Arguments for and against privatisation in developing countries

What is the rationale behind privatization? Critically examine the arguments for and against privatisation in developing countries.

Introduction

Privatization has its roots in the 1980’s, especially in European market where the governments were facing budgetary constraints, therefore they introduced privatization by selling Socially Owned Enterprises or Public Assets to the private sector. (Cook, Uchida October 2001).

When we discuss about the rationale behind privatization one arguments states that: ‘Privatization fosters competition and thereby results in efficiency and effectiveness within sectors. Competition is very important to obtain more efficient and effective public services. Imperfect competition, for example, a monopolistic arrangement results in poor quality services’ (Aktan, 1987). The transfer from publically owned to privately owned it does have some positive effects when it’s about decision making, enforcing controls, better working performance, meeting company targets and management. Public sector tends to complete a certain task, whereas private sector aims to achieve certain objectives by putting more efforts into it. (Source http://www.unescap.org/drpad/publication/dp22_2122/chap3.PDF)

Privatization when looked at a broader aspect should not be seen as an initial transaction, where the government tries to reduce budget deficits, but rather should include key stakeholders and many experts of different fields to assess whether this transaction could also affect positively employment increase, social wealth fare, GDP and so on. The success is only achieved by incorporating government policy reforms, enforcing rule of law, reducing corruption on central and local level, reducing barriers for potential investors, lowering taxes and trade policies. (United Nations. New York 1999).

In the global aspect privatization had some ups and downs and in the mid 1990’s proceeds of privatization were around $30 billion per annum. (Figure 1)

Figure 1. Privatization proceedings from year 1990 – 2003

In 1997 privatization proceedings reached revenues up to $70 billion with the increased activity of transaction mainly from three countries in Latin America like Argentina, Brazil and Mexico. This increase of shares came mainly from privatization proceedings from Oil and Gas that these countries started to perform better in the international market by expanding their business. However, things got worst with the East Asian crisis, and in 1998 stock market in Argentina crashed and with Russian debt crises and Brazilian crises it spread out to other countries by reducing annual revenues and decreasing market share price.

Figure 2. Top Ten Countries that generated higher income

From 1990 – 1999 more than 20% of privatization revenues came from Brazil followed by Argentina around 14%, Mexico 10%, China around 7% and so on. Most of the revenues came from Foreign Direct Investments that these countries generated and privatization sales in Telecommunications, Banking, Oil and Gas. However, in the second decade it was China that was leading the way, by surpassing Brazil and other countries with more than 20% this time. Policy changes, reforms and better strategy created by Chinese attracted more Foreign Direct Investments comparing to other mentioned countries, therefore more privatization transactions occurred in China, followed by Brazil and Poland in 2000 to 2003. (Kikeri and Kolo, November 2005).

This section presents an analysis paper, where I used two case studies to compare and contrast rational behind privatization, arguments for and against privatization in Kosovo and Albania.

Privatization in Kosovo

With the presence of international community in Kosovo after the war it was evident that it is heavily important to restructure central and local institutions in order for the economy and state to function properly. During these times Kosovo was a state of import consumption where from 2000 to 2002 import consumption surpassed from €1.8 to €2.2 billion, whereas exports only €108 mil. This created a huge deficit in the economy and something needed to be changed in order to soft the crises. International community proposed that besides providing grants and donations they need to privatize Kosovo public assets in a very short time. (KIPRED, 2005)

The process of privatizing Socially Owned Enterprises or Public Assets started after 2001 in Kosovo after the war. In the beginning it was very challenging and very debated whether privatization of certain assets should occur during that time, some of them were argued whether should privatize later by assessing the market and for some was highly questionable whether to privatize or not at all. Some of the question that were raised: What do we gain with privatization? What will happen with current employees? How is this going to affect unemployment rate? On the other hand: what if we don’t privatize? What will be the negative effects? According to (Shehu, 2009) many SOE’s that were privatized immediately after the war are in the brick of bankrupt due to heavily affected by financial crises and these companies didn’t meet required expectations that agreed upon in the beginning of their start-up and now they are obliged to meet deadlines or face reverse procedures of privatization from the beginning. One of the companies that is at high risk is Lamkos Kosovo, a wood company with international investments from Bulgaria which was operating with full capacity for four years before it started to collapse due to losing market share in international market and heavily decreased revenues.

Knudsen (2010) argues that since United Nations came in Kosovo after the war their strategy was to mainly privatize Kosovo public assets without or very little participation of the national government or the key stakeholders. Pillar IV, which was mainly in charge of proceedings didn’t make any research about the consequences of privatizing some very sensible Socially Owned Enterprises. As a result many people lost their jobs, companies were transforming from production to services, which affected exports income, and even failing to sustain within the first several years. This caused downwards in the economy, increased unemployment rate and trade deficits.

Privatization in Kosovo had a difficult history. Since 2002 around 500 socially owned enterprises were privatized, 69% of them are active, while 1/3 of them are completely non-operational. This caused the unemployment rate to increase more than 10%. However, privatization had some really good years in 2005, 2006 and in 2007. Many SOE’s that were transferred to private companies managed to increase their market share and revenues in domestic and international market. (Ahmeti, 2008).

Some of these companies are: Ferronikeli – is the one of the largest privatized companies with more than 1000 employees, more than €60 million in investments. They generate more than 50% of the total exports in international countries like: Germany, Italy, China, Korea and so on.

Stone Castle – is a vineyard that employees more than 260 workers. It is one of the largest winery companies in the region with more than 10 million litres produced. Besides supplying the domestic market their main policy is to export internationally in countries like: United Kingdom, Germany, Italy, Spain and Belgium.

Trofta – is the largest fishery company in Kosovo and probably one of the largest in the Balkans after privatization. This company became so successful on its service and tasteful fish that it attracts people from many European countries. Its main strategy is to export live fish to many European countries. (Source: Privatization Agency in Kosovo)

All these private companies contributed in employing many people as promised prior to privatization agreement, reducing poverty rate, expanding their business to regional countries, and even purchasing shares from other smaller international companies.

Until today Kosovo’s income from sale of SOE’s generated is €380mil. However, the usage or investment of this money has never been done due to lack of government and institutional projects. (Ahmeti, 2008)

While some proceeds went smooth and generated revenues for some cases the lack of successful privatization process is associated by neglecting and not attracting Foreign Direct Investment. These are: Ski Resort Brezovica and Trepca Mining. These two so called ‘Golden Natural Resources’ were not in the agenda of government to privatize because of financial crises occurred in 2008. The government has postponed the decision on privatizing these SOE’s so perhaps after the crises it will make for revenues from higher bidders. (Koha Ditore, 2010).

However, (Shehu, 2009) argues that the interest of foreign investors is always there if there are suitable political and business policies. No matter if they are regional or global multinational companies there is always a potential investor even in these crises times. The government needs to attract them with the best policies. If there is transparency and no corruption investors will always seek to invest, to have their companies present in even new countries.

Privatization in Albania

Albania was an isolated and closed country for all internationals until 1992. There was no private ownership; everything belonged to the state. With the ruin of communism in this last part of the world economy and trade liberalization was in the agenda of the newly established government. By closing the doors to Russia and opening to Western Europe and United States, Albania’s bright future started to sparkle. Although the government was late to compete with other countries in the region they believed that with newly established policy reforms, tax reforms and privatization could achieve their goals in years to follow. From 1992 – 1999 more than 75% of the national wealth was privatized. Around 100% of proceeds in services and infrastructure road, while around 96% in agriculture. More than $450 million was Foreign Direct Investment during seven years and majority of these investments came from Italy and Greece neighbours.

Table 1. Foreign direct Investment in Albania

From the first table it’s evident that FDI amount was increasing in the years to come, however, because of the political crises that occurred Albania in 1997 it affected largely FDI investments and privatization to reduce and even investors to leave the country in the following years. (Business in Albania: Ministry of Economic Cooperation and Trade. 2000)

Aleksi, et al (2000) argues that privatization proceedings were very fast. Transferring the majority of state ownership to private companies in 1996 and by 1999 more than 90% in such a short period resulted with unavoidable problems in the process and almost all state economy was in the hands of privately owned companies. Lack of high tech equipment, quality human resources, capital investments and experience was a drawback for these companies to supply the domestic market and not to mention competing with international brands. Other issue that the government neglected is the sale of public SOE’s as a whole. Instead of dividing it in small parts and selling it to many individuals or companies it was sold as a whole. Therefore, the country hasn’t made any significant revenues to reduce budget deficits, reduce poverty, increase employment or even change a bit of the social life. In the end, there was more poverty and more unemployed people in the country than before the privatization started.

Some of the privatized proceedings that took place were:

Privatization of services where included: consulting, finance, attorneys, shopping markets etc.

Privatization of state ownership included companies like: AMC – a telecommunication company, Mining and Energy, Tirana Airport and so on.

Other privatization proceedings: Tirana Brewery, Cement Factories Kruja and Elbasan, Hotel Dajti, Tirana International Hotel etc.

This fast privatization strategy also created room for corruption. Therefore, corruption was motivated to occur in three ways: ‘firstly the decision makers created a privatization process in a way that benefited mostly those who had political connections, secondly the process lacked the needed amount of information and transparency and thirdly by deliberately obstructing and delaying the privatization of particular state owned enterprises’. Basically everyone involved in privatization process starting from the lowest government officials and up to the prime minister was fighting to get a piece of cake or even a big chunk of it. During this process even the media was compromised and biased to report privatization proceedings, corruption of the state officials involved even though it was stately owned at that time. (Nurellari, Albania)

According to World Bank Privatization Database from 2000 – 2007 in Albania privatization proceedings was doing alright. However, when we compare the data we can see that Albania had less revenues in privatization compared to Kosovo. This calculation is done when we convert USD to €, we can see that $481 is around €360, whereas Kosovo from 2002 onwards generated €380 million.

Country

Year

Sector

Name

Amount in US$ (in millions)

Albania

2000

Financial

National Commercial Bank

10

Albania

2000

Infrastructure

Albanian Mobile Communication

86

Albania

2001

Infrastructure

Vodafone Albania

38

Albania

2003

Energy

Petrolimpex sh.a. Tirana

3

Albania

2003

Financial

Savings Bank of Albania

125

Albania

2003

Financial

INSIG

11

Albania

2004

Competitive

Hotel Tirana

6

Albania

2005

Financial

Italian Albanian Bank

41

Albania

2007

Infrastructure

Albtelecom

161

Total amount in revenues

481

Source: World Bank Privatization Database

Conclusion

Many companies that are active at the moment in Kosovo and Albania are operating basically as micro and small and medium size business. They have a limited or small number of employees with very few qualifications and they use very old working technology. The government needs to lower their taxes on these businesses so they could start growing or even lift taxes in the first years of establishment. Support could also be from national development bank to provide business loans with small interest rates, and also grace periods until they start generating revenues.

Attracting foreign direct investments in privatization proceedings could also be possible by enabling policies and laws that protect the investor no matter domestic or international. By having a proper working environment several component should be considered: monetary policies to lower interest rates, proper banking system, foreign investment strategies, rule of law, etc. If all these measures are taken the state’s economy will thrive and it will be ready to compete in the international market. (Aleksi et.al. 2000)