7:14 AM Jun 16, 1993


Geneva 14 June (Chakravarthi Raghavan) -- Privatization is first and foremost a political process involving a change in the role of the State and thus needs a broad-based consensus on the objectives to be achieved, was one of the major points stressed here last week at an UNCTAD Ad Hoc Working Group meeting.

The working group on comparative experiences with privatization ended a week-long second session with its chairman, Bror Wahlroos of Finland saying at the close of the session (according to an UNCTAD press release) "We really succeeded in doing very valuable work".

The discussions were based on country presentations provided at the last session, and subsequent documentation sent to the secretariat and a secretariat cross-country analysis and interventions from invited panellists.

The secretariat, is to prepare a further report in the light of the discussions.

Privatization, like 'market-orientation', has now become an accepted policy in developing and developed countries and in the former centrally planned economies now described as "transition economies".

The experiences of various countries in the privatization efforts were discussed at the closed door meetings. While no conclusions were drawn, a note by the UNCTAD secretariat provided a summary of the main points made.

A point that seemed missing related to the fact that the public sector "asset" being privatized represents the collective savings of the community, even if achieved by taxation or borrowing and hence handing over of such assets to private entrepreneurs, domestic and foreign, at prices below the real asset values, is not viewed as expropriation for private benefit of public assets.

The secretariat summary of the points also did not indicate discussion in depth of the charges of public assets being handed over to foreigners at throw-away prices and foreigners coming to dominate the economy -- a cry being increasingly heard both in the 'countries in transition' as well as in some of the developing countries too.

The discussions in the working group related to measures and instruments for successful privatization.

The key objective of privatization was viewed as enhancing economic efficiency through improved competition, thus contributing to economic development and part of an overall strategy to foster private entrepreneurship and development of the private sector as an engine of wealth creation.

This required creation of a favourable environment for development of entrepreneurship and private enterprise.

But privatization, involving as it does a change in the role of the State, is a political process and hence the importance of defining at the outset the extent of the programme and creating a broad-based consensus on its objectives. If necessary such a consensus would need to be achieved through concessions.

But while it is a political process, the rationale for privatization is economic and it must be undertaken as an economic exercise within a favourable macroeconomic framework.

Privatization, involving sale of State- or publicly-owned property will be subject to close scrutiny by the public and politicians and could not be treated as a "normal commercial transaction".

At the political level therefore efforts would be needed to associate legislators with the privatization process -- where political issues are involved. But where only technical issues are involved they may be informed ex post (after the event).

But privatization implies not only "rebalancing" public and private sectors, but also substitution of a "private sector culture for a public sector culture", with privatization being seen as transfer of investment or commercial decision and risk to the private sector.

A consensus on the objectives of privatization should be quickly followed up by actions to avoid risk of renewed pressure for compromise or for delays.

The techniques to be chosen should be guided by the objectives and specificity and needs of the enterprises as well as cost considerations.

For example, if the objective is to cut the 'umbilical cord' of the enterprise to the State, leaving the State to carry out its core activities, then transfer of investment risk through sale might be better than transfer of management, and outright sale better than partial one.

But in some circumstances, the second best solution -- a partial rather than outright sale -- might be needed.

While public auctions may be useful for small enterprises to achieve quick, low-cost sales, in respect of large enterprises offering of shares, even if costlier than a trade sale, might be preferable.

From the point of view of effective ownership and good governance, broad-based share ownership would need to be balanced with "core" share ownership, but with guarantees from the "core" investors to prevent "crony capitalism" through transfer of shares by the new owners to undesirable partners or use of ownership rights to issue debentures to raise remaining capital to finance the transaction and thus devaluing the holding of other investors.

There might also be a need for "restructuring" of the enterprise prior to the privatization, particularly when the enterprise could not be sold as is.

In many cases "cosmetic" changes, like cleaning up the plant and coaching the management before the buyer arrives could yield a high return.

Other issues discussed in the meeting included valuation of assets before sale, forms of sale, underwriting of shares in floatation and sales, measures to overcome financial constraints, internal privatization by sale to managements and workers, debt-equity swaps, checking up carefully the antecedents of domestic and foreign investors and buyers.