Privatization is a reform area where the World Bank has the lead role. The privatization component of IMF-supported programs has often drawn from and supported the strategy and measures contained in World Bank-supported reform packages. IMF conditionally has reinforced public enterprise reforms, including privatization, planned under the aegis of the World Bank, where these reforms are important to the objectives of the program (Bredenkamp and Schadler, 1999). IMF staff have relied on World Bank expertise for evaluating the appropriateness and feasibility of the measures and timetables, as well as for monitoring the implementation of specific measures.
Reflecting the significant burden that public enterprises have frequently imposed on the budget and the economy, IMF-supported programs have placed growing emphasis on privatization (World Bank, 1995, and Bredenkamp and Schadler, 1999). This trend has followed from the lack of success in hardening the budget constraint of public enterprises in a number of developing and transition countries and the modest results of attempts at restructuring large enterprises and improving their operational efficiency, including through performance contracts. As a result, there has been a growing recognition that privatization may be the only way to sever inappropriate financial links between public enterprises and the government. In addition, privatization has been a key element of structural change in IMF-supported programs with countries in transition from a centrally planned to a market-driven economy.
This section examines aspects of the privatization component of IMF-supported programs approved during the period 1994–98 through a review of the case study countries, as well as the IMF’s MONA database.34 The study will be limited to programs under the SBA, EFF, SAF, and ESAF approved by the Executive Board during 1994–98.
Privatization in IMF-Supported Programs
The incorporation of privatization and privatization-related measures in IMF-supported programs has been flexible. This has reflected the underlying diversity of approaches across countries in the design of divestiture programs and supporting measures.
A large number of programs in recent years have included commitments associated with privatization (see Figure 3).35 Monitoring has relied primarily on structural benchmarks, prior actions, structural performance criteria, and review clauses, as well as qualitative assessments of progress. The measures associated with privatization, which have been covered by IMF structural conditionality, can be classified according to the various stages of the privatization process to which they apply.
Monitoring Privatization in IMF Arrangements Approved in 1994–98’1
Sources: MONA; and IMF staff estimates.1 Types of IMF arrangements: Extended Fund Facility (EFF), Structural Adjustment Facility (SAF), Enhanced Structural Adjustment Facility (ESAF), and Stand-By Arrangement (SBA). In 1999, the ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF).2 Excludes the privatization of financial institutions.3 Monitoring in the form of structural performance criteria, prior actions, and structural benchmarks.4 The first line of figures shows the number of programs containing monitoring of conditionality in each category. The second line shows these figures as a percent of all IMF-supported programs approved in 1994–98. The third line shows them as a percent of the IMF-supported programs approved in 1994–98 that contained monitoring of conditionality related to privatization.5 Mainly measures under mass privatization in transition economies, and the privatization of land, housing, and real estate.Monitoring Privatization in IMF Arrangements Approved in 1994–98’1
Sources: MONA; and IMF staff estimates.1 Types of IMF arrangements: Extended Fund Facility (EFF), Structural Adjustment Facility (SAF), Enhanced Structural Adjustment Facility (ESAF), and Stand-By Arrangement (SBA). In 1999, the ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF).2 Excludes the privatization of financial institutions.3 Monitoring in the form of structural performance criteria, prior actions, and structural benchmarks.4 The first line of figures shows the number of programs containing monitoring of conditionality in each category. The second line shows these figures as a percent of all IMF-supported programs approved in 1994–98. The third line shows them as a percent of the IMF-supported programs approved in 1994–98 that contained monitoring of conditionality related to privatization.5 Mainly measures under mass privatization in transition economies, and the privatization of land, housing, and real estate.Monitoring Privatization in IMF Arrangements Approved in 1994–98’1
Sources: MONA; and IMF staff estimates.1 Types of IMF arrangements: Extended Fund Facility (EFF), Structural Adjustment Facility (SAF), Enhanced Structural Adjustment Facility (ESAF), and Stand-By Arrangement (SBA). In 1999, the ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF).2 Excludes the privatization of financial institutions.3 Monitoring in the form of structural performance criteria, prior actions, and structural benchmarks.4 The first line of figures shows the number of programs containing monitoring of conditionality in each category. The second line shows these figures as a percent of all IMF-supported programs approved in 1994–98. The third line shows them as a percent of the IMF-supported programs approved in 1994–98 that contained monitoring of conditionality related to privatization.5 Mainly measures under mass privatization in transition economies, and the privatization of land, housing, and real estate.Structural conditionality associated with the privatization process has aimed at establishing the groundwork for privatization. This has often involved measures such as the preparation, approval, and announcement of privatization plans, the submission or enactment of legislation to enable or facilitate privatization, and the setting up of institutional structures and the strengthening of management needed for the privatization process. It has also involved the preparation and/or restructuring of enterprises prior to being put up for sale and actions aimed at bringing specific enterprises or groups of enterprises to the point of sale.
Conditionality attached to the pace of privatization, as measured by privatization targets, has also been used frequently in programs. Such targets have taken several forms. Most frequently, they have been quantitative—including general targets that involve a given number of public enterprises to be divested by certain dates, and enterprise-specific targets that involve certain enterprises or groups of enterprises. Targets for fiscal receipts have also been used, albeit much less frequently.
The widespread conditionality on privatization targets reflects the fundamental objective that privatization should actually take place and the often substantial drain of public enterprises on the economy and the budget. Moreover, privatization targets are more specific and more readily monitored than other aspects of the divestiture process. The need to observe announced deadlines for specific privatizations when structural performance criteria or prior actions are attached to the actual sales has the merit of emphasizing the importance attached to the sales in the program. However, this can also undermine the government’s negotiating position in these operations vis-à-vis potential buyers. To guard against such an eventuality, some programs attach conditionality to the bringing of public enterprises to the point of sale, or to particular elements of the process short of final sale. In such cases, it is important to ensure, in consultation with the World Bank, that any reservation prices set by the authorities are realistic and, if possible, supported by independent valuations.
In contrast to the process and target stages in the privatization process, conditionality in the form of structural performance criteria, prior actions, or structural benchmarks has been attached much less frequently to other aspects of the privatization process. Conditionality on the specific use of privatization proceeds has been applied only in a few cases. Program ceilings, however, may be established so as to limit in effect the use of proceeds. Indeed, restrictions on the use of privatization proceeds and on the spending of proceeds in excess of programmed amounts have been included in a large number of programs through the use of quantitative performance criteria and adjusters (see below). Conditionality on postprivatization regulation through structural performance criteria, prior actions, and structural benchmarks has not been used often.
Privatization conditionality in IMF-supported programs should continue to reinforce the divestiture strategies supported by the World Bank. Within the framework of Bank-IMF collaboration, the IMF should focus on those aspects of policies—the relationship between privatization and macroeconomic policies—that are in its area of responsibility. In this regard, IMF staff should help guide reform priorities on the basis of the financial impact of public enterprises, as well as monitor budget constraints.36
There is room for somewhat greater selectivity in the use of structural performance criteria, prior actions, and structural benchmarks to strengthen their contribution to the success of reform. The focus, while supportive of World Bank privatization strategies, should be on privatization measures that have a significant fiscal and macroeconomic impact and that are deemed critical to the achievement of the objectives of the financial program.
The World Bank’s last formal review of its assistance to privatization in developing countries emphasized the importance of focusing on the entire privatization process, rather than mainly on the number of privatized enterprises. World Bank conditionality for tranche release has subsequently been linked more strongly to the process aspects of privatization, as well as to setting up appropriate legal frameworks and regulatory institutions for the post-privatization period.
There is scope for IMF conditionality to selectively reinforce this emphasis on process and regulation where measures in these areas are considered central to the financial program.37 This might include consideration of institutional processes; operational mechanisms for asset sales; legal and procedural changes; and the establishment of regulatory frameworks within which privatized firms, especially utilities, will operate. An increased emphasison process and regulation should also seek to enhance transparency and promote good governance in privatization procedures.
Conditionality on actual privatization will often remain important. This might, in some cases, be better placed in the form of structural benchmarks rather than structural performance criteria and prior actions to limit adverse bargaining incentives. Qualitative assessments, with input from the World Bank, would then be required where there are delays in specific privatizations.
Privatization and Program Design
The determination of fiscal performance criteria should reflect the macroeconomic impact of privatization proceeds and their use. From the viewpoint of fiscal control and transparency, it is important to include as broad a definition of privatization receipts as possible in the fiscal targets and quantitative performance criteria established in the program. In particular, programs should give due consideration to the extrabudgetary activities that may be associated with privatization, and these should be consolidated in the fiscal accounts. Moreover, privatization receipts should be classified as financing in the fiscal programs included in IMF arrangements. The design of programs should also take into account the expected sources of the privatization proceeds and the degree of capital mobility, particularly if the privatization program is large relative to income and monetary aggregates. As these issues were discussed substantially in Sections II and III, this section focuses on the more specific issue of the combinations of fiscal performance criteria and automatic adjusters that indicate how fiscal ceilings should change when, as commonly occurs, privatization receipts deviate from programmed levels.
The effect on the program of deviations from programmed levels of privatization receipts differs according to whether privatization proceeds are classified as revenue or financing and the nature of performance criteria and adjusters. In practice, a wide variety of combinations of performance criteria and adjusters associated with deviations from projected receipts resulting from privatization has been used in programs with the case study countries (see Table 9). Depending on the particular program, privatization-related adjusters (symmetric or asymmetric) have been attached to one or several quantitative fiscal performance criteria and to the net international reserves and net domestic assets of the central bank or of the banking system. In some cases, the applicability of these adjusters has been linked to the origin (foreign or domestic) of privatization proceeds or to their currency composition.
Design of Adjusters Related to Privatization Receipts in Programs with Case Study Countries
Types of IMF arrangements: Extended Fund Facility (EFF), Enhanced Structural Adjustment Facility (ESAF), and Stand-by Arrangement (SBA). In 1999, the ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF).
Cash receipts. The recapitalization program is treated as off-budget investment in the firms partly divested.
Only includes the privatization proceeds transferred to the government by the privatization agencies.
Program baseline assumed no privatization proceeds.
Until 1997: revenue; since 1998: financing.
Excludes proceeds from privatization of Telmex and commercial banks.
Until 1998: not included (off budget); since 1999: revenue.
Design of Adjusters Related to Privatization Receipts in Programs with Case Study Countries
| Country | Arrangement1 | Classification of Privatization Revenue in the Fiscal Accounts | Fiscal Quantitative Performance Criteria | Adjusters Related to Privatization Receipts | |
|---|---|---|---|---|---|
| Coverage | Concept | ||||
| Argentina | EFF 1998 | Financing | Federal government | Overall balance, net disbursements of foreign and domestic debt | Measurement of net disbursements of external and domestic debt of the public sector adjusted downward (upward) for any shortfall (excess) in privatization receipts to the program |
| Bolivia | ESAF 1994 | Revenue2 | Public sector | Overall balance, net domestic financing | Overall balance, net domestic financing, net international reserves, and net domestic assets of central bank adjusted for privatization proceeds in excess of programmed amounts |
| Côte d’Ivoire | ESAF 1998 | Financing | Central government | Primary balance, net bank credit | No adjusters |
| Egypt | SBA 1996 | Financing 3 | General government | Overall balance, net domestic financing | Net domestic financing adjusted downward by the amount of privatization proceeds accruing to the government 4 |
| Estonia | SBA 1997 | Not included (off budget) | General government | Overall balance | No adjusters |
| Hungary | SBA 1996 | Revenue3 | Consolidated government | Overall balance (excluding privatization receipts): quarterly performance criterion | Net international reserves and net domestic assets of central bank adjusted for excesses over the program baseline in cash privatization receipts from abroad |
| Overall balance (including privatization receipts): annual performance criterion | |||||
| Kazakhstan | EFF 1996 | Financing 5 | General government | Overall balance, net central bank credit | No adjusters |
| Mexico | SBA 1995 | Revenue 6 | Public sector | Overall balance, primary surplus (both excluding privatization receipts), net foreign credit | Net foreign credit, net international reserves, and net domestic assets of central bank adjusted for privatization proceeds in foreign currency (excluding external debt instruments of the Mexican government)4 |
| Mongolia | ESAF 1997 | Revenue | General government | Net bank credit, net domestic financing | Net bank credit and net domestic financing adjusted downward for privatization revenues in excess of program baseline |
| Mozambique | ESAF 1996 | Revenue7 | Central government | Net bank credit | Net bank credit adjusted downward for privatization revenues in excess of program baseline |
| Peru | ESAF 1996 | Financing | Public sector | Net domestic financing (including privatization receipts) | Net international reserves and net domestic assets of central bank adjusted for excesses and shortfalls in privatization proceeds relative to program baseline: adjusters in the event of shortfalls capped |
| Philippines | SBA 1998 | Financing | Public sector | Public sector borrowing requirement | No adjusters |
| Russia | EFF 1996 | Financing | Federal government | Overall balance, monetary authorities’ net credit | No adjusters |
| Enlarged government | Overall balance, monetary authorities’ net credit | No adjusters | |||
| Uganda | ESAF 1997 | Not included | Central government | Net bank credit | No adjusters |
| (off budget) | |||||
| Ukraine | SBA 1997 | Financing | Consolidated government | Overall balance | No adjusters |
| Vietnam | ESAF 1994 | Not included | General government | Net bank credit | No adjusters |
| (off budget) | |||||
Types of IMF arrangements: Extended Fund Facility (EFF), Enhanced Structural Adjustment Facility (ESAF), and Stand-by Arrangement (SBA). In 1999, the ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF).
Cash receipts. The recapitalization program is treated as off-budget investment in the firms partly divested.
Only includes the privatization proceeds transferred to the government by the privatization agencies.
Program baseline assumed no privatization proceeds.
Until 1997: revenue; since 1998: financing.
Excludes proceeds from privatization of Telmex and commercial banks.
Until 1998: not included (off budget); since 1999: revenue.
Design of Adjusters Related to Privatization Receipts in Programs with Case Study Countries
| Country | Arrangement1 | Classification of Privatization Revenue in the Fiscal Accounts | Fiscal Quantitative Performance Criteria | Adjusters Related to Privatization Receipts | |
|---|---|---|---|---|---|
| Coverage | Concept | ||||
| Argentina | EFF 1998 | Financing | Federal government | Overall balance, net disbursements of foreign and domestic debt | Measurement of net disbursements of external and domestic debt of the public sector adjusted downward (upward) for any shortfall (excess) in privatization receipts to the program |
| Bolivia | ESAF 1994 | Revenue2 | Public sector | Overall balance, net domestic financing | Overall balance, net domestic financing, net international reserves, and net domestic assets of central bank adjusted for privatization proceeds in excess of programmed amounts |
| Côte d’Ivoire | ESAF 1998 | Financing | Central government | Primary balance, net bank credit | No adjusters |
| Egypt | SBA 1996 | Financing 3 | General government | Overall balance, net domestic financing | Net domestic financing adjusted downward by the amount of privatization proceeds accruing to the government 4 |
| Estonia | SBA 1997 | Not included (off budget) | General government | Overall balance | No adjusters |
| Hungary | SBA 1996 | Revenue3 | Consolidated government | Overall balance (excluding privatization receipts): quarterly performance criterion | Net international reserves and net domestic assets of central bank adjusted for excesses over the program baseline in cash privatization receipts from abroad |
| Overall balance (including privatization receipts): annual performance criterion | |||||
| Kazakhstan | EFF 1996 | Financing 5 | General government | Overall balance, net central bank credit | No adjusters |
| Mexico | SBA 1995 | Revenue 6 | Public sector | Overall balance, primary surplus (both excluding privatization receipts), net foreign credit | Net foreign credit, net international reserves, and net domestic assets of central bank adjusted for privatization proceeds in foreign currency (excluding external debt instruments of the Mexican government)4 |
| Mongolia | ESAF 1997 | Revenue | General government | Net bank credit, net domestic financing | Net bank credit and net domestic financing adjusted downward for privatization revenues in excess of program baseline |
| Mozambique | ESAF 1996 | Revenue7 | Central government | Net bank credit | Net bank credit adjusted downward for privatization revenues in excess of program baseline |
| Peru | ESAF 1996 | Financing | Public sector | Net domestic financing (including privatization receipts) | Net international reserves and net domestic assets of central bank adjusted for excesses and shortfalls in privatization proceeds relative to program baseline: adjusters in the event of shortfalls capped |
| Philippines | SBA 1998 | Financing | Public sector | Public sector borrowing requirement | No adjusters |
| Russia | EFF 1996 | Financing | Federal government | Overall balance, monetary authorities’ net credit | No adjusters |
| Enlarged government | Overall balance, monetary authorities’ net credit | No adjusters | |||
| Uganda | ESAF 1997 | Not included | Central government | Net bank credit | No adjusters |
| (off budget) | |||||
| Ukraine | SBA 1997 | Financing | Consolidated government | Overall balance | No adjusters |
| Vietnam | ESAF 1994 | Not included | General government | Net bank credit | No adjusters |
| (off budget) | |||||
Types of IMF arrangements: Extended Fund Facility (EFF), Enhanced Structural Adjustment Facility (ESAF), and Stand-by Arrangement (SBA). In 1999, the ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF).
Cash receipts. The recapitalization program is treated as off-budget investment in the firms partly divested.
Only includes the privatization proceeds transferred to the government by the privatization agencies.
Program baseline assumed no privatization proceeds.
Until 1997: revenue; since 1998: financing.
Excludes proceeds from privatization of Telmex and commercial banks.
Until 1998: not included (off budget); since 1999: revenue.
Most programs were designed with the aim of preventing the use of excess privatization proceeds over the program baseline. This was achieved in a variety of ways. The fiscal deficit was capped where privatization receipts were classified as financing (Argentina, Côte d’Ivoire, Egypt, Kazakhstan (since 1998), the Philippines, Russia, and Ukraine), while in Peru the fiscal performance criterion was set on net domestic financing (including privatization receipts). In other programs, where privatization receipts were classified as revenue, adjusters limited the spending of excess privatization receipts (Bolivia, Mongolia, and Mozambique), or fiscal performance criteria were specified excluding these receipts (Hungary and Mexico).38 However, where privatization receipts were classified as revenue, the absence of adjusters to the fiscal performance criteria implied that excess receipts could be spent by the government (Kazakhstan (1996–97)).
Programs differed somewhat more in their treatment of shortfalls in privatization receipts relative to the program baseline. In some programs, such shortfalls implied the need for fiscal adjustment (Argentina, Bolivia, Hungary, Kazakhstan (1996–97), Mongolia, Mozambique, and the Philippines), while in others privatization shortfalls could be financed, though usually up to certain caps (Côte d’Ivoire, Kazakhstan (since 1998), Peru, Russia, and Ukraine).39
The need to save excess privatization receipts, seen frequently in programs, is based on the principle that the fiscal program has been designed with certain macroeconomic objectives in mind and that additional nonrecurrent financial resources should be used in a manner consistent with those objectives, which typically would entail saving them. This approach is generally consistent with the discussion in Section III of the likely impact of spending additional privatization receipts on government net worth and aggregate demand.
Choices regarding program design in the presence of projected privatization receipts should be made on the basis of the fiscal and macroeconomic circumstances of the country, the objectives of the program, and the availability and timeliness of data. Judgments about types of risks to the program should also influence choices. Particular care needs to be exercised to ensure consistency between fiscal and other performance criteria. For instance, if the government must save excess privatization receipts—to the extent that this is achieved through additional deposits at the central bank—net international reserves and net domestic assets of the central bank should also have privatization-related adjusters. Otherwise, government deposits of the excess receipts with the central bank would create room for credit to the private sector to expand beyond the original program targets.
