MBA: 870 MANAGEMENT THEORY & PRACTICE Group 3 Sheila Nasieku Eliud Nzola Jane Mungai PeterMwaniki Caroline Wahome

THE ASSIGNMENT
EMERGING ISSUES IN MANAGEMENT

PRIVATIZATION

1

Privatization Definition A very broad term--but most simply, privatization is the transfer of assets or service delivery from the government to the private sector. Privatization runs a very broad range, sometimes leaving very little government involvement, and other times creating partnerships between government and private service providers where government is still the dominant player. Privatization may also be described as the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement. The term "Privatization" has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company's stock, privatizing a publicly traded stock. The second is a demutualization of a mutual organization or cooperative to form a joint stock company.

There is constant increase in the privatization of the economy the government is taking many steps to privatize the government owned industries which are providing least efficiency. The privatization is carried through the advertisement in the news by which the companies and individuals are asked to come to the auction ceremony of any property in which many buyers come together and they quote their prices. The higher the price the person can win to take the property or ownership. The privatization is the only key to gain the economic efficiency and enhance the productivity of the country. It started from the British when the government started to sold his owned properties to private sector in 1980. By doing privatization the government can attract large number of foreign investors by which the country get the foreign reserves and the there are chances to increase the employment opportunities in the country by utilizing the government funds the government can start the large infrastructure development projects by which the government can provide better facilities to the government sector. It took practice after started from British to other countries of the world.

Merely defining "privatization" is difficult. In its purest form, the term refers to the shifting of the production of a good or the provision of a service from the government to the private sector, often by selling government-owned assets. Most definitions of privatization, though, are more expansive, covering virtually any action that involves exposing the operations of government to the pressures of the commercial marketplace.

2

The broader definition of privatization also includes a wide range of public-private partnerships. Types of privatization

There are three main methods of privatization:
• •

Share issue privatization (SIP) - selling shares on the stock market Asset sale privatization - selling the entire firms or part of it to a strategic investor, usually by auction or using Treuhand model. (The Treuhand (Treuhandanstalt or Treuhand agency) was the agency that privatized the East
German enterprises owned as public property (common property). Created by the Volkskammer on June 17, 1990, it oversaw the restructuring and selling of about 8,500 firms with initially over 4 million employees. At that time it was the world's largest industrial enterprise)

Voucher privatization - shares of ownership are distributed to all citizens, usually for free or at a very low price.

Share issue privatization is the most common type of privatization. Share issue can broaden and deepen domestic capital markets, boosting liquidity and potentially economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g. under pricing required) may be higher. For this reason, many governments elect for listings in the more developed and liquid markets. Euronext, and the London, New York and Hong Kong Stock Exchanges are popular because they are highly developed and sophisticated. As a result of higher political and currency risk deterring foreign investors, asset sales are more common in developing countries. Voucher privatization has mainly been used in the transition economies of Central and Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. A very substantial benefit to share or asset sale privatizations is that bidders compete to offer the state the highest price, creating revenues for the state to redistribute in addition to new tax revenue. Voucher privatizations, on the other hand, would be a genuine return of the assets into the hands of the general population, and create a real sense of participation and inclusion. Vouchers, like all other private property, could then be sold on if preferred by what companies are offering.

3

TECHNIQUES OF PRIVATIZATION A variety of alternative service delivery techniques can be employed to maximize efficiency and increase service quality. Some methods will be more appropriate than others depending on the service. In searching for ways of cutting costs and increasing delivery, consider using a combination of these techniques:

Contracting Out (also called "outsourcing"). The government competitively contracts with a private organization, for-profit or non-profit, to provide a service or part of a service. Management Contracts. The operation of a facility is contracted out to a private company. Facilities where the management is frequently contracted out include airports, wastewater plants, arenas and convention centers. Public-Private Competition (also called "managed competition," or "market testing"). When public services are opened up to competition, in-house public organizations are allowed to participate in the bidding process. Franchise. A private firm is given the exclusive right to provide a service within a certain geographical area. Internal Markets. Departments are allowed to purchase support services such as printing, maintenance, computer repair and training from in-house providers or outside suppliers. In-house providers of support services are required to operate as independent business units competing against outside contractors for departments’ business. Under such a system, market forces are brought to bear within an organization. Internal customers can reject the offerings of internal service providers if they don’t like their quality or if they cost too much. Vouchers. Government pays for the service; however, individuals are given redeemable certificates to purchase the service on the open market. These subsidize the consumer of the service, but services are provided by the private sector. In addition to providing greater freedom of choice, vouchers bring consumer pressure to bear, creating incentives for consumers to shop around for services and for service providers to supply high-quality, low-cost services. Commercialization (also referred to as "service shedding"). Government stops providing a service and lets the private sector assume the function. Self-Help (also referred to as "transfer to non-profit organization"). Community groups and neighborhood organizations take over a service or government asset such as a local park. The new providers of the service also are directly benefiting from the service. Governments increasingly are discovering that by turning some non-core services—such as zoos, museums, fairs, remote parks and some recreational programs —over to non-profit organizations, they are able to ensure that these institutions don’t drain the budget.

4

Volunteers. Volunteers are used to provide all or part of a government service. Volunteer activities are conducted through a government volunteer program or through a non-profit organization. Corporatization. Government organizations are reorganized along business lines. Typically they are required to pay taxes, raise capital on the market (with no government backing—explicit or implicit), and operate according to commercial principles. Government corporations focus on maximizing profits and achieving a favorable return on investment. They are freed from government procurement, personnel and budget systems. Asset Sale or Long-Term Lease. Government sells or enters into long-term leases for assets such as airports, gas utilities or real estate to private firms, thus turning physical capital into financial capital. In a sale-leaseback arrangement, government sells the asset to a private sector entity and then leases it back. Another asset sale technique is the employee buyout. Existing public managers and employees take the public unit private, typically purchasing the company through an Employee Stock Ownership Plan (ESOP). Private Infrastructure Development and Operation. The private sector builds, finances and operates public infrastructure such as roads and airports, recovering costs through user charges. Several techniques commonly are used for privately building and operating infrastructure;
o

With Build-Operate-Transfer (BOT) arrangements, the private sector designs, finances, builds, and operates the facility over the life of the contract. At the end of this period, ownership reverts to the government. A variation of this is the Build-Transfer-Operate (BTO) model, under which title transfers to the government at the time construction is completed. Finally, with Build-Own-Operate (BOO) arrangements, the private sector retains permanent ownership and operates the facility on contract.

o

o

Why privatize? Ownership is a significant determinant of enterprise performance. In both developed and developing countries, good SOE performance has been very difficult to bring about--and even harder to sustain. Governments facing financial crisis often try to improve performance by bringing in new and dynamic managers, and paying them incentive salaries. And they grant managers autonomy to set prices and hire and fire--and agree to overdue tariff increases and payment of past due bills. These measures often have a positive effect. But as the crisis dissipates, so does political resolve. Political interference, a common and deadly disease of SOEs, tends to re-emerge--and painfully achieved SOE reforms tend to backslide. SOEs thought to be well on the road to recovery have either stopped improving performance or suffered deterioration. In Korea, where reform short of ownership change ended losses in a group of SOEs for three years in the mid-1980s, large deficits have since reappeared. In New Zealand and Japan, SOE reforms began to bite only when done in conjunction with privatization.

5

Recognition that SOE reforms are limited and unsustainable, coupled with the fiscal burden of subsidizing loss-makers, has led financially hard-pressed governments to opt for privatization. Arguments for and against privatization

Pro-privatization
Proponents of privatization believe that private market factors can more efficiently deliver many goods or service than government due to free market competition. In general, it is argued that over time this will lead to lower prices, improved quality, more choices, less corruption, less red tape, and quicker delivery. Many proponents do not argue that everything should be privatised. According to them, market failures and natural monopolies could be problematic. However, some Austrian school economists and anarcho-capitalists would prefer that everything be privatised, including the state itself. The basic economic argument given for privatisation is that governments have few incentives to ensure that the enterprises they own are well run. One problem is the lack of comparison in state monopolies. It is difficult to know if an enterprise is efficient or not without competitors to compare against. Another is that the central government administration, and the voters who elect them, have difficulty evaluating the efficiency of numerous and very different enterprises. A private owner, often specializing and gaining great knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently. Also, governments can raise money by taxation or simply printing money should revenues be insufficient, unlike a private owner. If there are both private and state owned enterprises competing against each other, then the state owned may borrow money more cheaply from the debt markets than private enterprises, since the state owned enterprises are ultimately backed by the taxation and printing press power of the state, gaining an unfair advantage. Privatising a non-profitable company which was state-owned may force the company to raise prices in order to become profitable. However, this would remove the need for the state to provide tax money in order to cover the losses.

Performance. State-run industries tend to be bureaucratic. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive, and such an improvement can be reversed easily by another regime. Increased efficiency. Private companies and firms have a greater incentive to produce more goods and services for the sake of reaching a customer base and hence increasing profits. A state-owned firm would not be as productive due to the lack of financing allocated by the entire government's budget that must consider other areas of the economy. Specialisation A private business has the ability to focus all relevant human and financial resources onto specific functions. A state-owned firm does not have the necessary resources to specialise its goods and services as a result of the general products provided to the greatest number of people in the population.

6

Improvements. Conversely, the government may put off improvements due to political sensitivity and special interests — even in cases of companies that are run well and better serve their customers' needs. Corruption. A monopolized function is prone to corruption; decisions are made primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than economic ones. Corruption (or principal-agent issues) during the privatisation process - however - can result in significant underpricing of the asset. This allows for more immediate and efficient corrupt transfer of value - not just from ongoing cash flow, but from the entire lifetime of the asset stream. Often such transfers are difficult to reverse. Accountability. Managers of privately owned companies are accountable to their owners/shareholders and to the consumer, and can only exist and thrive where needs are met. Managers of publicly owned companies are required to be more accountable to the broader community and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment decisions away from otherwise profitable areas. Civil-liberty concerns. A company controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies. Goals. A political government tends to run an industry or company for political goals rather than economic ones. Capital. Privately held companies can sometimes more easily raise investment capital in the financial markets when such local markets exist and are suitably liquid. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests. In either case, for smaller markets, political risk may add substantially to the cost of capital. Security. Governments have had the tendency to "bail out" poorly run businesses, often due to the sensitivity of job losses, when economically, it may be better to let the business fold. Lack of market discipline. Poorly managed state companies are insulated from the same discipline as private companies, which could go bankrupt, have their management removed, or be taken over by competitors. Private companies are also able to take greater risks and then seek bankruptcy protection against creditors if those risks turn sour. Natural monopolies. The existence of natural monopolies does not mean that these sectors must be state owned. Governments can enact or are armed with anti-trust legislation and bodies to deal with anti-competitive behavior of all companies public or private. Concentration of wealth. Ownership of and profits from successful enterprises tend to be dispersed and diversified -particularly in voucher privatisation. The availability of more investment vehicles stimulates capital markets and promotes liquidity and job creation. Political influence. Nationalized industries are prone to interference from politicians for political or populist reasons. Examples include making an industry buy supplies

• •

7

from local producers (when that may be more expensive than buying from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing its staffing to reduce unemployment, or moving its operations to marginal constituencies. Profits. Corporations exist to generate profits for their shareholders. Private companies make a profit by enticing consumers to buy their products in preference to their competitors' (or by increasing primary demand for their products, or by reducing costs). Private corporations typically profit more if they serve the needs of their clients well. Corporations of different sizes may target different market niches in order to focus on marginal groups and satisfy their demand. A company with good corporate governance will therefore be incentivized to meet the needs of its customers efficiently.

Anti-privatization Opponents of privatisation dispute the claims concerning the alleged lack of incentive for governments to ensure that the enterprises they own are well run, on the basis of the idea that governments are proxy owners answerable to the people. It is argued that a government which runs nationalized enterprises poorly will lose public support and votes, while a government which runs those enterprises well will gain public support and votes. Thus, democratic governments do have an incentive to maximize efficiency in nationalized companies, due to the pressure of future elections. Opponents of certain privatisations believe certain parts of the social terrain should remain closed to market forces in order to protect them from the unpredictability and ruthlessness of the market (such as private prisons, basic health care, and basic education). Another view is that some of the utilities which government provides benefit society at large and are indirect and difficult to measure or unable to produce a profit, such as defense. Still another is that natural monopolies are by definition not subject to competition and better administrated by the state. The controlling ethical issue in the anti-privatisation perspective is the need for responsible stewardship of social support missions. Market interactions are all guided by self-interest, and successful actors in a healthy market must be committed to charging the maximum price that the market will bear. Privatisation opponents believe that this model is not compatible with government missions for social support, whose primary aim is delivering affordability and quality of service to society. Many privatisation opponents also warn against the practice's inherent tendency toward corruption. As many areas which the government could provide are essentially profitless, the only way private companies could, to any degree, operate them would be through contracts or block payments. In these cases, the private firm's performance in a particular project would be removed from their performance, and embezzlement and dangerous cost cutting measures might be taken to maximize profits.

8

Furthermore, large corporations can pay public relations professionals to convince decisionmakers that privitazation is a sensible idea, whether or not this is actually the case. Corporations typically have far more resources for expert testimony, advertisements, conferences and other propaganda efforts than anti-privatisation advocates. Of course, this fact has no bearing on the merits of privatisation itself. Some would also point out that privatising certain functions of government might hamper coordination, and charge firms with specialized and limited capabilities to perform functions which they are not suited for. In rebuilding a war torn nation's infrastructure, for example, a private firm would, in order to provide security, either have to hire security, which would be both necessarily limited and complicate their functions, or coordinate with government, which, due to a lack of command structure shared between firm and government, might be difficult. A government agency, on the other hand, would have the entire military of a nation to draw upon for security, whose chain of command is clearly defined. Opponents would say that this is a false assertion: numerous books refer to poor organization between government departments (for example the Hurricane Katrina incident). Furthermore, opponents of privatization argue that it is undesirable to transfer state-owned assets into private hands for the following reasons:

• •

• • • • •

• • •

Performance. A democratically elected government is accountable to the people through a legislature, Congress or Parliament, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to social objectives. Improvements. the government is motivated to performance improvements as well run businesses contribute to the State's revenues. Corruption. Government ministers and civil servants are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest. However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally. Accountability. The public does not have any control or oversight of private companies. Civil-liberty concerns. A democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened. Goals. The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole. Capital. Governments can raise money in the financial markets most cheaply to relend to state-owned enterprises. Lack of market discipline. Governments have chosen to keep certain companies/industries under public ownership because of their strategic importance or sensitive nature. Cuts in essential services. If a government-owned company providing an essential service (such as the water supply) to all citizens is privatised, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable. Natural monopolies. Privatisation will not result in true competition if a natural monopoly exists. Concentration of wealth. Profits from successful enterprises end up in private, often foreign, hands instead of being available for the common good. Political influence. Governments may more easily exert pressure on state-owned firms to help implementing government policy.

9

Downsizing. Private companies often face a conflict between profitability and service levels, and could over-react to short-term events. A state-owned company might have a longer-term view, and thus be less likely to cut back on maintenance or staff costs, training etc, to stem short term losses. Many private companies have downsized while making record profits. Profit. Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority, and are thus anti-democratic. The more necessary a good is, the lower the price elasticity of demand, as people will attempt to buy it no matter the price. In the case of price elasticity of demand is zero (perfectly unelastic good), demand part of supply and demand theories does not work. Privatisation and Poverty. It is acknowledged by many studies that there are winners and losers with privatisation. The number of losers —which may add up to the size and severity of poverty—can be unexpectedly large if the method and process of privatisation and how it is implemented are seriously flawed (e.g. lack of transparency leading to state-owned assets being appropriated at minuscule amounts by those with political connections, absence of regulatory institutions leading to transfer of monopoly rents from public to private sector, improper design and inadequate control of the privatisation process leading to asset stripping.[6] Job Loss. Due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company.

Intermediate Views Others don't dispute that well run for-profit entities with sound corporate governance may be considerably more efficient than an inefficient governmental bureaucracy or NGO, however many implementations of privatization can - in practice - lead to the firesale of public assets, and/or to inefficient or corrupt - for profit management. Developed / Low corruption economies It is fairly easy for a top executive to reduce the perceived value of an asset - due to information asymmetry. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (eg. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce sale price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their earnings forecasts). There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates. When the entity gets taken private - at a dramatically lower price - the new private owner gains a windfall from the former top executive's actions to surreptitiously reduce the sales

10

price. This can represent 10s of billions of dollars (questionably) transferred from previous owners (the public) to the takeover artist. The former top executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the 10s or 100s of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives). When a publicly held asset, mutual or non-profit organization undergoes privatization, Top executives often reap tremendous monetary benefits. The executives can facilitate the process by making the entity appear to be in financial crisis - this reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell. Ironically, it can also contribute to a public perception that private entities are more efficiently run reinforcing the political will to sell of public assets. Again, due to asymmetric information, policy makers and the general public see a government owned firm that was a financial 'disaster' - miraculously turned around by the private sector (and typically resold) within a few years. Underdeveloped &/or High corruption economies In a society with substantial corruption, privatization allows the government currently in power and its backers to siphon a large portion of the entire net present value of state assets away from the public and into the accounts of their favored power brokers. Without privatization, corrupt officials would have to slowly harvest their corrupt earnings over time. As such, efficient privatization depends on their being a very low of current corruption among the current government officials since it allows for far more 'efficient' extraction of corrupt rents. Of course, corrupt governments can also extract corrupt rents quite efficiently in other ways particularly by borrowing extensively to engage in spending on overly favorable contracts with their backers (or on tax shelters, subsidies or other give-aways). Generations of subsequent taxpayers are then left with paying back the debt incurred for corrupt transfers made decades previously. Naturally, this may lead to the sale of public assets.... In the end, the public is left with a government that taxes them heavily, and gives them nothing in return. Debt repayment is enforced by international agreements and agencies such as the IMF. Infrastructure and upkeep is sacrificed - leading to a further decay in the economic efficiency of the country over time. Outcomes Literature reviews find that in competitive industries with well-informed consumers, privatisation consistently improves efficiency. Such efficiency gains mean a one-off increase in GDP, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth. The type of industries to which this generally applies includes manufacturing and retailing. Although typically there are social costs associated with these efficiency gains, many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps retraining.

11

In sectors that are natural monopolies or public services, the results of privatization are much more mixed, as a private monopoly behaves much the same as a public one in liberal economic theory. In general, if the performance of an existing public sector operation is sufficiently bad, privatisation (or threat thereof) has been known to improve matters. Changes may include, inter alia, the imposition of related reforms such as greater transparency and accountability of management, improved internal controls, regulatory systems, and better financing, rather than privatisation itself. Regarding political corruption, it is a controversial issue whether the size of the public sector per se results in corruption. The Nordic countries have low corruption but large public sectors. However, these countries score high on the Ease of Doing Business Index, due to good and often simple regulations, and for political rights and civil liberties, showing high government accountability and transparency. One should also notice the successful, corruption-free privatizations and restructuring of government enterprises in the Nordic countries. For example, dismantling telecommunications monopolies have resulted in several new players entering the market and intense competition with price and service. Also regarding corruption, the sales themselves give a large opportunity for grand corruption. Privatizations in Russia and Latin America were accompanied by large-scale corruption during the sale of the state-owned companies. Those with political connections unfairly gained large wealth, which has discredited privatization in these regions. While media have reported widely the grand corruption that accompanied the sales, studies have argued that in addition to increased operating efficiency, daily petty corruption is, or would be, larger without privatization, and that corruption is more prevalent in non-privatized sectors. Furthermore, there is evidence to suggest that extralegal and unofficial activities are more prevalent in countries that privatized less.

Alternatives to total privatization Public Utility The enterprise can remain as a public utility. Non-Profit The enterprise could be managed by a private non-profit organization. Municipalization Transferring control to municipal government Outsourcing or Sub-contracting It is possible that national services may sub-contract or out-source functions to private enterprises. A notable example of this is in the United Kingdom, where many municipalities have contracted out their garbage collection or administration of parking fines to private companies. In addition, the British government has involved the private sector more in the workings of the National Health Service principally through outsourcing the construction and

12

operation of new hospitals to private companies. There are also moves to refer patients to private surgeries to ease the load on existing NHS human resources, and covering the cost of this. Partial ownership An enterprise may be privatised, with a number of shares in the company being retained by the state. This is a particularly notable phenomenon in France, where the state often retains a "blocking stake" in private industries. In Germany, the state privatised Deutsche Telekom in small tranches, and still retains about a third of the company. As of 2005, the state of North Rhine-Westphalia is also planning to buy shares in the energy company E.ON in what is claimed to be an attempt to control spiraling costs. Whilst partial privatization could be an alternative, it is more often a stepping stone to full privatization. It can offer the business a smoother transition period during which it can gradually adjust to market competition. Some state-owned companies are so large that there is the risk of sucking liquidity from the rest of the market, even in the most liquid marketplaces, and thus must be sold off bit by bit. The first tranche of a multi-step privatization would also in the first instance establish a valuation for the enterprise to mitigate complaints of under-pricing. In some instances of partial privatization of contracted services, provision of some portion(s) of the state-owned service are provided by private-sector contactors, but the government retains the capacity to self-operate at contract intervals, if it so chooses. An example of partial privatization would be some forms of school bus service contracting, such as arrangements where equipment and other resources purchased with government capital funds and/o those already owned by a governmental entity are used by the contractor for a period of time in providing services, but ownership is retained by the governmental unit. This form of partial privatization eases concerns that once an operation is contracted, the government may be unable to obtain sufficient competitive bids, and be subjected to terms less desirable than the prior operation under state-ownership. Under that scenario, a reverse privatisation would be more feasible for the government. (see section below) Notable privatizations The largest privatization in history was Japan Post. It was the nation's largest employer and one third of all Japanese government employees worked for Japan Post. Japan Post was often said to be the largest holder of personal savings in the world. The Prime Minister Junichiro Koizumi wanted to privatize it because it was thought to be an inefficient and a source for corruption. In September 2003, Koizumi's cabinet proposed splitting Japan Post into four separate companies: a bank, an insurance company, a postal service company, and a fourth company to handle the post offices as retail storefronts of the other three. After privatization was rejected by upper house, Koizumi scheduled nationwide elections to be held on September 11, 2005. He declared the election to be a referendum on postal privatization. Koizumi subsequently won this election, gaining the necessary supermajority and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.

13

Nippon Telegraph and Telephone's privatization in 1987 was the largest share offering in financial history at the time. 15 of the world's 20 largest public share offerings have been privatizations of telecoms. The United Kingdom's largest public share offerings were privatisations of British Telecom and British Gas. The largest public share offering in France was France Telecom. Privatisation in Europe has led to genuine competition: the former state-owned enterprises lost their monopolies due to legislation and technological change, competitors entered the market, and prices for broadband access and telephone calls fell dramatically.

PRIVATIZATION IN KENYA History of Privatization After Kenya’s independence in 1963, the establishment of the parastatals was driven by a national desire to: • Accelerate economic social development. • Redress regional economic imbalances. • Increase Kenyan Citizen’s participation in the economy. • Promote indigenous entrepreneurship. • Promote foreign investments (through joint ventures). This desire was expressed in the Sessional Paper No. 10 of 1965 on African Socialism and its application to planning in Kenya. Review of the Public Enterprises Performance A comprehensive review of the Public Enterprises Performance was carried out in 1979 (the Report on the Review of Statutory Boards) and 1982 (the Report of the Working Party on Government Expenditures). The Report on Review of Statutory Boards pointed out that: (i) The growth in the parastatal sector had not been accompanied by development of efficient systems to ensure that the sector plays its role in an efficient manner. (ii) There was clear evidence of prolonged inefficiency, financial mismanagement, waste and malpractices in many parastatals. (iii) Government investments had largely been at the initiative of private promoters with government being brought in either as an indispensable partner or to undertake rescue measures. (iv) Many of the parastatals had moved away from their primary functions, especially the regulatory boards most of which had translated their regulatory role into executive one, resulting in waste and confusion. (v) There was danger of over-politicizing production and distribution through establishment of too many parastatals.

14

The Report on the Working Party on Government Expenditures concluded that productivity of state corporations was quite low while at the same time they continued to absorb an excessive portion of the budget, becoming a principal cause of long-term fiscal problem. The report observed that: (i) Nationalization had remained merely presentational through government ownership; (ii) State corporations’ operations had become inefficient and unprofitable, partly due to multiplicity of objectives; (iii) existence of parastatals in commercial activities had stifled private sector initiatives; and (iv) many of the joint ventures had failed, requiring the Government to shoulder major financial burden. The Report on the Working Party on Government Expenditures concluded that some of the resources diverted to the government to finance the state corporations’ activities could have contributed more to national development if these state corporations were left in the private sector. The report recommended that:(i) The government should act as a creator of favourable setting within which people can develop themselves and the economy (ii) The government should divest from its investments in commercial and industrial enterprises to transfer active participation to more Kenyans through participation in shareholding (iii) The government should reduce exposure to risk in areas in which the Private Sector can assume risk without government intervention (iv) The government should dismantle some of the existing administrative hurdles which discourage private sector initiative and provide needless opportunities for corruption (v) The government should reorganize legal and institutional framework regarding monitoring and supervision of parastatals. Following the two reviews a number of measures were put in place. One of the measures was the enactment of the State Corporations Act. However, although this was a major attempt to streamline the management of the state corporations, the performance of most of the corporations continued to deteriorate. One reason is the continued reliance on limited public sector financing. The state corporations continued relying on public sector financing which was not adequate to meet all the sector’s needs. They continued to be financed from loans borrowed by the government and/or channeled through them as government equity; loans borrowed by the enterprises on government guarantees which in most cases ended up being repaid by the Treasury when the corporations defaulted; funds provided directly by the Treasury as grants or equity; or through internally generated funds. The internally generated funds were, however, inadequate due to huge debt burdens, tariffs that were below cost recovery levels, over employment, which caused most of the revenue to be used in payment of salaries, non-viable ventures which siphoned away resources from the enterprises, corruption and mismanagement in general. In addition most of the parastatals were under capitalization from the time of incorporation as they were mainly financed from loans without due regard to the establishment of a strong financial base. Most of them also continued to spread their resources thinly due to multiplicity of objectives and poor accountability.

15

In July 1992, through the issuance of the Policy Paper on Public Enterprise Reform and Privatization, the Government outlined the scope of the Public Sector Reform Programme the institutional framework and the guidelines and procedures for privatizing Public Enterprises (PEs). The Policy Paper identified 240 commercial PEs with public sector equity participation and classified them into two categories: (i) 207 Non strategic commercial PEs which were to be privatized and (ii) 33 Strategic Commercial PEs which were to be re-structured and retained under public sector control. By the end of the first phase of the privatization programme in 2002, most of the nonstrategic commercial enterprises had either been fully or partially privatized. At that time, the direction of thinking regarding restructuring and retention of a number of strategic corporations under Government operation and control had also changed due to:• Inadequacy of public resources to finance the requisite investment in infrastructure facilities; • The need to arrest continued deterioration in infrastructure services; • Lesson from other countries which had succeeded in improving their infrastructure services through Public Private Partnerships; and • Restructuring which resulted in separation of commercial activities from regulatory functions, making it possible to privatize commercial activities while ensuring Government continued presence in the privatized sectors through establishment of strong legal and institutional regulatory frameworks. Although numerous enterprises were privatized during the first phase, the impact on the economy was limited because; (i) Most of the enterprises privatized under this Phase were relatively small and selfsufficient, (ii) Most of the large companies were considered strategic and therefore not privatized, and (iii) The programme had institutional and process weaknesses arising from failure to entrench the procedures and institutional framework in law. As a result, the Parastatal Reform Programme Committee (PRPC) eventually became dormant while its secretariat (The Executive Secretariat and Technical Unit (ESTU)),which was the administrative organ, was reduced to a skeleton staff following closure of the World Bank Credit under which it was funded. Lack of clearly defined processes and an effective communications strategy also exposed the Programme to accusation of corruption. There was also limited participation by individual Kenyans in most of the transactions due to the transaction methods applied. Under the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) 2003-2007, the Government implemented a number of key privatization transactions. These included the Kenya Electricity Generating Company (KenGen) Initial Public Offer (IPO), the concessioning of the Kenya Railways operations, Mumias Sugar Company Second Offer,

16

Kenya Reinsurance Corporation IPO, Sale of 51% Telkom Kenya shareholding to a strategic partner and the recently completed Safaricom IPO. Through these transactions, the country mobilized over Kshs.80 billion used to support the country's recovery and overall development agenda. Following expiry of the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) 2003-2007, Kenya has embarked on implementation of a long term strategy, Vision 2030. On basis of Vision 2030 and its First Medium Term plan for the period 2008 2020 the Government is focusing on four priority areas namely: • Restoring the economy to a higher broad-based long term growth path with expanded opportunities for all Kenyans; • Creating employment opportunities for the youth for a more stable and cohesive society; • Reducing poverty and inequality through accelerated regional development; and • Deepening human capital development efforts to increase productivity and prosperity. To support the pursuit of these goals, the privatization seeks to improve the efficiency and competitiveness of Kenya's productive resources by subjecting more of Kenya's production to market forces, mobilizing investment resources for rehabilitation, expanding and modernizing key infrastructure facilities, developing the capital markets and supporting the budget through privatization proceeds and increased taxes. Government is also expected to earn increased dividends from its remaining shareholding as a result of improved performance following enterprise privatization. Privatization commission of Kenya PRIVATIZATION PROCESS For each privatization included in the privatization programme the Commission shall make a specific proposal for privatization. The Minister shall present a report on the privatization proposals approved by the Cabinet to the relevant committee of Parliament. Without limiting what else may be included, a privatization proposal shall set out the following – (a) For the assets or operations being proposed for privatization (i) the purpose of the establishment or existence of the assets or operations; (ii) the extent to which the purpose has been met by the assets or operations including any inadequacies in meeting that purpose; (iii) the rights or other entitlements and resources that have been provided to meet the purpose; (iv) Recommendations for continuing to meet the purpose; and (v) if the asset is a state corporation, the financial position of the state corporation; (b) The recommended method of privatization; (c) The estimated costs of implementing the proposed privatization;

17

(d) Recommendations for dealing with the employees directly affected by the proposed privatization, including dealing with any benefits they might be .owed; (e) The benefits to be gained from the proposed privatization; (f) A work plan for the proposed privatization (g) Information regarding any written law, the repeal, amendment or enactment of which will be necessary for the proposed privatization to be carried out; and (h) Proposals on how Kenyans are to be encouraged to participate in the transaction. METHODS OF PRIVATIZATION The Different Approaches The following methods shall be used for privatization; i. public offering of shares; ii. concessions, leases, management contracts and other forms of public-private partnerships; iii. negotiated sales resulting from the exercise of pre-emptive rights; iv. sale of assets, including liquidation; v. any other method approved by the Cabinet in the approval of a specific privatization proposal. BENEFITS OF PRIVATIZATION i) The improvement of infrastructure and delivery of public services by the involvement of private capital and expertise; ii) The reduction of the demand for government resources; iii) The generation of additional government revenues by receiving compensation for privatizations; iv) The improvement of the regulation of the economy by reducing conflicts between the public sector’s regulatory and commercial functions; v) The improvement of the efficiency of the Kenyan economy by making it more responsive to market forces; vi) The broadening of the base of ownership in the Kenyan economy; and vii) The enhancement of the capital markets.

18

Some of the institutions that have been privatized in Kenya;

Year 1988 1996 2001 2006 2006 2007 2007 2008

Name Kenya Commercial Bank Kenya Airways Mumias Sugar Co. Kenya Electricity Generating Company Limited Kenya-Uganda Railways Telkom Kenya Kenya Reinsurance Safaricom Kenya Limited National Bank of Kenya Housing Finance Company of Kenya East Africa Portland Cement Co. Kenya Power & Lighting Co.

STATE FIRMS SLATED FOR PRIVATISATION Institution and Public Shareholding Kenya Energy Generation Company (KenGen) - GoK Kenya Ports Authority (KPA) - GoK Kenya Ports Authority – Outsourcing of Stevedoring Services (KPA) Kenya Ports Authority – Development of Berths No 11-14 Chemilil Sugar Company – ADC Chemilil Sugar Company – Development Bank of Kenya (DBK) South Nyanza Sugar Company – GoK South Nyanza Sugar Company- ICDC South Nyanza Sugar Company – Industrial Development Bank (IDB) Nzoia Sugar Company – GoK Nzoia Sugar Company – IDB Capital limited Miwani Sugar Company Limited (Under receivership) ADC Miwani Sugar Company Limited – Development Bank of Kenya Muhoroni Sugar Company Limited(Under receivership) ADC Muhoroni Sugar Company Limited(Under receivership) Shareholding 70 100 100 100 96.2 1.4 98.8 0.7 0.3 97.9 0.9 16.9 0.3 16.9 0.3

19

DBK Kabarnet Hotel – Kenya Tourist Development Cooperation (KTDC) Mt. Elgon Lodge Limited (KTDC) Mt. Elgon Lodge Limited (Kitale Municipal Council)) Mt. Elgon Lodge Limited (Trans Nzoia County Council) Golf Hotel Limited (KTDC) Golf Hotel Limited (Kakamega Municipal Council) Sunset Hotel (KTDC) Kisumu Municipal Council Kenya Safari Lodges and Hotels Limited (KTDC) Kenya Safari Lodges and Hotels Limited (KWS) KTDC i. ii. iii. Associated Companies International Hotels Kenya Limited (KTDC) Kenya Hotels Properties Limited (KTDC) Mountain Lodge Limited (KTDC) 40 33.8 39.1 22.5 48.1 50.2 48.8 89.3 28.2 28.8 72.6 27 25 100 100 51 49 98.2 72.9 13.5 13.5 80 20 4.6 63.4

National Bank of Kenya – GoK National Bank of Kenya – NSSF Consolidated Bank – Deposit Protection Fund Consolidated Bank – State Corps Development Bank of Kenya Agrochemical and Food Corporation (ADC) Agrochemical and Food Corporation (ICDC) Kenya Wine Agencies (ICDC) East Africa Portland Cement (NSSF) East Africa Portland Cement (GoK) Kenya Meat Commission New Kenya Co-operative Creameries Numerical Machining Complex (Kenya Railways) Numerical Machining Complex (University of Nairobi) Isolated Power Stations

PRIVATIZATION PROGRAMME The Privatization Programme is a list of public sector assets and operations identified for privatization as provided for under the Act. The current Privatization Programme was approved by Cabinet on 11th December 2008 and gazetted by the Deputy Prime Minister and Minister for Finance on 14th August 2009. The investments in the approved programme, current public sector shareholding and the objectives for their privatization are as follows. Entity/operation in the approved Privatization Programme Development Bank of Kenya (DBK): Industrial & Commercial Development Corporation (ICDC) – 89.3% Main Objective/Rationale for privatization • To release funds invested by ICDC for lending to industry and other enterprises and mobilize necessary resources to support the bank’s future growth, support the growth and stability of the financial markets, enhance corporate governance and broaden

(i)

20

shareholding. (ii) National Bank of Kenya (NBK) • To mobilize necessary resources to support the bank’s Restructuring and Privatization: future growth, support the growth and stability of the Ordinary shares - GOK 22.5% financial sector and the capital markets, enhance National Social Security Fund (NSSF): corporate governance, broaden shareholding and to 48.05%. Preference shares: GOK recoup part of Government investment to finance other KShs. 4.5bn, NSSF KShs. 1.175 bn. development projects. (iii) Public Owned Sugar Companies. • To enhance efficiency of the sugar sector and meet GOK/Common Market for East and Southern Africa • Chemelil Sugar Company – (COMESA) Sugar safeguard commitment to privatize Agriculture Development Corporation sugar companies. Key objective is to carry out necessary (ADC): 96.21% and DBK: 1.42%. investments and address all challenges affecting the sector’s competitiveness before the safeguard is lifted in • South Nyanza Sugar Company. Ltd. 2012. – GOK: 98.8%, ICDC: 0.7% and Industrial Development Bank (IDB): • To raise funds for the rehabilitation of the sugar 0.3%. factories. • Nzoia Sugar Company. – GoK 97.93%, IDB Capital Ltd. 0.94% • Miwani Sugar Company. Ltd. (Under Receivership) – GoK: 49%. • Muhoroni Sugar Company. Ltd. (Under Receivership) – ADC: 16.9%, Development Bank of Kenya: 0.3% (iv) Kenya Wine Agencies (KWAL): ICDC – 28.8% (v) Privatization of the Kenya Tourist Development Corporation (KTDC) hotels: • Kabarnet Hotel – KTDC: 98.2%; • Mt. Elgon Lodge Ltd – KTDC: 72.92%, Kitale Municipal council: 13.54%; and Trans-Nzoia Country Council: 13.54%; • Golf Hotel Ltd – KTDC: 80%, Kakamega Municipal Council: 20%; • Sunset Hotel Ltd – KTDC: 95.4%, Kisumu City: 4.6% • Kenya Safari Lodges and Hotels Ltd. – KTDC: 63.42%, KWS: 0.02%; • To address the excess debt through necessary restructuring.

• To assure its continued viability. • To mobilize resources to rehabilitate and modernize existing facilities. • To raise proceeds to finance the industry through loans and other investments by KTDC. • To address and identify the best option for ownership and management of hotels owned by KTDC.

21

• KTDC Associated Companies: * International Hotels Kenya Ltd. – KTDC: 40%; * Kenya Hotel Properties Ltd. – KTDC: 33.83%, * Mountain Lodge Ltd. – KTDC: 39.11%, * Ark Ltd. – KTDC: 5.64%) (vi) Kenya Ports Authority (KPA) approved operations. • To enhance Kenya’s regional competitiveness and facilitate investment and economic growth.

(i) Eldoret container Terminal: KPA • To improve efficiency in delivery of services through -100%. mobilization of private sector financial and management resources. (ii) Stevedoring services: KPA- 100% • To expand capacity through mobilization of private (iii) Development of Berths 11-14; sector capital and management resources. KPA- 100% (vii) Consolidated Bank of Kenya (Deposit • To mobilize necessary resources to support the bank’s Protection Fund – 50.2%, State future growth, support the growth and stability of the Corporations and other Government financial sector, enhance corporate governance and institutions- 48.8%) broaden shareholding. (viii)Agrochemical and Food Company – • To address financial and management resource needs ADC: 28.2% and ICDC: 28.8% and the company’s excess debt. (ix) Kenya Pipeline Company Limited • To ensue capacity expansion through mobilization of (KPC): GOK 100% private sector capital and management resources. (x) Kenya Electricity Generating • To mobilize resources for additional investments, Company (KenGen) - Sale of Part of enhance transparency and corporate governance, Government shares. GOK – 70% broaden shareholding, develop the Capital Markets and raise resources to support the Government budget. (xi) East African Portland Cement – • To mobilize resources for additional investments, NSSF: 27%, GOK: 25% enhance transparency and corporate governance, broaden shareholding in the economy, develop the Capital Markets and raise resources to support the Government budget. (xii) Kenya Meat Commission (KMC): • To address KMC’s future viability and the required GOK – 100% financial and management resources through restructuring and privatization. (xiii)Privatization of the New Kenya Co- • To address future governance and sustainability of its operative Creameries – GOK - 100% operations. (xiv) Numerical Machining Complex – • To address mobilization of resources for investment in Kenya Railways Corporation: 51%, the company and the utilization of the company’s idle Nairobi University 49%. assets through restructuring and privatization. (xv) Isolated Power Stations. • To facilitate comprehensive review of the most appropriate and effective way of operating the stations in
22

the future.

STATUS
Entity/operation in the approved Privatization Programme and the government objective 1. Development Bank of Kenya (DBK): The Objective: To release funds invested by ICDC for lending to industry and other enterprises and mobilize necessary resources to support the bank’s future growth, support the growth and stability of the financial markets, enhance corporate governance and broaden shareholding. The Status: Detailed proposal has been submitted to the Treasury for submission to the cabinet. 2. National Bank of Kenya (NBK) The Objective: To mobilize necessary resources to support the bank’s future growth, support the growth and stability of the financial sector and the capital markets, enhance corporate governance, broaden shareholding and to recoup part of Government investment to finance other development projects. The Status: Detailed proposal has been finalized for submission to the cabinet 3. Public Owned Sugar Companies The Objective: To enhance efficiency of the sugar sector and meet GOK/Common Market for East and Southern Africa (COMESA) Sugar safeguard commitment to privatize sugar companies. Key objective is to carry out necessary investments and address all challenges affecting the sector’s competitiveness before the safeguard is lifted in 2012. To raise funds for the rehabilitation of the sugar factories. To address the excess debt through necessary restructuring. The Status: Most of the necessary work to prepare detailed proposal has been completed. Detailed proposal finalized after stakeholders workshop held on 23rd Oct 2009 in Kisumu 4. Kenya Wine Agencies (KWAL) The Objective: To ensure its continued viability Bring a Strategic Equity Partner on board obviate pressure from current suppliers The Status: Most of the work necessary to finalize detailed proposal has been completed 5. Kenya Tourist Development Corporation (KTDC) hotels The Objective: To mobilize resources to rehabilitate and modernize existing facilities. To raise proceeds to finance the industry through loans and other investments by KTDC. To address and identify the best option for ownership and management of hotels owned by KTDC. The Status: Consultancy work at an advanced stage.

23

6. Kenya Ports Authority (KPA) - approved operations The Objective: To enhance Kenya’s regional competitiveness and facilitate investment and economic growth. To improve efficiency in delivery of services through mobilization of private sector financial and management resources. To expand capacity through mobilization of private sector capital and management resources. The Status: Procurement of transaction advisory services at final stage. 7. Consolidated Bank of Kenya The Objective: To mobilize necessary resources to support the bank’s future growth, support the growth and stability of the financial sector, enhance corporate governance and broaden shareholding. The Status: Identification of transaction advisory services completed Negotiation with consultancy team scheduled to take place this week 8. Agrochemical and Food Company ADC The Objective: To address financial and management resource needs and the company’s excess debt. The Status: Identification of transaction advisory team completed Negotiation with consultants scheduled to take place this week 9. Kenya Pipeline Company Limited (KPC) The Objective: To ensue capacity expansion through mobilization of private sector capital and management resources The Status: Transaction advisors identified contracts to be signed after 14 days appeal window 10. Kenya Electricity Generating Company (KenGen) The Objective: To mobilize resources for additional investments, enhance transparency and corporate governance, broaden shareholding, develop the Capital Markets and raise resources to support the Government budget. The Status: To await recovery of market 11. East African Portland Cement The Objective: To mobilize resources for additional investments, enhance transparency and corporate governance, broaden shareholding in the economy, develop the Capital Markets and raise resources to support the Government budget. The Status: To await recovery of market 12. Kenya Meat Commission (KMC) The Objective: To address KMC’s future viability and the required financial and management resources through restructuring and privatization The Status: Evaluation of Expression of Interest for consultancy services ongoing 13. New Kenya Co-operative Creameries

24

The Objective: To address future governance and sustainability of its operations Improve its competitiveness The Status: Evaluation of Expression of Interest for Consultancy Services ongoing

14. Numerical Machining Complex The Objective: To address mobilization of resources for investment in the company and the utilization of the company’s idle assets through restructuring and privatization The Status: Procurement of consultancy services on hold 15. Isolated Power Stations The Objective: To facilitate comprehensive review of the most appropriate and effective way of operating the stations in the future The Status: Evaluation of Expression of Interest for Consultancy services ongoing

References Kikeri,S, (1997), Privatization; The lessons of Experience , World Bank. Others
Sr. no 1. 2. 3. 4. 5. 6. 7. 8. Weblink Title/Information

http://www.privatization.org/database/whatisprivatization/privatization_t echniques.html http://www.privatization.org/database/whatisprivatization.html http://www.gassmannconsulting.com/privatisation.htm http://www.indymedia.ie/openwire?search_text=privatisations http://www.waronwant.org/?lid=6533 http://www.monbiot.com/archives/category/privatisation/ http://uk.answers.yahoo.com/question/index?qid=1006030100609 http://www.turkisheconomy.org.uk/privatisation.html

Types and Techniques of Privatization(good one) About privatization in general(good one) Overall view Articles u may want to go through Privatisation, Power & Poverty Articles related to privatisation of the medical industry and education Write up on privatisation in India Official government link in Turkey

25

9. 10. 11. 12. 13. 14. 15.

http://www.anarkismo.net/newswire.php?story_id=3472 http://www.actionaid.org.uk/1358/world_bank__imf.html http://www.oecd.org/statisticsdata/0,2643,en+2825+293564+1+1+1+1+1 _2649_34847_1_119656_1_1_37467,00.html http://www.privatisation.gov.pk/ http://www.brettonwoodsproject.org/article.shtml?cmd[126]=x-12616248 http://www.johnpilger.com/page.asp?partid=134 http://search.ft.com/search? page=1&queryText=privatisation&drillDown=%2Bgatopics%3A %22Privatisations%22&aje=true http://www.ifla.org/IV/ifla64/188-139e.htm http://weekly.ahram.org.eg/2004/685/ec3.htm http://www.eerc.ru/details/download.aspx?file_id=3769 http://www.xterna.com/xt/Privatisation/page2.html http://www.nato.int/docu/colloq/1995/95-12.htm http://www.competitionregulation.org.uk/publications/working_papers/wp55.pdf http://rru.worldbank.org/Documents/PapersLinks/1076.pdf http://rru.worldbank.org/Documents/PapersLinks/1481.pdf http://rru.worldbank.org/PapersLinks/Impact-Infrastructure-Privatization/ (Click on the title of the article) http://privatisation.mackphilisa.net/pages/History_of_Privatization.vrt

Privatisation – the rip-off of public resources - But is ‘nationalisation’ the answer? World bank, IMF –conditions of privatisation OECD and privatisation Official Pakistan link on privatisation Bank “soul searching” on privatisation Globalisation: New Rulers of the World- Privatisation Newspaper articles from financial times on privatisation A Review of Privatisation Study criticises privatisation programme-Egypt Analysis of the impact of privatisation on medium and large scale industries Links to newspapers articles and privatisation related articles NATO link on privatisation Privatisation in developing Countries: a review of the Evidence and the policy Lessons Utilities Privatization and the Poor: Lessons and Evidence from Latin America Private Participation in Infrastructure in Developing Countries Winners and Losers: Assessing the Distributional Impact of Privatization History of Privatization in Kenya

16. 27. 18. 19. 20. 22.

23. 24. 25. 26.

26

Sign up to vote on this title
UsefulNot useful