterprises would be classified as transfers to the private sector in the budgetary accounts. There is a presumption that the scope of such transfers, if they continue to be made at all, is generally likely to be limited.
25For example, in Uganda, the Ministry of Finance estimated that the value of subsidies to public enterprises in 1996 amounted to 3 percent of GDP even though direct budgetary subsidies to enterprises have been limited.
26Public enterprise deficits may occur in the context of normal operations and need not be indicative of a cost 10 the government. However, chronic deficits after transfers likely imply a large element of quasi-fiscal costs.
27The balance of the public enterprise sector as a whole also reflects any changes that may have taken place in the financial performance of public enterprises that remain in the public sector. Also, it is not possible on the basis of the available data to include above-the-line quasi-fiscal costs, such as subsidized interest from the banking system, explicitly into the analysis.
28The emphasis placed on speed early in the transition, particularly in the form of voucher privatization, may have come at a cost in terms of weaker corporate governance and slower enterprise restructuring (Nellis, 1999 and Stiglitz, 1999).
29Perotti and van Oijen (1999), moreover, present evidence that privatization serves as a positive signal for investors and that it reduces investor uncertainty over the willingness of a country’s authorities to pursue prudent macroeconomic policies and to create a stable set of microeconomic incentives for investors.
30Havrylyshyn, Izvorski, and van Rooden (1998) discuss a variety of secular reasons why growth tended to drop sharply in the early years of transition.
31D’Souza and Megginson (1999) find a much weaker relationship between privatization and investment for firms studied after privatization in the 1990s. They argue that this result obtains because many of the firms divested in the later sample were utilities that were extremely capital intensive before privatization.
32D’Souza and Megginson (1999), however, found a significant decline in employment for 78 privatized firms in 25 countries (of which 10 were developing countries), in a sample that included a much higher proportion of firms in regulated industries, which were therefore less competitive and more labor intensive, than did the earlier studies.
33This study also concluded that infrastructure privatization and effective regulation yield significant macroeconomic benefits and gains for all income classes.
34MONA (database for monitoring IMF arrangements) has been compiled by the Policy Development and Review Department since 1993. It contains information on all IMF-supported programs under Stand-By (SBA) and extended arrangements (Extended Fund Facility (EFF), Structural Adjustment Facility (SAF). and Enhanced Structural Adjustment Facility (ESAF)) approved since January 1, 1993.
35The World Bank has supported privatization programs as part of public enterprise reform strategies under structural and sectoral operations in many countries. Examples of this support are provided at the World Bank See also Bredenkamp and Schadler (1999).
36Bredenkamp and Schadler (1999) discuss cases where the key aspects of public enterprise reform are not covered by ongoing World Bank activities. In those cases, it is recommended that the IMF take an active role in advising the authorities on those aspects of policies toward public enterprises that are particularly important to the financial program, in consultation with World Bank staff, until the World Bank can be more actively engaged.
37In Uganda, for example, the government recently revised its privatization strategy in consultation with the World Bank, and conditionally in the IMF program switched from structural benchmarks attached to quantitative privatization targets to prior actions on processes designed to bring a certain number of enterprises to the point of sale.
38Privatization-related adjusters were attached to the net international reserves and net domestic assets of the central bank in the case of excess privatization receipts in some of these programs (Bolivia, Hungary, Mexico, and Peru). In Hungary, the adjusters applied only to the extent that cash privatization receipts originated abroad, while in Mexico the adjusters were triggered only if the receipts were made in foreign currency.
39In Egypt and Mexico, the program baselines assumed no privatization receipts.
40There is evidence that operational restructuring of public enterprises prior to privatization in Mexico was not reflected in the net sale price (López-de-Si lanes, 1997).
41The issue of mobilization of political support for privatization and the role of domestic investors have been, and continue to be, researched by the World Bank. See, for example. World Bank (1995), Lieberman and Kirkness (1998), and Shafik (1996).
42The government may retain some “golden” share, that is, a share with special voting rights, in privatized firms—often utilities and natural monopolies. If it does so, this may lead to similar managerial and governance issues as under privatization (World Bank, 1995). However, the government’s aim may be to retain the power to veto certain actions, such as takeovers, that could have the effect of asset stripping (Megginson and Netter, 1999). From the investors’ perspective, the new owners may also want the government to keep a share as a form of insurance against ad hoc regulation.
43A fuller description of methodology and results is available on request from the authors.
44Results from the spending and revenue regressions are not shown. Also, regressions using the debt stock as the dependent variable suggest that it is independent of the amount of budgetary privatization proceeds. This likely reflects noise in the debt-to-GDP ratio due to movements in nominal GDP growth rates and financing operations that affect the debt stock without impacting the recorded deficit.
45A formal test of the proposition that budgetary privatization proceeds are only used to reduce domestic financing when there is an IMF-supported program is rejected. There are, however, limited observations without an IMF-supported program, and in some such cases a program may have been under discussion.
46When real GDP growth is the dependent variable, it is included in levels, and its lagged value is added as an additional explanatory variable.

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