THE EFFECTS OF PRIVATISATION
ON THE PUBLIC SECTOR AND THE ROLE OF THE STATE IN MALAWI
By
Collins Magalasi cmagalasi@gmail.com
December 2006
LIST OF ACRONYMS
1. INTRODUCTION. 4
1.1. Objectives of the Paper 5
1.2. Methodology. 5
1.3. Organisation of the Report 5
2. PRIVATISATION: THEORETICAL FRAMEWORK. 6
2.1. Privatization Trends in Developing Countries. 7
2.1.1. Sub-Saharan Africa. 7
3. PUBLIC SECTOR AND SOES IN MALAWI 9
3.1. Reasons for Public Sector Participation. 9
3.1.1. The Colonial Era. 9
3.1.2. Political Dimension. 10
3.2. Nature and Coverage. 10
4. PRIVATIZATION PROCESS IN MALAWI 14
4.1. Earlier Experiences. 14
4.2. Privatisation Policy. 15
4.3. Why Privatization. 16
4.4. Policy Environment 17
4.5. Consultations. 20
4.6. Malawi's Privatisation Programme (PP) 21
5. CHALLENGES OF PRIVATISATION. 25
5.1. Privatization and Technical Efficiency. 26
5.2. Impact of the Privatization Program.. 27
5.2.1. Treasury Effects. 27
5.2.2. Use of Privatization Proceeds. 28
5.2.3. Malawian participation and Ownership De-concentration. 28
5.2.4. Impact of Listed Companies on Capital Market Development 29
5.2.5. Employment 29
5.3. Discussion. 30
5.4. Solutions / Alternatives. 32
6. CONCLUSION AND RECOMMENDATIONS. 35
APPENDIX 1
LIST OF ACRONYMS
ADMARC Agricultural Development and Marketing Corporation
AIHL ADMARC Investment Holding Limited
CBM Commercial Bank of Malawi
DWASCO Dwangwa Sugar Corporation
DEA Data Envelopment Analysis
DEVPOL Development Policy Plan
DSP Divesture Sequence Plan
ESCOM Electricity Commission of Malawi
GDP Gross Domestic Product
IB Intermediate Buyer
IBRD International Bank for Reconstruction and Development
IDA International Development Aid
IFI International Financial Institutions
IMF International Monetary Fund
IPTAC Industrial Trade Policy Adjustment Credit
MDC Malawi Development Corporation
MIPA Malawi Investment Promotion Agency
MPTC Malawi Post and Tele-Communications Ltd
NICO national Insurance Company
OECD Organisation for Economic Cooperation and Development
PC Privatisation Programme
PCL Press Commission Limited
PIM Packaging Industries (MW) Limited
SAL Structural Adjustment Loan
SAPs Structural Adjustment Programmes
SC Statutory Corporation
SOE State Owned Enterprise
SUCOMA Sugar Corporation of Malawi
1. INTRODUCTION
Privatisation in its simplest sense is the transfer of public enterprise to private ownership. Beginning in the 1970s, there has been a global trend to move away from state ownership and control towards privatisation. State participation, which became common after the Second World War in developed countries and after independence in developing countries, slowly became less popular. Apart from the general fact that several of the State Owned Enterprises (SOEs) were inefficient and poorly managed, the period (1970-1990) was dominated by the growing dominance of neo-liberalism as a model for economic development (Jaunch, 2002). The neo-liberal ideology is driven by the belief in the "free market" as the best regulator and engine of economic growth while the state's developmental role in the economy is to be reduced.
The privatisation trend became common in African developing countries around 1980s to 1990s as part structural adjustment programs (SAPs). Introduced by international Financial Institutions (IFIs), the SAPs were meant to “assist” countries that were going through some economic hardship. The World Bank and International Monetary Fund (IMF) offered loans to these countries, and in return for these loans, African countries were forced to implement neo-liberal economic policies, which included privatization.
The trend of privatization in Africa and some developing countries did not miss Malawi whose [privatization] experience dates back to 1985. Malawi, a landlocked country in Southern Africa, is one of the poorest countries in the world. It is estimated that over 50% of Malawi’s 12million people live below poverty line, and the majority of Malawians derive their livelihood from agriculture sector. Despite all the reliance in agriculture, ironically, the first company to be subjected to privatisation was Agriculture Development Marketing Corporation (ADMARC), an institution that has been providing food support and back-up for rural Malawians, and whose full privatisation still remains a big contention by civil society up to now.
The imposition of privatisation by Bretton Woods[1] institutions, albeit its positive theoretical economic assessments, attracted a lot of critics who have expressed strong reservations about privatisation’s fairness and sometimes its efficiency and impact. Some of the specific arguments are, first, that privatisation causes social dislocation. Second, privatisation leads to layoffs and a worsening in labour conditions, in the short term in the divested firms and in the long run in the economy at large. Third, it has been argued that the bulk of the benefits accrue to a privileged few – shareholders, managers, foreign or domestic investors, those connected to the political elite – whereas the costs are borne by many, particularly tax payers, consumers, and workers, thereby reducing the overall welfare.
As expected, studies on the effects of privatisation show that there is a lot of variation on how privatisation has fared. In some countries, they provided a good solution to companies in infrastructure and network industries; privatisation transferred inefficient public monopolies to become efficient private monopolies; and significant gains have been achieved after privatisation. For example, in Brazil, during the 1981-94, before privatisation, the ratio of profits to net assets was negative, averaging -2.5 and falling to -5.4 percent towards the end; after privatisation most firms became profitable, and investment increased dramatically. Furthermore, higher profits brought more tax revenue to the government, and some companies began paying dividends to their investors (Kikeri and Nellis, 2003).
This paper is a result of quest to inform lobbyists and campaigners in Malawi and beyond on Privatisation and the Public Sector in Malawi. The paper is critical of the objectives and effects of privatisation on the public sector and the role of the state.
1.1. Objectives of the Paper
A number of reports show that privatisation has had considerable effects, both positive and negative. This paper covers a broader initiative to root an alternative development paradigm within the achievements and lessons from earlier experience of state led development. By looking at the nature and role of the “public sector” defined broadly, to cover democratic, accountable to the popular forces and which highlights popular participation, management and control, we try to focus on the appropriate role for the state in advancing development.
1.2. Methodology
The paper contextualises the process of privatisation within a review of the public sector in the period after independence capturing the key role of the state in developing the national resources and industries and advancing the rights and welfare of the people. Most of this is done through secondary data. Primary sources of information is used where there is little or no available documentation. The paper gets down to sectoral levels, where key strategic sectors are chosen to emphasise the above point. The sectors chosen are strategic from the point of view of their importance to the country’s economy and overall national development.
1.3. Organisation of the Paper
The paper is divided into four main parts. The first part is the privatisation theoretical framework which also covers the trends in developing countries. In the second part, the paper looks at the Public Sector and State Owned Enterprises in Malawi. Here the author will be looking at the Public Sector in Malawi and the reasons for going into production, infrastructures and services. The third part analyses the privatisation process in Malawi. The fourth section goes into the challenges of privatisation. And finally, before concluding, the paper looks at solutions and alternatives to privatisation, which could work in poor country like Malawi.
2. PRIVATISATION: THEORETICAL FRAMEWORK
In trying to answer the question of whether privatisation is necessary, most of the literature in the 1990s support privatisation. A good number of the supporters feel that privatisation is necessary, not simply to improve performance of public enterprises, it’s essential contributions are to ‘lock in the gains’ achieved earlier in reforming public ownership or in preparing a firm for sale, to distance the firm from political interference, and to inoculate it against the recurrence of the common and deadly ailment of public enterprises: interference by owners who have more than profit in their minds. (John Nellis, 1994).
The neoclassical reasoning is that there is there is little difference whether a firm is privately or publicly owned as long as it operates in a competitive market without barriers to entry or exit; or the owner instructs management to follow signals provided by the market and gives the autonomy to do so. The modern theory, however, changed this reasoning by attempting to establish a clearer relationship between ownership and efficiency. It is believed that private ownership will produce superior efficiency outcomes because of the following factors:
- establishment of a market for managers, leading to higher quality management
- capital markets subject privately owned firms to greater scrutiny and discipline than they do public enterprises
- private firms are subject to exit much more often than public enterprises
- politicians interfere less in the affairs of private than public firms
- private firms are supervised by self interested board members and shareholders, rather than by disinterested bureaucrats
This reasoning is supported by a trend where most state enterprises went through losses, became inefficient, produced low quality goods and services at high cost especially in developing countries. The general impression on state enterprises was that there were overstaffed, did not compete, and often resulted in bailouts, leading to national financial losses amounting in some cases as much as 5 to 6 percent of gross domestic product annually[2]. Bailouts for most of the state enterprises meant that the government had to finance larger fiscal deficits and increase tax revenues or reduce public spending in other areas, or both.
Privatization is also taken positively by public choice theorists, who look at the bureaucratic approach in which public enterprises are seen as an instrument of enhancing the utility functions of politicians such as maximization of votes and budgets (Niskanen, 1972; Buchanan, 1972; Blankart, 1983; Boycko et al., 1996). Proponents of the public choice theory hold that government departments pursue objectives that do not maximize profits and usually pursue goals such as maximizing budget, risk aversion, employment and investment. Boycko et al. (1996) propose a model of privatization within the framework of public choice theory. The model shows that privatization will lead to effective restructuring of state-owned enterprises that are currently producing at inefficiently high levels to maximize employment, only if both cash flow rights and control rights pass from the government into private hands (particularly managers’ hands). This will make it difficult for the government to bribe managers to produce at inefficient levels by offering them operating subsidies. Therefore, cutting the ‘soft budget constraint’ is vital to improving performance.
2.1. Privatization Trends in Developing Countries
By mid-1990s, privatisation in developing countries, which had started slowly in the 1980s, accelerated. Between 1990 and 1999 global proceeds totalled USD850 billion, growing from $30bn in 1990 to $145 in 1999. The Organisation for Economic Cooperation and Development (OECD) countries dominated throughout. In terms of numbers of countries and transactions developing countries dominated. Between 1990 and 2003, 120 developing countries carried out 7,860 transactions between 1990 and 2003, generating close to $410 billion in privatization proceeds, or 0.5 percent of total developing country GDP during that period.
The analysis of overall developing country trends shows that: (i) privatization activity dropped off after 1997 but picked up, albeit modestly, in recent years; (ii) the average size of a transaction increased over the years as countries moved towards privatizing larger firms; (iii) while a large number of countries are involved in privatisation processes, proceeds are highly concentrated in a handful of countries; and (iv) foreign investment accounted for half of privatization proceeds in the 1990s (Kikeri and Kolo, 2005).
In the early to mid-1990s, privatization proceeds in developing countries averaged between $20 to 30 billion on an annual basis. Proceeds peaked sharply in 1997 to almost $70 billion. The sudden and one-time jump resulted from increased activity in large infrastructure and energy (oil and gas) transactions across virtually all regions, with the largest share coming from three countries in Latin America (Argentina, Brazil, Mexico), Kazakhstan, Russia, and China. Revenues declined thereafter as Argentina’s stock of enterprises dwindled and as activity in Asia and Europe slowed down following the East Asian financial crisis of 1997 and the Russian debt crisis of 1998. By 2001 activity had reached the level of 1990, but starting in 2002 proceeds began a modest pick up and is slowly creeping back up to pre-1997 levels. The recent increases resulted mainly from share sales in telecoms, power, and banking in countries such as China (additional share offering of China Telecom), the Czech Republic (partial sale of Transgas), Slovakia (partial sale of the electricity company), India (telecoms), Pakistan (United Bank), and Saudi Arabia (telecoms).
2.1.1. Sub-Saharan Africa
By 2003 Sub-Saharan Africa—with $11 billion or 3 percent of proceeds and some 960 transactions—had the third highest number of transactions (after Eastern Europe and Latin America), but 70 percent were mostly small, low-value firms in competitive sectors. While 37 countries were engaged in privatization, the bulk of regional revenues in the 1990s was accounted for by a few large transactions in Ghana (Ashanti Goldfields and Consolidated Diamond Mines), South Africa (telecoms, steel, petrochemicals), and Nigeria (selected oil fields). South Africa was by far the biggest contributor to regional proceeds starting in 2000, accounting for nearly half of all regional proceeds, mainly due to additional share sales in Telkom, the sale of South African Airways, and sales in the petrochemicals sector. Other recent large transactions in the region: the partial divestitures of Mauritius Telecom (for $261 million) and the Cotton Company of Zimbabwe ($93 million).
Figure 1: Regional Distribution of Privatization Proceeds: 1990-2003
SAS: South Asia
MENA: Middle East and North America
ECA: Eastern Europe and Central Asia
LAC: Latin America and the Caribbean
EAP: East Asia and Pacific
SSA: Sub-Saharan Africa
Source: World Bank
3. PUBLIC SECTOR AND STATE OWNED ENTERPRISES IN MALAWI
The government of Malawi, from the mid 1960’s to the early 1980s, followed a policy of seeking comprehensive ownership of the means of production and also centralized management of the economy. In a way, this aimed to give the economy a state driven boost that was anticipated to trickle down to the poor masses, hitherto marginalized during colonial rule. This section looks at reasons for public sector participation, nature and coverage, and then looks at some sectoral cases.
3.1. Reasons for Public Sector Participation
State participation in most African countries has been common especially in essential services like utilities, manufacturing, mining, distribution and trade. The reasons for such participation vary a lot depending on the history and development levels of the countries concerned. In some cases, essential services such as utilities required large capital investments which given small market sizes were unattractive to foreign investors. Most utilities were deemed to be “natural monopolies” because provision by more than one provider would be inefficient for the economy because of the duplication of infrastructures (Kaluwa, 1998). Furthermore, there was the problem the absence of an indigenous entrepreneurial base with requisite technical skills and capital in the context of underdeveloped finance markets.
Historically, we also note that most African States inherited poor infrastructure at the time of independence. Actually, in infrastructure development, Africa has lagged behind the western hemisphere for centuries, even trailing Latin America in recent decades (Torero and Showdhury, 2004). During the colonial era, little was done to improve Africa’s infrastructure. The little infrastructure built during the colonial era was just to connect natural/mineral resources to markets. In fact, two thirds of the African railways built during the colonial period connected mines to a coastal harbor (J-P Platteau, 1996). These handicaps made most African States perceive the need to undertake some of the economic activity themselves because few private sector companies would want to invest in places where infrastructure support is unavailable.
Malawi’s public sector participation in economic activity is attributed to high financial barriers that made it almost impossible for private companies to undertake huge investments. The sectors where the state was mainly involved were utilities, covering water boards, the Electricity Supply Commission and the Department of Posts and Telecommunications; manufacturing, real estate, tourism, trade and development. Three main firms: the Malawi Development Corporation, ADMARC and Press Holdings became the major players in the sectors outside the utilities. These were supposed to moderate foreign dominance in industrial and commercial sectors and offer some “degree of economic autonomy without cutting off the flow of foreign investment” (DEVPOL-1, 1971).
3.1.1. The Colonial Era
Apart from the above reasons, Malawi is one country that has not enjoyed the benefit of mineral resources. It is also a landlocked country. With these two factors, the country’s colonial era compounded further labour exploitation without any infrastructure support. When the colonialists came into the country 1897 and realized the little benefits of this country, they started pushing for the Confederation with Zambia and Zimbabwe who had good deposits of some minerals. This came in much later, in 1953, with the Central African Federation or the Federation of Rhodesia and Nyasaland. Rhodesia was divided into two parts: Northern Rhodesia (which is now Zambia) and Southern Rhodesia (the current Zimbabwe).
The federation, when it was approved brought considerable social rupture of Malawi through displacement/ migration of Malawians to the mines in Zambia and Zimbabwe. Malawi effectively became a labour reserve. No industries came to Malawi, and all the investments were transferred to Salisbury (now Harare), the capital of Southern Rhodesia, and which also became the main business hub for the federation. At independence, the State effectively saw that had no choice but to take on the responsibility of certain investments.
3.1.2. Political Dimension
Another aspect for state participation in economic activity is the political dimension. The postcolonial ‘state’ embraced ‘unity’ as the means to evade the previous colonial tactics of divide and rule or any other threat of postcolonial polarization. Therefore design of the ‘state’ tried to take into account national integration, given the potentially dangerous ethnic and social cleavages that pervaded the political and social landscapes in the three regions of the country.
At a political level, the ‘state’ advocated the single party designed to subdue and keep dynamics of a free society under surveillance and also force its various competitive tendencies to occur within a single defined political arena. At the administrative level, the ‘state’ also advocated superiority of bureaucracy as structured machinery for awarding approvals of private activity while the state exercises regulatory control of all activity through central government, regional/provincial and district/local government.
In economic terms, the government postured itself as a benevolent amalgamation of newfound political values and economic authority seeking to provide for the needs of ‘masses’ hitherto marginalized by colonial rule. This practically relegated private enterprise to peripheral significance while public sector was defined along the principles of Stalinist-Marxist philosophy that the state should determine, inter alia, allocation of resources, distribution of income and consumption, levels of saving and investment, and relative prices of goods and services[3].
In this context, private enterprise existed as the preserve of an elite utilising political power to accomplish objectives of political accumulation in a fashion that evoked the term ‘capitalism of the few’. Survival and success for private sector required co-operation with and co-option by the state.
3.2. Nature and Coverage
Comparing with some neighbouring countries, Malawi cannot be characterized as having one of the largest numbers of public enterprises. Tanzania and Mozambique featured higher in the privatisations of the early 1990s. For Tanzania, it is probably more a legacy of her socialist background. Table 3.1 below gives a good indicator of Malawi’s place among the Sub-Saharan countries.
Table 3.1. Comparative Analysis: Malawi and Sub-Saharan Africa, 1986-92
% of enterprises divested
Number of Enterprises before Divesture
0-50
51-100
101-200
>200
0-10
The Gambia
Mauritius
Rwanda
Sierra Leone
Zimbabwe
Burkina Faso
Congo
Uganda
Zambia
Cameroon
Cote d’Ivoire
Malawi
Kenya
Tanzania
11-25
Chad
Burundi
Central African Republic
Madagascar
Ghana
Mozambique
26-40
Niger
Guinea
Nigeria
41-60
Guinea-Bissau
Benin
Mali
Senegal
Togo
Divesture includes partial sales but not management contracts and leases. Malawi had 121 statutory bodies and 18 commercial parastatals. Source: World Bank (1994)
During the 1990s, the SOEs in Malawi accounted for 25% of GDP, 20% of gross fixed capital formation and 8% of total formal sector employment (Economic Report, 1990). The main players, as already stated, were ADMARC, MDC and Press Holdings. This state domination started much earlier than the 1990s. In fact, before the start of the general economic reforms in the 1980s the government directly owned 24 of the 77 commercial statutory and non-statutory SOEs, the rest being either majority owned or minority owned through ADMARC and MDC (Kaluwa, 2000).
In order for one to understand specifically the set up of SOEs and the operations, I have briefly outlined below the three important players, ADMARC and MDC and PCL.
ADMARC: Structure and Purpose
ADMARC, a Malawian parastatal organization was created in 1971 with the mandate to market agricultural produce and inputs, and to assist the development of the smallholder agricultural sector through marketing activities and investments in agro-industry enterprises. In addition, ADMARC was mandated with a food security role in maize markets by acting as a buyer and seller in remote areas, providing grain storage across seasons and supporting a large marketing structure with distribution or market centers located throughout urban and rural areas. This function was especially critical at times of maize scarcity.
The social role was reflected in the pan-territorial and pan-seasonal pricing system for smallholder farmers, particularly maize, and the establishment of markets in non-profitable areas. Until 1987, ADMARC enjoyed a monopoly in buying, importing, marketing and storage of grain.
To fulfil its mandates, ADMARC operated a maize price band that remained in effect until the mid-1990s. Further, it rapidly developed an extensive network and infrastructure of markets across the country comprising of regional offices, divisional offices, area offices, storage depots, parent markets, unit markets and seasonal markets[4]. These markets were used to conduct sales of inputs, purchase commodities from smallholders, and sell food crops to net consumers.
Apart from agricultural marketing activities, ADMARC also invested heavily in equities and loans in various enterprises and is directly involved in estate agriculture. In fact, by the mid-1980s, ADMARC had equity investments in 34 commercial enterprises and owned numerous estates. Until 2002 ADMARC also used to run various subsidiaries (e.g. a cotton ginning company, a bus company, cold storage), many of which were loss making. In 2002, the Ministry of Finance assumed control over its four largest loss-making subsidiaries, in preparation for public sale, and three of the companies have since been privatized. ADMARC also runs many support departments, including printing services, building services, carpentry services, tailoring services, hospital, football clubs, rice mill, groundnut grading factory, guest houses and cottages, and urban housing.
Malawi Development Corporation
The government’s created the Malawi Development Corporation as a publicly funded development bank specialized in establishment of new industries. MDC was mandated to provide long-term financing for investment in projects undertaken through acquisition of shares from foreign enterprises or completely new investments in industry. The rationale for the MDC was defined along the needs for robust financial and project development effort at the country’s early stages of development.
Hence, MDC’s key investments included the labour intensive Portland Cement Company of Malawi, which supplied cement to the local building and construction industry; Packaging Industries, catering largely for cement and industrial carton box packaging as well as investment in Commercial Bank of Malawi, one of the country’s only two banks after independence.
MDC also owned Cold Storage Company, the only approved abattoir and front for development of beef farming in the country; Agrimal, a company involved in production of hoes and farm equipment and Plastic products Ltd, also involved in industrial packaging.
Press Corporation Limited (PCL)
Press Corporation was owned by Dr Kamuzu Banda, then the Life President of Malawi and undertook a number of acquisitions in the strategic areas of the economy. Press Corporation joined ADMARC as co-investor in National Bank of Malawi also raising the stake from the state sector. Press Corporation also joined MDC as investors in National Insurance Company similarly raising the shareholding of the State. Press also undertook joint investments with Carlsberg Denmark in Carlsberg Malawi, ensuring that it maintained a majority stake in the joint venture (Southern Bottlers).
The state’s presence in the agricultural sector was also manifested through Press Corporation Ltd, which owned a large number of tobacco estates under Press Agriculture Limited, andGeneral Farming Co Limited. This was in addition to Khasu, Mudi, Kasonjola and other private estates owned personally by Dr Banda.
PCL, though a personal company, played a huge role in the economy and state domination. For example, in the 1970’s, Life President Banda issued a directive removing all Asian traders from the rural areas to urban and peri-urban centers. This paved the way for expansion of Peoples’ Trading Centre retail shops owned by none other than PCL (Kalonga Stambuli, 2002). In 1984, the Malawi government specifically issued bonds purely for debt recovery replaced bad debts of Press Corporation to Commercial Bank of Malawi amounting to $39 million. Apart from enhancing state domination, the ownership structures reflected strong infusions of politically appointed management.
4. PRIVATIZATION PROCESS IN MALAWI
Government of Malawi finally accepted to undertake privatization in 1987 under the Industrial Trade Policy Adjustment Credit (ITPAC). By this time the government had already undertaken some structural adjustment loans, and there existed no practical economic alternative when this facility came in. The main obstruction to privatization was now political due to the fact that this would deprive government of the means of economic control. Very few studies gave a detailed analysis of any future effects of this program. Nevertheless, things moved slowly, and it was only post 1994, after the change of government, which brought fresh impetus to the public sector reform program. This section looks at privatization process from earlier experiences up to the current situation.
4.1. Earlier Experiences
Privatization process in Malawi started around 1984, though it was a decade later that the Privatization Commission came into existence. During this time the government implemented privatization programs within the framework of expenditure-switching and expenditure-reducing structural adjustment programs of the World Bank and IMF following the poor performance of state enterprises in the early 1980s (Adam et al., 1992; Adam, 1994). The restructuring process of the SOE sector in Malawi began with the parastatal reform programme which was initiated in 1981 and mainly targeted directly owned state enterprises. The establishment of the Department of Statutory Bodies, responsible for monitoring and improving control and resource management in state-owned enterprises marked the first step in enhancing the operational efficiency of SOEs.
The government reform strategies included review of corporate objectives, introduction of performance related incentives, increasing the autonomy of management in recruitment and firing of employees (Malawi Government, 1987). All these strategies were in line with the overall policy objective of improving the efficiency and effectiveness of parastatal institutions including public departments responsible for reviewing, monitoring and regulating the parastatal sector.
Thus, within the framework of restructuring process, privatisation has been implemented in two main phases.
Phase 1
The first phase, which is also in two parts, began in 1984. This overall phase of privatization was supported under the first six structural adjustment loans that the World Bank provided to Malawi. The initial part comprised a “no cash, in-house” asset swap worth MK14 million involving the troika to align their portfolios with their core areas of interest. Alongside the asset swaps between 1984 and 1989, ADMARC and MDC also intensified divesture activity in the form of minority equity sales in associate companies or the sales of minor interests such as farms and other enterprises.
The second part, which went on to 1992, was dominated by heavy financial losses and heavy borrowing from the government and the banking system by the two most problematic parastatals, ADMARC and Malawi Railways, suggesting a need for significant restructuring. There was weak medium- to long-term financial and investment planning which required a stronger input by the Department of Statutory Bodies through its broader responsibilities. Both ADMARC and Malawi Railways underwent restructuring with ADMARC divesting its investment portfolio further although there has been considerable resistance and delays in redefining its function and roles. Nevertheless, several estates, thirteen non-manufacturing enterprises and eleven manufacturing enterprises held by ADMARC and MDC were privatized by the end of 1992 (Chirwa, 2000). The eleven privatized manufacturing enterprises were among the fifty-two state-owned enterprises in the manufacturing sector.
In assessing the initial part of phase 1, one can say that the asset swap benefited PCL (controlled by Dr. Banda) more than it did ADMARC which received PCL’s unprofitable subsidiaries and left ADMARC financially exposed (Harrigan, 1991). Secondly, the divesture programme did not amount to privatization since as development finance institutions, divesture would typically be normal activity especially for farms; ADMARC itself financed the purchases by Malawians through soft loans.
Overall assessment of the early privatization episodes can be summarized as follows:
- privatization in the strict sense was a minor component of the parastatal restructuring programme
- both the privatization and restructuring hardly addressed the main issues usually considered, such as widespread poverty, concentrated ownership, uncompetitive markets (for both productive inputs and outputs) and the demands of globalised markets and accountability dispensation.
- ADMARC and Press still held a dominant position in the banking system and the economy as a whole
- Although the financial performance of the parastatal sector did show some improvement, this was still fragile and mainly attributable to interest-cost reduction.
- Much of the impact of this phase was more notable for the experience it generated than anything else (Adam et al, 1992).
Phase 2
The second phase, which will be covered at length in this part of the paper, began in 1996 under the seventh structural adjustment loan, the Fiscal Restructuring and Deregulation Programme. The scope of privatization in the second phase is much broader and the government identified more than one hundred and fifty state enterprises to be privatised. To have a complete understanding on the background of this phase, we can start by looking at the privatisation policy which laid foundation for the overall program.
4.2. Privatisation Policy
The Privatisation Act and Privatisation Policy[5] came into being in 1996, and paved the way for the establishment of the Privatisation Commission. This second phase of the restructuring program had the major objective of increasing the size and diversity of the private sector while reducing public budgetary and administrative burden. According to the privatisation policy document, the major objectives of the Malawi privatization program are stipulated as:
· to foster increased efficiency in the economy;
· to increase competition and reduce monopoly;
· to promote participation by the Malawi public in enterprises; and
· to raise revenue for the government.
Accordingly, by realizing these objectives, the Government is expected to create an economic environment conducive to private sector development and also free public resources for investment in infrastructure and social programmes.
The first three objectives, it can be noted, have direct welfare implications for the society, in terms of availability of goods and services and their quality, their competitive pricing, and equity in the distribution of income generating assets. The last objective probably not only covers the proceeds of privatization but also expenditure savings from reduced subventions as well as revenue generated from profitable and tax paying enterprises. There are other potential positive aspects effects apart from those that were specifically identified, like the impact on the development of a finance capital market and the upgrading of Malawian participation in the economic activity from predominantly petty service-oriented enterprises to more substantial ones including manufacturing (Kaluwa, 2000).
The institutional arrangement places The Privatisation Commission (PC) with the sole authority in Malawi to implement the privatization of the direct or indirect government ownership of any public enterprise. Its functions include, but are not limited to, the planning, management implementation, and control of the privatization of public enterprises in Malawi. It is also the duty of the Commission to report to the Cabinet the details of the sale of each public enterprise.
Membership of the Commission includes ex-officio representatives of Government, representatives nominated by each political party represented in the National Assembly, a representative nominated by the Malawi Congress of Trade Unions, and members representing professional and commercial business interests.
A Secretariat of The Privatization Commission was established comprising an Executive Director and subordinate employees. The Executive Director of the Privatization Commission is responsible for the effective administration and implementation of the provisions of the privatisation programme.
4.3. Why Privatization
The reason for Malawi to go into privatization at that time was more to do with the performance of the economy during the 1970s and 1980s. After some good performance for almost two decades after independence, Malawi started experiencing significant economic problems. When the Bretton Woods institutions came in to help around 1981, Malawi slowly drifted into “conditionality trap”. It was therefore easy for the international financial institutions to impose privatization as conditionality, just when the privatization fever was spreading globally. This part takes us through the post independence eras and how the country got herself involved deeper and deeper with IFIs and the conditionalities that came forth.
1965-1984 Era
The period soon after independence (1964) to 1979 is one of the best that Malawi experienced economically. The per capita GDP grew fairly rapidly from $158 in 1965 up to $225 in l979, after which there were two years of negative growth rates before a recovery began in 1982. The year 1979 can be treated as a major turning point in the post-Independence economy. Table 4.1 summarizes the trend during this period.
Table 4.1, Growth rates for selected national income aggregates: In real terms (annual growth rates)
1965-84 1965-79 1979-84
Aggregate
1. Real GDP 4.7% 5.5% 2.6%
2. Real GDP per capita 1.9% 2.6% 0.1%
1965-83 1965-79 1979-83
3. Real Total Consumption 0.2% 0.8% -1.5%
per capita,
of which:
(i) Private Sector consumption
per capita 0.2% 0.2% 0.9%
(ii) Public Sector Consumption
per capita 0.4% 4.2% -11.8%
4. Real total investment
per capita,
of which:
(i) Private Sector consumption
per capita 5.6% 12.9% -16.6%
(ii) Public Sector Consumption
per capita 3.2% 4.2% 0.0%
Source: Government data, (Kydd and Hewitt, 1986)
At independence the economy was overwhelmingly agrarian, agriculture accounting for 55% of GDP. By 1984, the share of agriculture in GDP had declined to 37%, while the share of manufacturing had risen moderately to 12%. However, perhaps the most crucial change between l964 and l984 had been within the agricultural sector, in which the estimated share of agricultural production (monetary and non-monetary) of peasant producers (farmers in customary land areas) had declined from 92 to 77% in 1983, recovering slightly to 79% in 1984.” This reflects the fact that the share of estate (i.e. large-scale) agriculture in GDP had risen nearly eightfold over the 20 years from l964. Thus a striking feature of Malawi’s post-Independence economic development has been the rapid development of estate agriculture.
4.4. Policy Environment
Terms of Trade
The terms of trade held up reasonably well through the 1970s but declined sharply in 1979 and 1980. Although the terms of trade recovered somewhat in 1981, both series shown in Figure 4.1 agree that they declined subsequently, but differ on the extent of this decline. The terms of trade estimates permit the conclusions that, up to 1979, the trading environment facing Malawi was supportive of the rapid growth which occurred and also that, from 1979, the sharp deterioration in the trading environment was a major cause both of the decline in per capita GDP in 1980 and 1981 and of the sharp recovery in GDP in 1984. There is, nevertheless, a possibility that other factors could have contributed to these changes.
Responses to the balance-of-payments, 1975-83: Structural Adjustment Loan 1
The current account balance has been negative in every year since Independence. Up to the mid-1970s this negative balance was adequately offset by long-term capital inflows. However, balance-of-payments difficulties began to emerge in 1975, when there was a large deficit on the overall balance, but did not become a critical constraint on growth until 1979. Over 1975 to 1979 the deficit was mainly financed by a reduction of reserves, taking up quotas with the IMF, drawing on the Compensatory Financing Facility and borrowing in the Eurocurrency market, but these methods of financing had been exhausted by the time of the sharp deterioration in the terms of trade in 1980.
From 1980 several instruments were used to deal with the situation. There were some facilities that were available from IMF, and there was also the rescheduling of official and commercial debt. The third and the most important one that helped finance the payment deficits were the World Bank structural Adjustment Loans (SALs). The government requested a SAL in 1980 and, in June 1981, a loan of US $4.5 million at standard IBRD terms was approved, to be disbursed over two years. This “first SAL” was fully disbursed by mid-1982 and was followed by a “second SAL” approved in November 1983, to be disbursed in two tranches, one in 1983 and one in 1984. The second SAL was US $52 million, and was on the much more concessional terms of an IDA credit.
The justification for SALs arose from the need felt within the World Bank for a financing instrument which would be “entirely policy focused” and would not only demonstrate but put into effect the Bank’s “single-minded concern for policy reform.” The main objective implied by the documents was to ensure that the Bank’s mix of projects was relevant to the needs of the country as they evolved. Most of the recommendations made to the government in these documents were project related, but also a few more general recommendations were made (for example on agricultural pricing and general advice against public subsidies). However in the pre-SAL period, these recommendations never became more than that; for example, the government was able to effectively ignore the Bank’s recommendations (and agreements with the Bank) on agricultural prices from 1973 to 1982, without experiencing any interruption in the Bank’s disbursements for projects.
When the preliminary work for the first SAL began in late 1980, the nature of the Bank’s involvement in Malawi changed. Priority was now given to devising a set of policies which would bring about the necessary adjustments to allow the economy to resume growth with a viable balance of payments. What had previously been the Bank’s central concern, questions about projects, were now clearly subsidiary to a search across the whole economy for measures which would assist in adjustment and bring about increased efficiency. Thus the reorientation in the Bank’s work not only drew it into areas of the Malawi economy in which its existing experience was relatively shallow but also required that an agenda of possible policy changes had to be drawn up rather rapidly (Kydd and Hewitt, 1986).
The report for the first SAL argued that, while the primary cause of the crisis was deterioration in the terms of trade, nevertheless this had revealed underlying structural weaknesses. Six areas of weakness were identified. First was the slow growth of peasant produced exports. An issue with which the Bank was very familiar as, since l967, it had been the leading donor to Malawi’s rural development program, the main objective of which had been to increase peasant crop production. Second was what was described as the narrowness of the export base: this was a response to the growing importance over the 1970s of tobacco in Malawi’s earnings and the experience, in 1980, of a sharp fall in export prices for what was then the major estate grown variety, Flue-cured. Third was a concern about energy resources, in particular the country’s overwhelming dependence on dwindling stock of fuelwood supplemented by imported oil products. Fourth was the deterioration which had occurred in the finances of parastatal enterprises. Fifth was increasing budget deficits at the end of the 1970s, caused by expenditure growing much faster than tax revenues. Finally, there was the rigidity and unpredictability caused by the system of administered prices and wages.
Structural Adjustment Loan 2
The second SAL, approved in November 1983, stands in marked contrast to its predecessor. First of all, the economic background was different, because over the two years of the first SAL the problem in the balance of payments and in public finance had become more acute, and it was evident that tougher corrective measures would be necessary. Second, the Bank now had the experience of two years’ engagement with the general problems of the Malawi economy and most of the studies commissioned in conjunction with the first SAL had been completed. Thus the Bank felt that, in dealing with the Malawi economy, it had moved a good way down the learning curve. It now had an agenda of policy changes and institutional reforms which it was prepared to press hard in negotiations with the government.
The financial performance and efficiency of the parastatals and of the Press Group was now a major issue in the dialogue between the Bank and the government. In the case of the parastatals, the main thrust of the Bank’s advice was that tariffs should be raised to a level which eliminated the need for subsidies and/or borrowing to cover operating deficits plus debt repayment.
In reviewing the two SALs to Malawi, there are a number of features that can be noted. The first SAL was characterized by mild conditionality and recognition that structural problems can best be tackled in a medium-term perspective. The Bank did not believe that it knew all the answers, and much of the work of the first SAL was directed towards identifying issues and studying them. The resources provided by the SALs were of a sufficient scale to avert a drastic curtailment of the government’s development program and its recurrent spending. Over the period of the SALs it has been possible to continue to expand the government’s main “poverty focused” program, rural development projects in peasant farming areas. At the same time, the Bank has been discussing with the government measures to improve primary health care and primary education, although significant World Bank investment in these areas has yet to occur, and in some of the proposals the poverty focus is markedly less keen.
The background of the two SALs created a niche for liberalization, and parallel studies, mostly commissioned by the international financial institutions supporting privatization. The World Bank (1989) study on Malawi manufacturing provided the first evidence available to the effect that foreign owned firms were found to be more efficient than locally owned ones and that private firms were more efficient than publicly owned ones. The study was undertaken during a period before trade liberalization reforms and when the economy was characterized by acute foreign exchange rationing.
4.5. Consultations
Prior to 1996, a number of workshops and meetings took place on privatization. The institutions involved were mostly The World Bank and the donor community, Malawi Government and parastatals that were directly related to private sector development. Civil society was hardly involved. Such workshops, seminars and meetings were mostly supported by the World Bank. As sponsoring organization, the Bank used the platform to convince the government on privatization. For example, during one of the workshops (MIPA, 1994), the Deputy Resident Representative of the World Bank Malawi Mission gave a long lecture on the positive aspects of privatization. He emphasized on the development of private sector as paramount importance to the country, as well as a clear hint of more money coming in if the government were to go into such a program. Among other issues he said:
“Properly planned and executed, privatization has the potential to achieve the following:
- Broaden Malawi’s ownership base. In the past, entrepreneurial initiative was dampened by policies that favored, explicitly and implicitly, some businesses and firms over others. The result is a high level of concentration in the economy which has crowded out additional private investment and initiative and has been detrimental to consumer welfare
- Help reduce budgetary burden for the government. In the 1960s and 70s, government budget was able to support infrastructural developments and subvention to the public enterprises. Today, Malawi’s government budget can no longer provide everything it once did. Building and operating of its infrastructure must be privatized to make space for increased social spending with the aim of alleviating poverty. Clearly, the private sector has to and seems to be willing to take up part of the traditional functions that are currently carried out by the public sector
- Increase economic efficiency and thus free resources for growth and development. The 1989 World Bank Industrial Sector Memorandum noted that in terms of resource costs, private sector firms were nearly twice as efficient as parastatals.
- Free-up valuable managerial capacity of Government. Malawi, as we all know, has a large unfulfilled agenda in respect to poverty alleviation, such as schools, medical facilities, etc. Government’s human resource capacity is too limited to implement a broad based poverty alleviation package without compromising in other areas of public of the public sector. Privatisation of selected public enterprises will free up the delay needed resources that are needed in hanging social sector and poverty related issues.
- Lastly, as studies have shown – for Africa as well as for other LDCs – an important benefit of privatization is the inflow of direct investment. Malawi needs to attract such investments and in doing so it is in sharp competition with its neighboring countries. Therefore it is even more important that the country sends the right signals to potential investors and private entrepreneurs about conduciveness of its business environment.”
The most revealing part of his presentation was on World Bank assistance.
“with the limited resource base, Malawi will continue to require substantial amounts of external financing. On its part, the World Bank will continue to support the central areas in Malawi’s development agenda, namely: (a) poverty reduction; (b) liberalization of the environment for private sector investments; (c) enhanced productivity of smallholder farmers; (d) natural resource conservation; and (d) macroeconomic stability.
“The reforms supported by early World Bank-financed structural adjustment operations encompassed public enterprise reform, agricultural pricing and marketing, and fiscal and external policies to support restoration of macroeconomic stability. More recent reforms have focused on underlying issues critical for generating broad-based and equitable participation in the economy, giving smallholders access to key high-value cash crops, and removing policy obstacles to entrepreneurship that continue to constrain physical capital investment and limit access to financial and human capital. The next set of structural issues to be addressed will concern trade and distribution, and aim at reducing obstacles posed by market concentration and promoting ease of entry.”
4.6. Malawi's Privatisation Programme (PP)
With all the push from World Bank, the second government that came in in 1994 made parastatal sector reform a priority. The reasons and arguments for this reform aligned to what the Bank had said during the SALs and in several fora: that the government was spending a lot of money subventing unprofitable SOEs, there was need to increase efficiency in private sector, need to do away with monopolies and increase competition. Department of Statutory Bodies was created and a privatization policy drafted which was passed into law in 1996.
The Act set out four very clearly stated objectives of the programme. The Privatisation Commission (PC) was established to begin the process of privatising SOEs.
The government, not the Commission, devised a Divestiture Sequence Plan. This was essentially a list of 100 SOEs earmarked for privatization. “The government determines who; the Commission only determines when and how”.
Of those original 100 SOEs in the DSP, by 2002 about 50 had been privatized. This started with the small ones and intended to that the "biggies" in the utilities sector - MTL and ESCOM, would come in at a later stage. Most of the utilities are still undertaking preparatory work for the privatisation process, though MTL has recently completed its privatisation (Dec 2005). The actual sequence chosen by the PC has been influenced by many factors, including how much time might be required to find a buyer or to restructure the SOE to make it saleable, and how the sale might affect the Malawian consumer.
There are several methods of privatization: the government can sell all or some of the shares in the entity (as was done with NICO); they can sell the assets as bits and pieces (for example, Malawi Book Service), they can sell it as a going concern (Portland Cement), or they can offer it as a concession (Malawi Railways).
When the government wholly owns (either directly or through Admarc Investment Holdings, or MDC, or MPICO or another holding company) an enterprise, it may first be necessary to change the legal status of the entity to meet the requirements of the Companies Act. This is what happened with MPTC - the telephone side was restructured as a private company, Malawi Telecoms Ltd, while the post office side, which is not being privatized at this time, remains a parastatal.
Many of the enterprises on the DSP list were operating as private sector companies with government ownership. This includes Packaging Industries (government shareholding sold), Encor (management buyout) Chillington Agrimal (sold to Malawi-based investor), Bata Shoe, and Leopard Match. In these cases, there are often pre-emption agreements - if a shareholder wants to sell its shares, they must first be offered to the other shareholders. In some cases the other shareholders ended up as majority or sole shareholders. Nampak, the South African technical partner with PIM, bought a majority shareholding. Chillington of Chillington Agrimal on the other hand, chose to sell its own shares instead of buying government's. Bata and Leopard Match have not yet been privatised although discussions are underway.
Table 4.2 gives a complete list of Divesture Sequence Plan (DSP) as at the end of 2002. This DSP is a list, as approved by Cabinet, of public enterprises categorized according to the sequence in which the whole or part of Government's shares will be disposed of. Cabinet last approved the DSP in 1997.
Table 4.2 Divesture Sequence Plan
COMPLETED TRANSACTIONS
PUBLIC ENTERPRISE
NO. OF UNITS
TRANSACTION CLASSIFICATION
1
Auction Holdings Ltd
1
Local and Private Placement
2
Bain Hogg Insurance Brokers
1
Sale to Shareholders
3
Blantyre Dairy
1
Competitive Sale
4
Blantyre Lodge (formerly Blantyre Rest House)
1
Competitive sale
5
Brick and Tile Company
1
Transfer of shares
6
Capital Hill Dairy Farm
1
Competitive sale
7
Central Tobacco Properties Ltd.
1
Reorganisation
8
Chemicals and Marketing Ltd
1
MBO
9
Chillington Agrimal Ltd
1
Concession
10
Chiphazi Farm
1
Competitive sale
11
Chitipa Inn
1
Competitive sale
12
Chintheche Inn
1
Concession
13
Choma Ranch
1
Concession/ Competitive sale
14
Commercial Bank of Malawi Ltd.
1
Public offer / share sale / MBO
15
Dwangwa Sugar Corporation (DSC)
1
Dept-equity/ sale to shareholders
16
Dzalanyama Ranch
1
17
Encor Products Ltd.
1
Dept-equity/sale to shareholders
18
Finance Corporation Ltd.
1
Competitive sale
19
Forestry Rest Houses
1
Concession
20
Government Hostel
1
Concession
21
I&E
1
Dept-equity/sale to shareholders/comp
22
Kaombe Farm
1
Completed-competitive sale
23
Kasikidzi Farm
1
Distributed to the people
24
Kasungu Inn
2
Concession and purchase
25
Katete Farm
1
Competitive sale
26
Kuti Ranch
2
Competitive sale
27
Likhubula Lodge
1
Concession
28
Luwawa Lodge
1
sale to shareholders
29
Chigumukire Ltd
1
30
Mchenga Coal Mine
1
Competitive sale
31
National Bank of Malawi
2
Public offer/stock exchange transaction
32
National Insurance Co. Ltd.
2
Public offer & MBO
33
New Building Society
1
sale to shareholders
34
VIPCOR
1
liquidation
35
VIPLY Ltd
1
sale to shareholders
36
Zomba Trout Farm
1
Concession
37
Smallholder Coffee Authority
1
Commercialisation
38
Smallholder Sugar Authority
1
Commercialisation
39
Ngabu Inn
1
Concession
40
Optichem (Malawi) Ltd.
1
sale to shareholders
41
Packaging Industries (MW) Ltd.
4
sale to shareholders/IPO/private sale
42
Premier Mining Ltd
1
Sale to shareholders
43
SUCOMA
4
Sale & Public offer
44
Malawi Lake Services Ltd.
1
Concession
45
Malawi Railways (1994) Ltd.
1
Concession
46
Mpwepwe Boatyard Company Limited
1
MBO
47
Mangochi Lodge
1
Concession
48
Mining & Investment Development Corporation
1
liquidation
49
Limbe Rest House
1
Competitive sale
50
Malawi Book Service
1
liquidation
51
Kachere lodge
1
Concession
52
Dzalanyama Lodge
1
Concession
53
Ntchisi Lodge
1
Concession
CURRENT TRANSACTIONS
1
ADMARC
GOVERNMENT
2
Air Cargo
GOVERNMENT
3
Air Malawi Ltd
GOVERNMENT
4
Alexander Forbes (formerly MIBRO)
5
Blantyre Milling Company Limited
Sold competitively
6
Blantyre Water Board
GOVERNMENT
7
Bwemba Dairy Farm
GOVERNMENT
8
Chileka International Airport
9
Cold Storage Co Ltd
ADMARC
10
David Whitehead and Sons (Malawi) Limited
ADMARC
11
ESCOM Limited
GOVERNMENT
12
Grain & Milling Ltd
ADMARC Sold competitively
13
Kasungu Flue Cured Authority
GOVERNMENT
14
Leopard Match Co. Ltd
MDC
15
Lifidzi Farm
16
Lilongwe Water Board
GOVERNMENT
17
Malawi Catering Services
GOVERNMENT
18
Malawi Dairy Industries
19
Malawi Finance Co. Ltd
GOVERNMENT
20
Malawi Rural Finance Company
GOVERNMENT
21
Malawi Tea Factory Co. Ltd
ADMARC
22
Malawi Telecommunications Limited
GOVERNMENT
23
Mchenga Coal Mine
24
Meru Ranch
GOVERNMENT
25
MPICO Ltd
GOVERNMENT
26
National Investment Trust Limited
27
Plastic Products Ltd.
MDC
28
Portland Cement Co. (1974) Ltd
MDC
29
Smallholder Tea Authority
GOVERNMENT
FUTURE TRANSACTIONS
1
ADMARC Investment Holdings Ltd
ADMARC
2
Bata Shoe Co. (Malawi) Ltd
MDC
3
Borehole Construction Fund
GOVERNMENT
4
Capital City Development Fund
GOVERNMENT
5
Government Press
GOVERNMENT
6
Malawi Housing Corporation
GOVERNMENT
7
Shire Buslines Ltd
ADMARC
8
Lilongwe International Airport
GOVERNMENT
9
Malawi Development Corporation (MDC)
ADMARC
10
Stockbrokers Malawi Limited
ADMARC
11
TDIC / Sunbird Tourism
MDC
12
Central Government Stores
GOVERNMENT
13
Central Medical Stores
GOVERNMENT
14
District Rest House Chain
ADMARC
15
Indefund
MDC
16
Indebank
ADMARC
17
Lilongwe Smallholder Poultry Project
GOVERNMENT
18
Manica Freight Services
GOVERNMENT
19
Mzuzu Smallholder Poultry Project
GOVERNMENT
20
National Seed Company
ADMARC
21
UNDP Housing Fund
ADMARC
Source: PC Annual Report
5. CHALLENGES OF PRIVATISATION
Very few studies have attempted the task of undertaking a complete analysis of privatisation in Malawi. Assessing performance of such a complicated venture would not give a good picture if done over a short period. A clearer impression will probably start showing some years (maybe 5-10) after the complete privatisation process. This does not mean that the immediate effects are not important. The controversial water privatisations proposals in Ghana and Tanzania in the past three years show how bitter the issues can become (see Box 5.1 below).
Box 5.1 Tanzania and Ghana Water Experiences
TANZANIA [DAWASA Water Privatisation]
(40-50% of the population have no access to clean water)
[2002]
The International Monetary Fund (IMF) and World Bank in Tanzania included conditions within their aid programs related to the divestiture of Dar es-Salaam Urban Water and sewerage Authority (DAWASA), the semi-autonomous government body previously responsible for running water supply system. This was part of the conditions for having Tanzania on debt relief under HIPC program. But then there was a lack of investor interest. The first bidding process was stopped after two French companies; Saur International and Vivendi were rejected. Donors agreed to waive the privatisation only to push it again through giving a loan (of $145m) which was meant to improve the water system.
GHANA
Current official statistics state that 62-70% of the urban population has access to treated water and 35-40% of the rural population. However, these figures mask the fact that far less has piped water. In urban areas, only 40% of the population (and 25% of the urban poor) have access to running water in their homes.
In July 2001, the World Bank approved a new $110 million structural adjustment loan for Ghana. Before disbursing the loan, however, the Bank forced the government of Ghana to implement seven “prior actions,” including a requirement to “increase electricity and water tariffs by 96 percent and 95 percent, respectively, to cover operating costs.”
(By 2002) A bucket of clean water in Ghana became more expensive than in the UK. This meant that a family making minimum wage had to spend almost half of its daily income for just three buckets of water. As a result, many families could not afford clean drinking water, and women and children bore the burden of collecting water, often from polluted streams and rivers.
The effort to attain “full cost recovery” is a prerequisite to privatization. Private companies want to operate systems where consumers meet the expenses of running the systems and pay enough for company profits, too, so that they earn a return on their investment.
Pressured by the World Bank, the government of Ghana plans to lease the Ghana Water Company to two as yet undetermined multinational water companies to provide urban water service. The World Bank included water privatization as one of many conditions that determined the extent of Ghana’s access to the portfolio of loans in the World Bank’s Country Assistance Strategy (CAS).
5.1. Privatization and Technical Efficiency
A study evaluating the impact of privatization on the technical efficiency of about 15 companies in the manufacturing sector was undertaken around the year 2000 (Chirwa, 2000). This was a very technical evaluation. Enterprise level data was used in the manufacturing sector spanning the period 1970 to 1997, by selecting industries in which privatization took place during the 1984-91 period in Malawi, in which privatized enterprises had been under private ownership for at least five years. The study, therefore, contributed to the limited empirical evidence on the privatization-efficiency hypotheses, particularly in developing countries by taking into account oligopolistic interdependence and the impact of other liberalization measures.
The sample for this paper was drawn from eight privatization activities (excluding asset swaps). Each of the five privatized enterprises was grouped into three-digit industry classification level. Data was obtained for private enterprises and other state-owned enterprises competing in the same industry. The privatized manufacturing industries were three-digit industries in which privatization occurred between 1984 and 1991. The three privatized manufacturing industries were food processing, manufacture of other chemical products and manufacture of transport equipment, and the sample included six privatized state-owned enterprises (PSOEs), three state-owned enterprises (SOEs) which had never been privatized and six private enterprises (PVTs) which had never been under state enterprise during the period of analysis.
After computing technical efficiency scores for firms using Data Envelopment Analysis (DEA) based on industry specific inter-temporal frontiers at three-digit industry level, the statistical results, overall, show that technical efficiency improved among privatized state enterprises, state-owned enterprises and private enterprises. However, there was significant evidence that changes in technical efficiency were higher in privatized enterprises, and that the proportion of the variance in technical efficiency attributed to privatization was also higher among privatized enterprises compared with that among state-owned enterprises and private enterprises.
The approach in this paper had been to study all firms competing in the same industry to discern the industry effects and to control for the many other sources of technical efficiency. The results from the econometric analysis, which accounts for other sources of technical efficiency showed that improvements in technical efficiency could not be attributed to privatization alone. The empirical results, particularly among privatized enterprises, showed that after controlling for the many other sources of technical efficiency, privatization improved technical efficiency and efficiency scores were at least 25 percent points higher in the period after privatization. The positive impact of privatization was also supported by the significant negative relationship between technical efficiency and state ownership in the industry effects model. These findings implied that the technical inefficiency associated with state ownership could be reduced by transferring their ownership to the private sector and partial privatization may not maximize efficiency. Furthermore, technical efficiency is higher in competitive industries, among firms with high capital intensity and among subsidiaries of multinational corporations. The latter implied that foreign participation in the privatization process in Malawi had positive implication on efficient domestic production. Structural adjustment programs by removing market rigidities enhanced the role of the market mechanism and provided further incentives for input allocation to maximize output.
Overall, from a policy point of view, the findings showed that the objective of promoting efficiency materialized in the first phase of privatization in Malawi even when other factors that influence technical efficiency are taken into account. Nonetheless, the competitive environment which was partly reinforced by the sequential implementation of structural adjustment policies played a critical role in facilitating the positive impact of privatization.
5.2. Impact of the Privatization Program
A comprehensive performance evaluation was done in 1998 covering three main indicators, a) the macro-level indicators which measure impact on economy-level variables, b) the meso-level indicators, which deal with the impact on markets, and c) micro-level indicators, which measure results at the enterprise level (Kaluwa, 2000). Often, one may add political level indicators, which might deal with issues like when to privatize, what enterprises, mode of privatization, immediate beneficiaries, reserve price of offer, use of proceeds etc.
5.2.1. Treasury Effects
According to the World Bank, by 1997 there had been 44 privatization transactions including those outside the Privatization Program with total sales of US$56m. By July 1999, the Privatization Programme itself raised around MK850m, which translates to 1% of GDP. These are one-off and short-term treasury effects. However, one may also wish to look at the long term effects like tax revenue and savings on subsidies to formerly government supplied inputs in sectors such as forestry and veterinary services. Table 5.1 summarises available information that facilitates an impressionistic view of treasury effects associated with current financial flows.
Table 5.1: Treasury Effects: Total Flows of Funds, Tax revenue and Net Flow of Funds
Year
Total Flow(1)
Tax: SC (2)
Tax: Major “Divested” Companies
SUCOMA
CBM
NICO
PIM
Total Tax
Net Flows (3)
1993
126.92
0.70
0.02
6.54
2.96
3.57
13.79
112.43
1994
187.85
0.90
0.02
30.80
6.09
1.38
39.19
147.76
1995
593.35
54.87
38.42
79.67
6.49
4.69
184.14
354.34
1996
37.96
2.01
68.42
67.58
12.39
4.03
154.43
-118.48
1997
701.38
29.71
65.20
70.89
10.95
9.60
186.35
485.32
1998
572.84
7.80
26.19
110.22
10.58
25.03
179.82
385.22
Notes:
(1) To Statutory Corporations, (2) Commercial Statutory Corporations, (3) +net of all taxes
Source: B. Kaluwa (1998), Economic Reports, various company Annual Reports
Total financial flows from central government to statutory corporations include “grants and transfers” on the recurrent budget as a large item (representing 99.9% of the total in 1998), and net long term lending on the development budget as a minor item. Return flows to central government include consolidated tax payments from commercial statutory corporations plus tax payments by large corporations “divested’ by central government and its agencies, which have since been listed on the Malawi Stock Exchange.
Although the picture presented in Table 5.1 incorporates trends which are not due to the Privatisation Programme it still allows a number of observations:
- The largest of divested companies (SUCOMA and CBM) have individually been associated with larger tax payments on a consistent year to year basis and cumulatively higher than all the commercial statutory corporations from 1996 although for CBM this trend pre-dates the Privatisation Programme.
- The trend of tax revenues from SCs has been erratic compared to those of the four listed companies and a major culprit is likely to be capital investment costs/revenue structures for the larger infrastructure SOEs such as ESCOM and the Water Boards
- The trend in the total net flows dominated by flows to statutory corporations which still represent large outflows towards that sector despite the large gains made from divested companies implying a persistent fiscal drag from subsidized SOEs.
From the table and accompanying statistics, the average share of flows to SOEs in total government expenditure has gone down since 1996 to 3.02% from 5.26% between 1987 and 1995 and implies a lowered burden on the government. Nevertheless there appear to have been some compensation effect since their share in total domestic credit has gone up from an average of 2.39% in the earlier period to 6.71% after 1996. This represents some sort of switching effect from dependence on government to market dependence which itself may be a sign of inadequate internal revenue generation coupled with heavy investment requirements.
5.2.2. Use of Privatization Proceeds
According to statutory provisions, the proceeds of privatization are held in the Privatisation Revenue Account for use in “funding the direct costs of the Commission and the Privatisation Programme, funding the restructuring public enterprises to be privatized including payment of retrenchment benefits, …” Among the uses of potentially contentious issue has been the pre-empted in the sense that residual revenues from this one-off exercise, after privatization related expenditures, could also be used in one-off development projects, rather than government recurrent expenditures (B Kaluwa, 2000).
5.2.3. Malawian participation and Ownership De-concentration
The overall assessment of the privatization programme shows that there has indeed been a commitment to relinquish government control. According to figures presented by World bank (World bank Reports, 1998/99), by 1997, 86% of privatization transactions involved transfers of the majority ownership to the private sector, 64% of the transaction involved shares while much of the rest involved asset sales.
Malawian participation too has been fulfilled. When we look at statistics of the first 38 transactions, about 50% involved Malawians as new owners, concession holders, or shareholders while 13% involved a mixture of Malawians and foreigners and 37% involved only foreigners.
Politically conscious decisions have been made to affect share-ownership, sales and asset transfers to special interest groups namely: tobacco growers and employees in the case of Auction Holdings Ltd; growers in the case of the former Kasinthula Rice Scheme and the Smallholder Coffee Authority; management buy-outs in cases of Mpwepwe Boatyard and New Capital Dairy (B Kaluwa, 2000). The major problem has been that Malawian participation could not be guaranteed in all cases of privatization despite stated preferences and softer loans. Part of the reason could be thin domestic financial capital base and management capacity, which have in a number cases contributed slow uptake by successful Malawian bidders. These problems have influenced the role of foreign ownership which has been beneficial in terms of providing foreign linkages for investment capital, technology, management and marketing in different available sectors.
5.2.4. Impact of Listed Companies on Capital Market Development
Privatisation has been a big boost to the development of capital markets in Malawi. Malawi has been a capital scarce economy and an obvious outcome of privatization has been a good base for stock exchange activity. This can be a catalyst for foreign investment inflows although so far these have not been large due to small capitalization and an inflationary environment. Privatisation boasts of about MK10 billion of its capitalization in the Malawi Stock Exchange. As can be seen from Table 5.2 below, by 1998, barely three years after the commission was put in place, the firms divested under privatization accounted for 73% of the stocks listed on the Malawi Stock Exchange.
Table 5.2: The Impact of the Privatisation Program (PP) on MSE Capitalisation
Company
Capitalization (MK)
Privatisation Program Companies
Commercial Bank of Malawi
1130.00
NICO
170.00
PIM
174.85
SUCOMA
4054.51
Total PP
5529.36
Other
BL
143.91
PCL
1981.91
OML
378.91
Grand Total
8034.09
PP/Grand Total (%)
73.54
Source: MSE
5.2.5. Employment
Looking at 20 mixed firms that had privatized (and were able to supply the information) by 1998, there was an 11% decline in employment for manufacturing firms (B Kaluwa, 2000). This is however tricky because most proponents of privatization look at this as temporal. It should be noted that post-privatisation employment changes reflect empowerment of management to effect changes that reflect commercial discretion so that from the enterprises perspective cutbacks can be in their best interest. Overall for the 20 firms, there was 55% rationalization of employment.
****
There are several factors this report could go into where privatization has been assessed and impact quantified. These include Import Substitution and Exports, Number of Products / Services changed, Debt/Equity Performance, New Investment and Technology, Staff performance and Staff benefits, Profitability and Efficiency Performance. However all these look at company level performance. The studies that link these micro performances to national socio-economic factors which the World Bank was trying to address when they came up with the initiative are hardly available. The next section attempts to look at these national areas that have been affected by privatization, through a discussion.
5.3. Discussion – has privatisation achieved its objectives?
Did privatization achieve its objective? At firm level there appears to be some indication of an improvement in performance. However, when one looks at national level with the fact that The World Bank’s core mandate is to eradicate poverty, there is some doubt that privatization achieved its goal. Privatisation, a central World Bank policy, should be able to contribute to this goal. Malawi’s indicators have gotten worse since liberalization and privatization came in, though these are not the only factors that impact on poverty indicators. The per capita income has gone down from $210 in the early 1980s to $170 in the late 1990s/early 2000. Obviously, the World Bank’s analytical framework is inconsistent, and damaging outcomes on privatization are still emerging.
ADMARC and Agricultural Sector
Let’s take for example, one of the sensitive areas which have received a lot of criticism from the civil society, that is, the proposed privatization of ADMARC, an agricultural marketing board. The World Bank has been demanding the commercialisation of the Malawian agricultural marketing board as a condition of its latest structural adjustment loan. Actually, the privatization of the state marketing board in Malawi (ADMARC) has been an objective of the World Bank for 10 years. It represents a central element in an approach to agriculture that holds that full liberalization of the sector will be best for poor women and men. This approach has been increasingly questioned in Malawi and other countries in the region, particularly in the context of the recurrent food crises. Many commentators believe the full liberalization of other elements of the agriculture sector under the Bank greatly contributed to the cause of the food crisis and the subsequent deaths in 2002.
Malawi’s economy relies on agriculture. State intervention in the agricultural sector in Malawi dates back to as early as 1926 when the colonial government established the Native Tobacco Board. Two more boards were later established in 1949: the Cotton and Maize Control Boards. In 1956, the three boards were merged to form the Agricultural Production and Marketing Board, which was renamed Farmers Marketing Board in 1962. In 1971, the Agricultural Development and Marketing Corporation (ADMARC) was established to replace the Farmers Marketing Board. Its main mandate was to market agricultural inputs and outputs, but was also allowed to make investments in anything that would contribute to the development of the economy.
Until the late 1970s and early 1980s, ADMARC performed reasonably well (Scarborough 1990) in terms of coverage. In particular, it was able to provide assured and reliable markets for smallholder produce in most remote areas. Further, it paid farmers cash on delivery, subsidized the cost of inputs, and subsidized the consumption of maize and rice. Between 1971 and 1979, ADMARC made about MK181.9 million from its marketing activities in the small-holder sector (Kydd and Christianssen 1982). This money was used to cross-subsidize the cost of inputs to small-holder farmers, consumption of maize and rice by food-deficit and urban households, and making investments in other sectors of the economy.
Towards the late 1970s, ADMARC started facing financial difficulties. The literature identifies a number of factors, both internal as well as external, that were responsible for ADMARC’s problems. Internal factors have included poor management of the corporation, mainly due to its large size and poor investment policies. On the other hand, external factors have included bad weather, poor pricing policies by the government, and increased transportation costs due to civil war in Mozambique that led to the closure of Malawi’s traditional route to the sea. Increased political interference played its part.
As ADMARC was going through financial problems, the economy of Malawi as a whole also found itself in a crisis. When the SALs came in, not surprisingly, ADMARC was one of the targets of reforms. Indeed, since then, the corporation has undergone various changes. These have among other changes, included market liberalization, a phased removal of input subsidies, and rationalization. ADMARC is on the list of current privatisations.
After all the reforms, including partial commercializing ADMARC and closing some of its outlets, several problems have occurred. Oxfam Study (2002) identified some of these as:
(a) Although private traders were allowed to complement the marketing activities of ADMARC, a problem still exists in the sense that these private traders find it difficult to go to some remote areas due to poor roads. Thus, some farmers in areas where ADMARC withdrew have found it difficult to sell their produce and to buy food and inputs. This poses a problem to the government since it has a duty to ensure that these areas have access to markets for produce, food, and inputs. Consequently, ADMARC has found itself being called upon to service such areas. But since government has to support ADMARC's commercialization programme for the benefit of World Bank, one reality it has had to face is that if ADMARC were to make a commercial decision when operating in these areas, the poor would be adversely affected. For example, if ADMARC were to supply maize to food-deficit households in such areas, the commercially viable price would be beyond their reach. The government has therefore entered into memoranda of understanding with ADMARC to the effect that it will undertake to pay ADMARC for the costs it incurs while performing such social roles on its behalf. However, the problem that still remains is that in most cases, the government has not lived up to its obligations and separating the social role is not easy.
(b) Related to the problem discussed in (b) above, is the fact that a cost-effective mechanism is not yet in place for the supply of food to food-deficit areas. For example, sometimes ADMARC moves maize from one corner of the country to another during the buying season, only to be asked to transport it to another far corner of the country during lean months. But as already mentioned, the government usually does not fully reimburse the transport costs that ADMARC incurs in undertaking such operations.
(c) Certain areas of the country, such as Likoma Island, are perpetually food-deficit. But there is no long lasting solution to ensure that such areas have access to food at reasonable prices, but without jeopardising the financial position of ADMARC.
(d) The commercialisation programme that ADMARC is undertaking is in some cases being frustrated by political interference. For example, even when ADMARC feels that the closure of a certain non-viable market will not adversely affect the poor, politicians usually resist the move because they fear that it will be politically costly. A case in point is one where a suggestion by ADMARC to replace a permanent market with a mobile one is resisted simply because of the view that development is non-existent unless one can see a permanent physical structure.
This is one area that gives some true colours to privatization at grassroots levels. A number of factors are not taken into consideration as international institutions give their conditions. Mostly, these have to do with poor understanding of the local and remote situations, knowledge of the infrastructure available and real levels of poverty.
Privatization of Utilities (Water)
Privatization of utilities is another case in point where there have been a lot of blunders in a lot of African countries.
Every day 30,000 children in the Third World die of preventable causes. Many of them could be saved if they had access to safe water. The World Bank argues that governments in impoverished countries have to privatize their water supply and distribution systems if they are to get the efficient delivery of water that is needed.
On the face of it, the argument makes sense. The adequate supply of water and other public services is too often frustrated by inadequate funding, inefficient bureaucracy or lack of political will. Promoters of private ownership say it brings investment and cost-effective service.
Experience and common sense say otherwise. Private investors aren't attracted by poor and rural communities. Any improvements that might come with private ownership are in areas that generate profit. Private water, telecommunications and electricity companies tend to focus on efficiency in collecting tariffs, but not on improving service, though it can be argued otherwise. In most cases, these companies will ignore long term major investments, and any investment is transferred to the customers. Costs of services usually leap up quickly, annoying middle class and wealthy customers but potentially in most cases leaving the poor without service at all.
People in affected communities do not have a voice in how or if they want their services privatized. People in impoverished countries want efficient services, sometimes even if the cost is higher as lack of services can carry hidden costs (especially in utility services). In some, privatization may be the way to go. They need to be allowed to choose if it is appropriate for them.
Looking at number countries in Sub-Saharan Africa, high prices and disconnections must mean that the poorest segments of society are likely to be the main losers from the privatization process. However, the privatisation process can also be helpful if the SOEs are very inefficient and do not provide the services at all to the poor, who cannot afford any alternatives or backup. In certain key sectors, like water, if privatisation leads to increases use of unsafe water sources, the consequences will be disastrous for public health (Kate Bayliss, 2001).
5.4. Solutions / Alternatives
Liberalization era came with a lot of unrealistic proposals in Malawi. For example, in health, user fees were suggested putting the majority of the population in difficult situation because they could hardly afford the services. Deregulation of the health sector too has resulted in deteriorating public healthcare services.
Repercussions due to privatization of water have been obvious in a number of countries. Malawi’s population that has access to clean water is about 50%. The privatization process of water sector led into some problems as early as 2001. In May 2001, 350 water workers were sacked for strike action. Workers were protesting at poor wages (most earned about $50 a month) and working conditions, as the company started implementing “stringent measures” to be more effective. Some employees were subsequently rehired but to regain their jobs, the workers had to sign a letter agreeing not to strike again and accepting their previous pay and working conditions.
Other utilities like telecommunications and electricity equally threaten the countries development goals if they go in private hands. Over 60 percent who do not have access to electricity can forget it should the electricity company go into the wrong hands. Nevertheless, with the current standing, there is very little effort by the SOEs and the government in improving the status.
Indeed private sector has a role in the delivery of public services, in particular, where capacity was lacking for extension of services. However, long-term concessions and splitting up of agencies were not seen as part of the private sector’s role. The state should maintain overall control and ownership for provision of services. In terms of different alternatives, below are some suggestions for some of the important sectors.
Joining Campaigns
Opposition to water privatization has taken place across the globe. Table 5.3 below lists major cases where privatisation was opposed with some definite degree of success. A number of campaigns are continuing, with no final outcome yet visible. However the fact that the campaigns are still going demonstrates a degree of success – Brazil was close to privatising much of its major cities’ water in 1999, for example.
Table 5.3: International campaigns against water privatisation
Country
City
Year
Type
Poland
Lodz
1994
Privatisation prevented
Honduras
Honduras
1995
Privatisation prevented
Hungary
Debrecen
1995
Privatisation prevented
Sweden
Malmo
1995
Privatisation prevented
Argentina
Tucuman
1996
Termination and reversion to public
Germany
Munich
1998
Privatisation prevented
Brazil
Rio
1999
Privatisation prevented
Canada
Montreal
1999
Privatisation prevented
Panama
1999
Privatisation prevented
Trinidad
1999
Termination and reversion to public
Bolivia
Cochabamba
2000
Termination and reversion to public
Brazil
Limeira
2000
Incomplete termination
Germany
Potsdam
2000
Termination and reversion to public
Hungary
Szeged
2000
Incomplete termination
Mauritius
2000
Privatisation prevented
Thailand
2000
Termination and reversion to public
USA
Birmingham
2000
Termination and reversion to public
Argentina
BA Province
2001
Termination and reversion to public
France
Grenoble
2001
Termination and reversion to public
Brazil
current
Continuing campaign
Ghana
current
Continuing campaign
Indonesia
Jakarta
current
Continuing campaign
S Africa
current
Continuing campaign
Uruguay
current
Continuing campaign
Source: David Hall, 2001, South Africa Labour Bulletin
There have also been a number of effective campaigns against water privatisation in sub-Saharan Africa. Two good examples are South Africa and Ghana.
South Africa
Water privatisation has been strongly and effectively opposed in South Africa (see above). These protests had an impact beyond national borders, affecting the privatisation of water in Mozambique. When the water privatisation contract award was first announced in September 1999, it was reported that Mozambican Public Works and Housing Minster, Roberto White, promised that not a single one of the country's current 850 workers will be retrenched or otherwise dismissed. This was described as an attempt to ”head off looming labour union protests” following concerted union protests in South Africa that have held back commercialisation schemes.
Ghana
There has been well-organised and effective widespread protest against the planned privatisation of water in Ghana. This has been dominated by the Integrated Social Development Centre (ISODEC), a Ghanaian NGO. The campaign has been reinforced by research from Christian Aid and benefited from widespread international support from academics and NGOs. Many of these participants have not protested against other water privatisations so the level of support must be a testament to the success of ISODEC in bringing the issue to international attention.
6. CONCLUSION AND RECOMMENDATIONS
Privatization is now widespread in industrialized, developing and transitional economies. The World Bank has played a key role in the implementation of privatization in low-income countries, attaching privatization to aid disbursements and promoting a pro-privatization culture.
The World Bank’s core mandate is to eradicate poverty. Privatization, a central World Bank policy, should therefore contribute to this goal, and is expected to do so by reducing poverty through the development of the private sector. In Malawi, the benefits of privatization mostly exist at company levels. The linkages to the poor and marginalized are weak or absent in some cases. The poor, who are supposed to benefit are getting worst outcomes of privatization, consequently affecting overall development negatively. However, despite all this, privatization is still pushed at the policy level.
According to this paper, however, the status quo has also got several weaknesses. Most SOEs have been performing below standard, with inefficient use of the government subvention that would have benefited the poor. Political factors also come in, where disconnections do not take place when people connected to the government are involved. Furthermore, sometimes the SOEs have been used as channel to siphon funds for the ruling political party’s activities.
Overall, privatization, as currently conceived by policy makers, will not help and may be detrimental to development prospects. Privatization policy goals must be reassessed, based on a more realistic perspective, and in particular there must be examination of what privatization, as opposed to alternative measures for public sector reform, can provide. There is need for proper and detailed cost-benefit analysis to guide restructuring processes, and to determine the public interest. More importantly, this analysis provided the basis for engagement between government and labor. Unfortunately, such studies have not been comprehensive as countries sometimes go into hurried privatization.
Recommendations, therefore, include:
· The government of Malawi should revisit the contracts made with the Bank, and change conditions after proper consultations with different stakeholders including civil society. At the same time, the World Bank and IMF should stop requiring privatisation of public services and utilities as a condition of loans.
· Reform strategies should start with assessing the strengths and a weakness of an enterprise in the context of the specific national and regional circumstances - not with the premise that private is best.
· Governments and donors should look at examples of best practice in public as well as private provision. Advisers and consultants need to be selected from the best performing service providers – not from consultancies who depend on the World Bank for a large proportion of their fees.
· Reform options should always include a plan for restructuring within the public sector. This and other options then need to be evaluated in an open and transparent way, using a fair basis for comparison.
· Effective regulation of private companies requires, first, clear and quantifiable objectives (for example, technology transfer, management and financial systems development, construction etc); second, adequate resources for monitoring and enforcement. If the capacity for this is lacking, then privatisation will only create a new set of problems.
The civil society needs to continue fighting the rights of the consumers in either case: where the SOEs are still in control or privatisation has taken place. We can say no to privatisation, but this may not improve the services. There is need to keep up pressure for improved performance among the service providers.
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Appendix 1
PRIVATISATION POLICY
Introduction
In this policy document commercial public enterprises are defined as those entities owned directly or indirectly by Government which by the nature of their activity are commercially oriented and have or should have financial autonomy. These encompass statutory corporations, trusts, authorities, treasury funds and limited liability companies in which the Government directly or indirectly has a shareholding.
It is recognised that efforts to promote agricultural and industrial development and increase the standard of living of the indigenous population through market intervention and establishment of public enterprises have not met with expectations. The Government of Malawi, taking into account the legacy of past inefficient interventions, has adopted a policy of liberalization of the economy and move to market based incentives and allocation of resources. In accordance with this policy, the Government has decided to divest its interests in commercial public enterprises and encourage and promote the private sector. Ultimately, the Government will seek no role in the competitive market beyond that of neutral arbiter.
Objectives of Privatisation
The declared policy of the Government of Malawi is to diminish the size of the public enterprise sector through privatisation with a view to:
Foster increased efficiency in the economy;
Increase competition and reduce monopoly in the economy;
Promote participation by the Malawian public in enterprises; and
Raise revenue for the Government.
By realizing these objectives, the Government will create an economic environment conducive to private sector development and also free public resources for investment in infrastructure and social programmes.
Institutional Arrangements
A "Public Enterprises (Privatization) Act" was passed by Parliament in March 1996 and it was assented to by His Excellency the State President on 17th April 1996. The Act which sets out the objectives and guidelines for the privatization programme also establishes the institutional set-up for the execution of the privatization programme.
The Privatization Commission shall be the sole authority in Malawi to implement the privatization of the direct or indirect government ownership of any public enterprise. Its functions include, but are not limited to, the planning, management implementation, and control of the privatisation of public enterprises in Malawi. It will also be the duty of the Commission to report to the Cabinet the details of the sale of each public enterprise.
Membership of the Commission includes ex-officio representatives of Government, representatives nominated by each political party represented in the National Assembly, a representative nominated by the Malawi Congress of Trade Unions, and members representing professional and commercial business interests.
A Secretariat of The Privatization Commission has been established comprising an Executive Director and subordinate employees. The Executive Director of the privatisation Commission is responsible for the effective administration and implementation of the provisions of the privatization programme.
Scope of Privatisation
Approximately one hundred and forty public enterprises exist to which should be added some thirty other assets managed by various ministries such as ranches, farms, fish farms and rest-houses.
In excess of one hundred of these enterprises or assets have a commercial orientation and have or should have financial autonomy. These entities will all fall within the scope of the privatization programme, and be included in a divestiture sequence plan prepared by the Privatisation Commission and submitted to the Cabinet for their approval. Some of these entities will need to undergo a 'commercialization' process with a view to preparing them for privatisation and ensuring greater operating efficiency in the interim period leading up to their eventual privatization.
This will entail changing their status to that of limited liability companies and granting them greater autonomy in their day to day management.
Remaining public enterprises, which are not presently considered to have a commercial orientation, will revert to the control of the appropriate ministry. In those cases where there is no apparent need for financial autonomy the enterprise will be absorbed directly into the relevant line ministry. A number of entities which are dormant will be liquidated and any surplus assets sold to private buyers.
Principles of Privatization
The privatisation programme will be carried out in accordance with certain guiding principles. To the extent possible, subject only to limitations imposed by existing rights conferred by shareholders' agreement, for example, pre-emption rights, etc., the following fundamental principles will apply:
Each transaction will be fully transparent to the public at large. In this regard thePrivatisation Commission will publicise details of all completed activities of the privatisation programme.
All investors, irrespective of ethnic group or source of capital (foreign or local) are free to participate in the privatization programme. In order to achieve the objective of increased participation by the Malawian public at large, shares in or assets of certain enterprises may be made available at a discount to citizens of Malawi. Where discounts are available, this fact and the quantum of the discount will be publicized in the invitation for competitive bids and a precondition of the discount being granted is that the shares or assets are subsequently retained for a period of not less than two years.
The privatization process will be fair and efficient. An independent opinion of value will be obtained for each enterprise to be privatised. Full disclosure of the details of the enterprise will be available to the investing public and fair and equitable bidding procedures and criteria for ranking bids will be established and published.
Sales will be primarily on a cash basis. However, mechanisms will be developed to facilitate broader participation by Malawian citizens in the privatisation process.
It is the intention of Government to sell all of its interest in public enterprises and not to maintain a minority position or set any conditions concerning the future operations of a privatised enterprise. In certain exceptional circumstances, where the existing regulatory framework is considered inadequate, Government may with the agreement of parties to the sale of an enterprise, retain a shareholding conferring special rights to, in the national interest; intervene in the operations of the privatized enterprise.
To the greatest extent possible, privatization transactions will be designed to reduce concentration of ownership and avoid creation or maintenance of consumer market monopolies. To this end, Government will not divest unregulated monopolies or grant any privileges or guarantees to purchasers of privatised enterprises.
The Commission may elect to privatise public enterprises in various ways including, but not limited to, a public offering of shares, sales by competitive tender of the shares or assets and business of a public enterprise, management or employee buy-out or, where pre-emption rights exist, negotiated private sale of shares. The Commission may also create and offer for sale additional shares in a public enterprise in order to dilute Government's existing shareholding in that enterprise.
Retrenchment
One of the principles of the privatisation programme is that Government will not set any conditions regarding the future operations of a privatised enterprise including requirements as to number of employees. In privatised enterprises where the number of employees is high, some level of retrenchment may be a prerequisite to being able to operate efficiently in a competitive market.
Where employees are made redundant as the result of privatisation or commercialisation of a public enterprise, retrenchment benefit will be promptly paid to all retrenched employees in addition to any other entitlements (excluding redundancy pay entitlements) provided for in their conditions of service or the rules of the enterprise's staff pension or provident fund.
To protect employees who are retained in the employ of a privatised or commercialised enterprise and therefore not entitled to retrenchment benefit, the newly privatised or commercialized enterprise will be required to give a legally binding undertaking to incorporate in their conditions of service provisions to provide for retrenchment benefits at least equal to those of staff retrenched during privatisation.
Proceeds Of Privatisation
A fund entitled the Privatisation Revenue Account will be established and placed under the control of the Ministry of Finance. The proceeds of the sale of all direct Government interest in public enterprises will be paid into this fund.
In the case of indirect Government interests, a public enterprise selling its interest in another public enterprise may be permitted by the Minister, on the advice of the Commission, to retain all or part of the proceeds of sale with the balance being paid into the Privatisation Revenue Account.
The funds being held on the Privatisation Revenue Account may with the approval of the Minister of Finance, be used for a limited number of purposes, namely, funding the direct costs of the Commission and the privatisation programme, funding the restructuring of public enterprises to be privatised including payment of retrenchment benefits, the remainder of the fund will be applied to projects included within the Government development budget.
End:
For Comments and Questions, please contact:
Collins Magalasi
Mobiles Malawi: +265 888 826 092 / +265 992 655 467
Email: cmagalasi@gmail.com
[1] Bretton Woods is the term commonly used to mean the International Financial Institutions (IFI) formed at the Bretton Woods meeting after the Second World War. In this report this term is used interchangeably with IFI or IMF and World Bank.
[2] This is more applicable in developing economies and in infrastructure and network industries. See Sunita Kikeri and John Nellis, An Assessment of Privatisation, The World Bank Observer, Vol 19, No 1. 2004.
[3] See Kalonga Stambuli, State Hegemony, Macro Effects and Private Enterprise in Malawi, SIGERE Working Paper 2002/34/pub Econ. Surrey Institute of Global Economics Research. 2002
[4] Seasonal markets are satellite markets of unit markets. They are mobile selling points that can be opened on demand with a temporary sales force. They operate mainly in the harvesting seasons and are mainly used to purchase produce from farmers. Unit markets have permanent structures such as small storage facility and office, with staff. They generally operate throughout the year and buy produce, sell produce and inputs. Parent markets combine permanent storage facilities with an administrative office that oversees unit and seasonal markets.
[5] The full text of the Privatisation Policy is in Annex 1.
ON THE PUBLIC SECTOR AND THE ROLE OF THE STATE IN MALAWI
By
Collins Magalasi cmagalasi@gmail.com
December 2006
LIST OF ACRONYMS
1. INTRODUCTION. 4
1.1. Objectives of the Paper 5
1.2. Methodology. 5
1.3. Organisation of the Report 5
2. PRIVATISATION: THEORETICAL FRAMEWORK. 6
2.1. Privatization Trends in Developing Countries. 7
2.1.1. Sub-Saharan Africa. 7
3. PUBLIC SECTOR AND SOES IN MALAWI 9
3.1. Reasons for Public Sector Participation. 9
3.1.1. The Colonial Era. 9
3.1.2. Political Dimension. 10
3.2. Nature and Coverage. 10
4. PRIVATIZATION PROCESS IN MALAWI 14
4.1. Earlier Experiences. 14
4.2. Privatisation Policy. 15
4.3. Why Privatization. 16
4.4. Policy Environment 17
4.5. Consultations. 20
4.6. Malawi's Privatisation Programme (PP) 21
5. CHALLENGES OF PRIVATISATION. 25
5.1. Privatization and Technical Efficiency. 26
5.2. Impact of the Privatization Program.. 27
5.2.1. Treasury Effects. 27
5.2.2. Use of Privatization Proceeds. 28
5.2.3. Malawian participation and Ownership De-concentration. 28
5.2.4. Impact of Listed Companies on Capital Market Development 29
5.2.5. Employment 29
5.3. Discussion. 30
5.4. Solutions / Alternatives. 32
6. CONCLUSION AND RECOMMENDATIONS. 35
APPENDIX 1
LIST OF ACRONYMS
ADMARC Agricultural Development and Marketing Corporation
AIHL ADMARC Investment Holding Limited
CBM Commercial Bank of Malawi
DWASCO Dwangwa Sugar Corporation
DEA Data Envelopment Analysis
DEVPOL Development Policy Plan
DSP Divesture Sequence Plan
ESCOM Electricity Commission of Malawi
GDP Gross Domestic Product
IB Intermediate Buyer
IBRD International Bank for Reconstruction and Development
IDA International Development Aid
IFI International Financial Institutions
IMF International Monetary Fund
IPTAC Industrial Trade Policy Adjustment Credit
MDC Malawi Development Corporation
MIPA Malawi Investment Promotion Agency
MPTC Malawi Post and Tele-Communications Ltd
NICO national Insurance Company
OECD Organisation for Economic Cooperation and Development
PC Privatisation Programme
PCL Press Commission Limited
PIM Packaging Industries (MW) Limited
SAL Structural Adjustment Loan
SAPs Structural Adjustment Programmes
SC Statutory Corporation
SOE State Owned Enterprise
SUCOMA Sugar Corporation of Malawi
1. INTRODUCTION
Privatisation in its simplest sense is the transfer of public enterprise to private ownership. Beginning in the 1970s, there has been a global trend to move away from state ownership and control towards privatisation. State participation, which became common after the Second World War in developed countries and after independence in developing countries, slowly became less popular. Apart from the general fact that several of the State Owned Enterprises (SOEs) were inefficient and poorly managed, the period (1970-1990) was dominated by the growing dominance of neo-liberalism as a model for economic development (Jaunch, 2002). The neo-liberal ideology is driven by the belief in the "free market" as the best regulator and engine of economic growth while the state's developmental role in the economy is to be reduced.
The privatisation trend became common in African developing countries around 1980s to 1990s as part structural adjustment programs (SAPs). Introduced by international Financial Institutions (IFIs), the SAPs were meant to “assist” countries that were going through some economic hardship. The World Bank and International Monetary Fund (IMF) offered loans to these countries, and in return for these loans, African countries were forced to implement neo-liberal economic policies, which included privatization.
The trend of privatization in Africa and some developing countries did not miss Malawi whose [privatization] experience dates back to 1985. Malawi, a landlocked country in Southern Africa, is one of the poorest countries in the world. It is estimated that over 50% of Malawi’s 12million people live below poverty line, and the majority of Malawians derive their livelihood from agriculture sector. Despite all the reliance in agriculture, ironically, the first company to be subjected to privatisation was Agriculture Development Marketing Corporation (ADMARC), an institution that has been providing food support and back-up for rural Malawians, and whose full privatisation still remains a big contention by civil society up to now.
The imposition of privatisation by Bretton Woods[1] institutions, albeit its positive theoretical economic assessments, attracted a lot of critics who have expressed strong reservations about privatisation’s fairness and sometimes its efficiency and impact. Some of the specific arguments are, first, that privatisation causes social dislocation. Second, privatisation leads to layoffs and a worsening in labour conditions, in the short term in the divested firms and in the long run in the economy at large. Third, it has been argued that the bulk of the benefits accrue to a privileged few – shareholders, managers, foreign or domestic investors, those connected to the political elite – whereas the costs are borne by many, particularly tax payers, consumers, and workers, thereby reducing the overall welfare.
As expected, studies on the effects of privatisation show that there is a lot of variation on how privatisation has fared. In some countries, they provided a good solution to companies in infrastructure and network industries; privatisation transferred inefficient public monopolies to become efficient private monopolies; and significant gains have been achieved after privatisation. For example, in Brazil, during the 1981-94, before privatisation, the ratio of profits to net assets was negative, averaging -2.5 and falling to -5.4 percent towards the end; after privatisation most firms became profitable, and investment increased dramatically. Furthermore, higher profits brought more tax revenue to the government, and some companies began paying dividends to their investors (Kikeri and Nellis, 2003).
This paper is a result of quest to inform lobbyists and campaigners in Malawi and beyond on Privatisation and the Public Sector in Malawi. The paper is critical of the objectives and effects of privatisation on the public sector and the role of the state.
1.1. Objectives of the Paper
A number of reports show that privatisation has had considerable effects, both positive and negative. This paper covers a broader initiative to root an alternative development paradigm within the achievements and lessons from earlier experience of state led development. By looking at the nature and role of the “public sector” defined broadly, to cover democratic, accountable to the popular forces and which highlights popular participation, management and control, we try to focus on the appropriate role for the state in advancing development.
1.2. Methodology
The paper contextualises the process of privatisation within a review of the public sector in the period after independence capturing the key role of the state in developing the national resources and industries and advancing the rights and welfare of the people. Most of this is done through secondary data. Primary sources of information is used where there is little or no available documentation. The paper gets down to sectoral levels, where key strategic sectors are chosen to emphasise the above point. The sectors chosen are strategic from the point of view of their importance to the country’s economy and overall national development.
1.3. Organisation of the Paper
The paper is divided into four main parts. The first part is the privatisation theoretical framework which also covers the trends in developing countries. In the second part, the paper looks at the Public Sector and State Owned Enterprises in Malawi. Here the author will be looking at the Public Sector in Malawi and the reasons for going into production, infrastructures and services. The third part analyses the privatisation process in Malawi. The fourth section goes into the challenges of privatisation. And finally, before concluding, the paper looks at solutions and alternatives to privatisation, which could work in poor country like Malawi.
2. PRIVATISATION: THEORETICAL FRAMEWORK
In trying to answer the question of whether privatisation is necessary, most of the literature in the 1990s support privatisation. A good number of the supporters feel that privatisation is necessary, not simply to improve performance of public enterprises, it’s essential contributions are to ‘lock in the gains’ achieved earlier in reforming public ownership or in preparing a firm for sale, to distance the firm from political interference, and to inoculate it against the recurrence of the common and deadly ailment of public enterprises: interference by owners who have more than profit in their minds. (John Nellis, 1994).
The neoclassical reasoning is that there is there is little difference whether a firm is privately or publicly owned as long as it operates in a competitive market without barriers to entry or exit; or the owner instructs management to follow signals provided by the market and gives the autonomy to do so. The modern theory, however, changed this reasoning by attempting to establish a clearer relationship between ownership and efficiency. It is believed that private ownership will produce superior efficiency outcomes because of the following factors:
- establishment of a market for managers, leading to higher quality management
- capital markets subject privately owned firms to greater scrutiny and discipline than they do public enterprises
- private firms are subject to exit much more often than public enterprises
- politicians interfere less in the affairs of private than public firms
- private firms are supervised by self interested board members and shareholders, rather than by disinterested bureaucrats
This reasoning is supported by a trend where most state enterprises went through losses, became inefficient, produced low quality goods and services at high cost especially in developing countries. The general impression on state enterprises was that there were overstaffed, did not compete, and often resulted in bailouts, leading to national financial losses amounting in some cases as much as 5 to 6 percent of gross domestic product annually[2]. Bailouts for most of the state enterprises meant that the government had to finance larger fiscal deficits and increase tax revenues or reduce public spending in other areas, or both.
Privatization is also taken positively by public choice theorists, who look at the bureaucratic approach in which public enterprises are seen as an instrument of enhancing the utility functions of politicians such as maximization of votes and budgets (Niskanen, 1972; Buchanan, 1972; Blankart, 1983; Boycko et al., 1996). Proponents of the public choice theory hold that government departments pursue objectives that do not maximize profits and usually pursue goals such as maximizing budget, risk aversion, employment and investment. Boycko et al. (1996) propose a model of privatization within the framework of public choice theory. The model shows that privatization will lead to effective restructuring of state-owned enterprises that are currently producing at inefficiently high levels to maximize employment, only if both cash flow rights and control rights pass from the government into private hands (particularly managers’ hands). This will make it difficult for the government to bribe managers to produce at inefficient levels by offering them operating subsidies. Therefore, cutting the ‘soft budget constraint’ is vital to improving performance.
2.1. Privatization Trends in Developing Countries
By mid-1990s, privatisation in developing countries, which had started slowly in the 1980s, accelerated. Between 1990 and 1999 global proceeds totalled USD850 billion, growing from $30bn in 1990 to $145 in 1999. The Organisation for Economic Cooperation and Development (OECD) countries dominated throughout. In terms of numbers of countries and transactions developing countries dominated. Between 1990 and 2003, 120 developing countries carried out 7,860 transactions between 1990 and 2003, generating close to $410 billion in privatization proceeds, or 0.5 percent of total developing country GDP during that period.
The analysis of overall developing country trends shows that: (i) privatization activity dropped off after 1997 but picked up, albeit modestly, in recent years; (ii) the average size of a transaction increased over the years as countries moved towards privatizing larger firms; (iii) while a large number of countries are involved in privatisation processes, proceeds are highly concentrated in a handful of countries; and (iv) foreign investment accounted for half of privatization proceeds in the 1990s (Kikeri and Kolo, 2005).
In the early to mid-1990s, privatization proceeds in developing countries averaged between $20 to 30 billion on an annual basis. Proceeds peaked sharply in 1997 to almost $70 billion. The sudden and one-time jump resulted from increased activity in large infrastructure and energy (oil and gas) transactions across virtually all regions, with the largest share coming from three countries in Latin America (Argentina, Brazil, Mexico), Kazakhstan, Russia, and China. Revenues declined thereafter as Argentina’s stock of enterprises dwindled and as activity in Asia and Europe slowed down following the East Asian financial crisis of 1997 and the Russian debt crisis of 1998. By 2001 activity had reached the level of 1990, but starting in 2002 proceeds began a modest pick up and is slowly creeping back up to pre-1997 levels. The recent increases resulted mainly from share sales in telecoms, power, and banking in countries such as China (additional share offering of China Telecom), the Czech Republic (partial sale of Transgas), Slovakia (partial sale of the electricity company), India (telecoms), Pakistan (United Bank), and Saudi Arabia (telecoms).
2.1.1. Sub-Saharan Africa
By 2003 Sub-Saharan Africa—with $11 billion or 3 percent of proceeds and some 960 transactions—had the third highest number of transactions (after Eastern Europe and Latin America), but 70 percent were mostly small, low-value firms in competitive sectors. While 37 countries were engaged in privatization, the bulk of regional revenues in the 1990s was accounted for by a few large transactions in Ghana (Ashanti Goldfields and Consolidated Diamond Mines), South Africa (telecoms, steel, petrochemicals), and Nigeria (selected oil fields). South Africa was by far the biggest contributor to regional proceeds starting in 2000, accounting for nearly half of all regional proceeds, mainly due to additional share sales in Telkom, the sale of South African Airways, and sales in the petrochemicals sector. Other recent large transactions in the region: the partial divestitures of Mauritius Telecom (for $261 million) and the Cotton Company of Zimbabwe ($93 million).
Figure 1: Regional Distribution of Privatization Proceeds: 1990-2003
SAS: South Asia
MENA: Middle East and North America
ECA: Eastern Europe and Central Asia
LAC: Latin America and the Caribbean
EAP: East Asia and Pacific
SSA: Sub-Saharan Africa
Source: World Bank
3. PUBLIC SECTOR AND STATE OWNED ENTERPRISES IN MALAWI
The government of Malawi, from the mid 1960’s to the early 1980s, followed a policy of seeking comprehensive ownership of the means of production and also centralized management of the economy. In a way, this aimed to give the economy a state driven boost that was anticipated to trickle down to the poor masses, hitherto marginalized during colonial rule. This section looks at reasons for public sector participation, nature and coverage, and then looks at some sectoral cases.
3.1. Reasons for Public Sector Participation
State participation in most African countries has been common especially in essential services like utilities, manufacturing, mining, distribution and trade. The reasons for such participation vary a lot depending on the history and development levels of the countries concerned. In some cases, essential services such as utilities required large capital investments which given small market sizes were unattractive to foreign investors. Most utilities were deemed to be “natural monopolies” because provision by more than one provider would be inefficient for the economy because of the duplication of infrastructures (Kaluwa, 1998). Furthermore, there was the problem the absence of an indigenous entrepreneurial base with requisite technical skills and capital in the context of underdeveloped finance markets.
Historically, we also note that most African States inherited poor infrastructure at the time of independence. Actually, in infrastructure development, Africa has lagged behind the western hemisphere for centuries, even trailing Latin America in recent decades (Torero and Showdhury, 2004). During the colonial era, little was done to improve Africa’s infrastructure. The little infrastructure built during the colonial era was just to connect natural/mineral resources to markets. In fact, two thirds of the African railways built during the colonial period connected mines to a coastal harbor (J-P Platteau, 1996). These handicaps made most African States perceive the need to undertake some of the economic activity themselves because few private sector companies would want to invest in places where infrastructure support is unavailable.
Malawi’s public sector participation in economic activity is attributed to high financial barriers that made it almost impossible for private companies to undertake huge investments. The sectors where the state was mainly involved were utilities, covering water boards, the Electricity Supply Commission and the Department of Posts and Telecommunications; manufacturing, real estate, tourism, trade and development. Three main firms: the Malawi Development Corporation, ADMARC and Press Holdings became the major players in the sectors outside the utilities. These were supposed to moderate foreign dominance in industrial and commercial sectors and offer some “degree of economic autonomy without cutting off the flow of foreign investment” (DEVPOL-1, 1971).
3.1.1. The Colonial Era
Apart from the above reasons, Malawi is one country that has not enjoyed the benefit of mineral resources. It is also a landlocked country. With these two factors, the country’s colonial era compounded further labour exploitation without any infrastructure support. When the colonialists came into the country 1897 and realized the little benefits of this country, they started pushing for the Confederation with Zambia and Zimbabwe who had good deposits of some minerals. This came in much later, in 1953, with the Central African Federation or the Federation of Rhodesia and Nyasaland. Rhodesia was divided into two parts: Northern Rhodesia (which is now Zambia) and Southern Rhodesia (the current Zimbabwe).
The federation, when it was approved brought considerable social rupture of Malawi through displacement/ migration of Malawians to the mines in Zambia and Zimbabwe. Malawi effectively became a labour reserve. No industries came to Malawi, and all the investments were transferred to Salisbury (now Harare), the capital of Southern Rhodesia, and which also became the main business hub for the federation. At independence, the State effectively saw that had no choice but to take on the responsibility of certain investments.
3.1.2. Political Dimension
Another aspect for state participation in economic activity is the political dimension. The postcolonial ‘state’ embraced ‘unity’ as the means to evade the previous colonial tactics of divide and rule or any other threat of postcolonial polarization. Therefore design of the ‘state’ tried to take into account national integration, given the potentially dangerous ethnic and social cleavages that pervaded the political and social landscapes in the three regions of the country.
At a political level, the ‘state’ advocated the single party designed to subdue and keep dynamics of a free society under surveillance and also force its various competitive tendencies to occur within a single defined political arena. At the administrative level, the ‘state’ also advocated superiority of bureaucracy as structured machinery for awarding approvals of private activity while the state exercises regulatory control of all activity through central government, regional/provincial and district/local government.
In economic terms, the government postured itself as a benevolent amalgamation of newfound political values and economic authority seeking to provide for the needs of ‘masses’ hitherto marginalized by colonial rule. This practically relegated private enterprise to peripheral significance while public sector was defined along the principles of Stalinist-Marxist philosophy that the state should determine, inter alia, allocation of resources, distribution of income and consumption, levels of saving and investment, and relative prices of goods and services[3].
In this context, private enterprise existed as the preserve of an elite utilising political power to accomplish objectives of political accumulation in a fashion that evoked the term ‘capitalism of the few’. Survival and success for private sector required co-operation with and co-option by the state.
3.2. Nature and Coverage
Comparing with some neighbouring countries, Malawi cannot be characterized as having one of the largest numbers of public enterprises. Tanzania and Mozambique featured higher in the privatisations of the early 1990s. For Tanzania, it is probably more a legacy of her socialist background. Table 3.1 below gives a good indicator of Malawi’s place among the Sub-Saharan countries.
Table 3.1. Comparative Analysis: Malawi and Sub-Saharan Africa, 1986-92
% of enterprises divested
Number of Enterprises before Divesture
0-50
51-100
101-200
>200
0-10
The Gambia
Mauritius
Rwanda
Sierra Leone
Zimbabwe
Burkina Faso
Congo
Uganda
Zambia
Cameroon
Cote d’Ivoire
Malawi
Kenya
Tanzania
11-25
Chad
Burundi
Central African Republic
Madagascar
Ghana
Mozambique
26-40
Niger
Guinea
Nigeria
41-60
Guinea-Bissau
Benin
Mali
Senegal
Togo
Divesture includes partial sales but not management contracts and leases. Malawi had 121 statutory bodies and 18 commercial parastatals. Source: World Bank (1994)
During the 1990s, the SOEs in Malawi accounted for 25% of GDP, 20% of gross fixed capital formation and 8% of total formal sector employment (Economic Report, 1990). The main players, as already stated, were ADMARC, MDC and Press Holdings. This state domination started much earlier than the 1990s. In fact, before the start of the general economic reforms in the 1980s the government directly owned 24 of the 77 commercial statutory and non-statutory SOEs, the rest being either majority owned or minority owned through ADMARC and MDC (Kaluwa, 2000).
In order for one to understand specifically the set up of SOEs and the operations, I have briefly outlined below the three important players, ADMARC and MDC and PCL.
ADMARC: Structure and Purpose
ADMARC, a Malawian parastatal organization was created in 1971 with the mandate to market agricultural produce and inputs, and to assist the development of the smallholder agricultural sector through marketing activities and investments in agro-industry enterprises. In addition, ADMARC was mandated with a food security role in maize markets by acting as a buyer and seller in remote areas, providing grain storage across seasons and supporting a large marketing structure with distribution or market centers located throughout urban and rural areas. This function was especially critical at times of maize scarcity.
The social role was reflected in the pan-territorial and pan-seasonal pricing system for smallholder farmers, particularly maize, and the establishment of markets in non-profitable areas. Until 1987, ADMARC enjoyed a monopoly in buying, importing, marketing and storage of grain.
To fulfil its mandates, ADMARC operated a maize price band that remained in effect until the mid-1990s. Further, it rapidly developed an extensive network and infrastructure of markets across the country comprising of regional offices, divisional offices, area offices, storage depots, parent markets, unit markets and seasonal markets[4]. These markets were used to conduct sales of inputs, purchase commodities from smallholders, and sell food crops to net consumers.
Apart from agricultural marketing activities, ADMARC also invested heavily in equities and loans in various enterprises and is directly involved in estate agriculture. In fact, by the mid-1980s, ADMARC had equity investments in 34 commercial enterprises and owned numerous estates. Until 2002 ADMARC also used to run various subsidiaries (e.g. a cotton ginning company, a bus company, cold storage), many of which were loss making. In 2002, the Ministry of Finance assumed control over its four largest loss-making subsidiaries, in preparation for public sale, and three of the companies have since been privatized. ADMARC also runs many support departments, including printing services, building services, carpentry services, tailoring services, hospital, football clubs, rice mill, groundnut grading factory, guest houses and cottages, and urban housing.
Malawi Development Corporation
The government’s created the Malawi Development Corporation as a publicly funded development bank specialized in establishment of new industries. MDC was mandated to provide long-term financing for investment in projects undertaken through acquisition of shares from foreign enterprises or completely new investments in industry. The rationale for the MDC was defined along the needs for robust financial and project development effort at the country’s early stages of development.
Hence, MDC’s key investments included the labour intensive Portland Cement Company of Malawi, which supplied cement to the local building and construction industry; Packaging Industries, catering largely for cement and industrial carton box packaging as well as investment in Commercial Bank of Malawi, one of the country’s only two banks after independence.
MDC also owned Cold Storage Company, the only approved abattoir and front for development of beef farming in the country; Agrimal, a company involved in production of hoes and farm equipment and Plastic products Ltd, also involved in industrial packaging.
Press Corporation Limited (PCL)
Press Corporation was owned by Dr Kamuzu Banda, then the Life President of Malawi and undertook a number of acquisitions in the strategic areas of the economy. Press Corporation joined ADMARC as co-investor in National Bank of Malawi also raising the stake from the state sector. Press Corporation also joined MDC as investors in National Insurance Company similarly raising the shareholding of the State. Press also undertook joint investments with Carlsberg Denmark in Carlsberg Malawi, ensuring that it maintained a majority stake in the joint venture (Southern Bottlers).
The state’s presence in the agricultural sector was also manifested through Press Corporation Ltd, which owned a large number of tobacco estates under Press Agriculture Limited, andGeneral Farming Co Limited. This was in addition to Khasu, Mudi, Kasonjola and other private estates owned personally by Dr Banda.
PCL, though a personal company, played a huge role in the economy and state domination. For example, in the 1970’s, Life President Banda issued a directive removing all Asian traders from the rural areas to urban and peri-urban centers. This paved the way for expansion of Peoples’ Trading Centre retail shops owned by none other than PCL (Kalonga Stambuli, 2002). In 1984, the Malawi government specifically issued bonds purely for debt recovery replaced bad debts of Press Corporation to Commercial Bank of Malawi amounting to $39 million. Apart from enhancing state domination, the ownership structures reflected strong infusions of politically appointed management.
4. PRIVATIZATION PROCESS IN MALAWI
Government of Malawi finally accepted to undertake privatization in 1987 under the Industrial Trade Policy Adjustment Credit (ITPAC). By this time the government had already undertaken some structural adjustment loans, and there existed no practical economic alternative when this facility came in. The main obstruction to privatization was now political due to the fact that this would deprive government of the means of economic control. Very few studies gave a detailed analysis of any future effects of this program. Nevertheless, things moved slowly, and it was only post 1994, after the change of government, which brought fresh impetus to the public sector reform program. This section looks at privatization process from earlier experiences up to the current situation.
4.1. Earlier Experiences
Privatization process in Malawi started around 1984, though it was a decade later that the Privatization Commission came into existence. During this time the government implemented privatization programs within the framework of expenditure-switching and expenditure-reducing structural adjustment programs of the World Bank and IMF following the poor performance of state enterprises in the early 1980s (Adam et al., 1992; Adam, 1994). The restructuring process of the SOE sector in Malawi began with the parastatal reform programme which was initiated in 1981 and mainly targeted directly owned state enterprises. The establishment of the Department of Statutory Bodies, responsible for monitoring and improving control and resource management in state-owned enterprises marked the first step in enhancing the operational efficiency of SOEs.
The government reform strategies included review of corporate objectives, introduction of performance related incentives, increasing the autonomy of management in recruitment and firing of employees (Malawi Government, 1987). All these strategies were in line with the overall policy objective of improving the efficiency and effectiveness of parastatal institutions including public departments responsible for reviewing, monitoring and regulating the parastatal sector.
Thus, within the framework of restructuring process, privatisation has been implemented in two main phases.
Phase 1
The first phase, which is also in two parts, began in 1984. This overall phase of privatization was supported under the first six structural adjustment loans that the World Bank provided to Malawi. The initial part comprised a “no cash, in-house” asset swap worth MK14 million involving the troika to align their portfolios with their core areas of interest. Alongside the asset swaps between 1984 and 1989, ADMARC and MDC also intensified divesture activity in the form of minority equity sales in associate companies or the sales of minor interests such as farms and other enterprises.
The second part, which went on to 1992, was dominated by heavy financial losses and heavy borrowing from the government and the banking system by the two most problematic parastatals, ADMARC and Malawi Railways, suggesting a need for significant restructuring. There was weak medium- to long-term financial and investment planning which required a stronger input by the Department of Statutory Bodies through its broader responsibilities. Both ADMARC and Malawi Railways underwent restructuring with ADMARC divesting its investment portfolio further although there has been considerable resistance and delays in redefining its function and roles. Nevertheless, several estates, thirteen non-manufacturing enterprises and eleven manufacturing enterprises held by ADMARC and MDC were privatized by the end of 1992 (Chirwa, 2000). The eleven privatized manufacturing enterprises were among the fifty-two state-owned enterprises in the manufacturing sector.
In assessing the initial part of phase 1, one can say that the asset swap benefited PCL (controlled by Dr. Banda) more than it did ADMARC which received PCL’s unprofitable subsidiaries and left ADMARC financially exposed (Harrigan, 1991). Secondly, the divesture programme did not amount to privatization since as development finance institutions, divesture would typically be normal activity especially for farms; ADMARC itself financed the purchases by Malawians through soft loans.
Overall assessment of the early privatization episodes can be summarized as follows:
- privatization in the strict sense was a minor component of the parastatal restructuring programme
- both the privatization and restructuring hardly addressed the main issues usually considered, such as widespread poverty, concentrated ownership, uncompetitive markets (for both productive inputs and outputs) and the demands of globalised markets and accountability dispensation.
- ADMARC and Press still held a dominant position in the banking system and the economy as a whole
- Although the financial performance of the parastatal sector did show some improvement, this was still fragile and mainly attributable to interest-cost reduction.
- Much of the impact of this phase was more notable for the experience it generated than anything else (Adam et al, 1992).
Phase 2
The second phase, which will be covered at length in this part of the paper, began in 1996 under the seventh structural adjustment loan, the Fiscal Restructuring and Deregulation Programme. The scope of privatization in the second phase is much broader and the government identified more than one hundred and fifty state enterprises to be privatised. To have a complete understanding on the background of this phase, we can start by looking at the privatisation policy which laid foundation for the overall program.
4.2. Privatisation Policy
The Privatisation Act and Privatisation Policy[5] came into being in 1996, and paved the way for the establishment of the Privatisation Commission. This second phase of the restructuring program had the major objective of increasing the size and diversity of the private sector while reducing public budgetary and administrative burden. According to the privatisation policy document, the major objectives of the Malawi privatization program are stipulated as:
· to foster increased efficiency in the economy;
· to increase competition and reduce monopoly;
· to promote participation by the Malawi public in enterprises; and
· to raise revenue for the government.
Accordingly, by realizing these objectives, the Government is expected to create an economic environment conducive to private sector development and also free public resources for investment in infrastructure and social programmes.
The first three objectives, it can be noted, have direct welfare implications for the society, in terms of availability of goods and services and their quality, their competitive pricing, and equity in the distribution of income generating assets. The last objective probably not only covers the proceeds of privatization but also expenditure savings from reduced subventions as well as revenue generated from profitable and tax paying enterprises. There are other potential positive aspects effects apart from those that were specifically identified, like the impact on the development of a finance capital market and the upgrading of Malawian participation in the economic activity from predominantly petty service-oriented enterprises to more substantial ones including manufacturing (Kaluwa, 2000).
The institutional arrangement places The Privatisation Commission (PC) with the sole authority in Malawi to implement the privatization of the direct or indirect government ownership of any public enterprise. Its functions include, but are not limited to, the planning, management implementation, and control of the privatization of public enterprises in Malawi. It is also the duty of the Commission to report to the Cabinet the details of the sale of each public enterprise.
Membership of the Commission includes ex-officio representatives of Government, representatives nominated by each political party represented in the National Assembly, a representative nominated by the Malawi Congress of Trade Unions, and members representing professional and commercial business interests.
A Secretariat of The Privatization Commission was established comprising an Executive Director and subordinate employees. The Executive Director of the Privatization Commission is responsible for the effective administration and implementation of the provisions of the privatisation programme.
4.3. Why Privatization
The reason for Malawi to go into privatization at that time was more to do with the performance of the economy during the 1970s and 1980s. After some good performance for almost two decades after independence, Malawi started experiencing significant economic problems. When the Bretton Woods institutions came in to help around 1981, Malawi slowly drifted into “conditionality trap”. It was therefore easy for the international financial institutions to impose privatization as conditionality, just when the privatization fever was spreading globally. This part takes us through the post independence eras and how the country got herself involved deeper and deeper with IFIs and the conditionalities that came forth.
1965-1984 Era
The period soon after independence (1964) to 1979 is one of the best that Malawi experienced economically. The per capita GDP grew fairly rapidly from $158 in 1965 up to $225 in l979, after which there were two years of negative growth rates before a recovery began in 1982. The year 1979 can be treated as a major turning point in the post-Independence economy. Table 4.1 summarizes the trend during this period.
Table 4.1, Growth rates for selected national income aggregates: In real terms (annual growth rates)
1965-84 1965-79 1979-84
Aggregate
1. Real GDP 4.7% 5.5% 2.6%
2. Real GDP per capita 1.9% 2.6% 0.1%
1965-83 1965-79 1979-83
3. Real Total Consumption 0.2% 0.8% -1.5%
per capita,
of which:
(i) Private Sector consumption
per capita 0.2% 0.2% 0.9%
(ii) Public Sector Consumption
per capita 0.4% 4.2% -11.8%
4. Real total investment
per capita,
of which:
(i) Private Sector consumption
per capita 5.6% 12.9% -16.6%
(ii) Public Sector Consumption
per capita 3.2% 4.2% 0.0%
Source: Government data, (Kydd and Hewitt, 1986)
At independence the economy was overwhelmingly agrarian, agriculture accounting for 55% of GDP. By 1984, the share of agriculture in GDP had declined to 37%, while the share of manufacturing had risen moderately to 12%. However, perhaps the most crucial change between l964 and l984 had been within the agricultural sector, in which the estimated share of agricultural production (monetary and non-monetary) of peasant producers (farmers in customary land areas) had declined from 92 to 77% in 1983, recovering slightly to 79% in 1984.” This reflects the fact that the share of estate (i.e. large-scale) agriculture in GDP had risen nearly eightfold over the 20 years from l964. Thus a striking feature of Malawi’s post-Independence economic development has been the rapid development of estate agriculture.
4.4. Policy Environment
Terms of Trade
The terms of trade held up reasonably well through the 1970s but declined sharply in 1979 and 1980. Although the terms of trade recovered somewhat in 1981, both series shown in Figure 4.1 agree that they declined subsequently, but differ on the extent of this decline. The terms of trade estimates permit the conclusions that, up to 1979, the trading environment facing Malawi was supportive of the rapid growth which occurred and also that, from 1979, the sharp deterioration in the trading environment was a major cause both of the decline in per capita GDP in 1980 and 1981 and of the sharp recovery in GDP in 1984. There is, nevertheless, a possibility that other factors could have contributed to these changes.
Responses to the balance-of-payments, 1975-83: Structural Adjustment Loan 1
The current account balance has been negative in every year since Independence. Up to the mid-1970s this negative balance was adequately offset by long-term capital inflows. However, balance-of-payments difficulties began to emerge in 1975, when there was a large deficit on the overall balance, but did not become a critical constraint on growth until 1979. Over 1975 to 1979 the deficit was mainly financed by a reduction of reserves, taking up quotas with the IMF, drawing on the Compensatory Financing Facility and borrowing in the Eurocurrency market, but these methods of financing had been exhausted by the time of the sharp deterioration in the terms of trade in 1980.
From 1980 several instruments were used to deal with the situation. There were some facilities that were available from IMF, and there was also the rescheduling of official and commercial debt. The third and the most important one that helped finance the payment deficits were the World Bank structural Adjustment Loans (SALs). The government requested a SAL in 1980 and, in June 1981, a loan of US $4.5 million at standard IBRD terms was approved, to be disbursed over two years. This “first SAL” was fully disbursed by mid-1982 and was followed by a “second SAL” approved in November 1983, to be disbursed in two tranches, one in 1983 and one in 1984. The second SAL was US $52 million, and was on the much more concessional terms of an IDA credit.
The justification for SALs arose from the need felt within the World Bank for a financing instrument which would be “entirely policy focused” and would not only demonstrate but put into effect the Bank’s “single-minded concern for policy reform.” The main objective implied by the documents was to ensure that the Bank’s mix of projects was relevant to the needs of the country as they evolved. Most of the recommendations made to the government in these documents were project related, but also a few more general recommendations were made (for example on agricultural pricing and general advice against public subsidies). However in the pre-SAL period, these recommendations never became more than that; for example, the government was able to effectively ignore the Bank’s recommendations (and agreements with the Bank) on agricultural prices from 1973 to 1982, without experiencing any interruption in the Bank’s disbursements for projects.
When the preliminary work for the first SAL began in late 1980, the nature of the Bank’s involvement in Malawi changed. Priority was now given to devising a set of policies which would bring about the necessary adjustments to allow the economy to resume growth with a viable balance of payments. What had previously been the Bank’s central concern, questions about projects, were now clearly subsidiary to a search across the whole economy for measures which would assist in adjustment and bring about increased efficiency. Thus the reorientation in the Bank’s work not only drew it into areas of the Malawi economy in which its existing experience was relatively shallow but also required that an agenda of possible policy changes had to be drawn up rather rapidly (Kydd and Hewitt, 1986).
The report for the first SAL argued that, while the primary cause of the crisis was deterioration in the terms of trade, nevertheless this had revealed underlying structural weaknesses. Six areas of weakness were identified. First was the slow growth of peasant produced exports. An issue with which the Bank was very familiar as, since l967, it had been the leading donor to Malawi’s rural development program, the main objective of which had been to increase peasant crop production. Second was what was described as the narrowness of the export base: this was a response to the growing importance over the 1970s of tobacco in Malawi’s earnings and the experience, in 1980, of a sharp fall in export prices for what was then the major estate grown variety, Flue-cured. Third was a concern about energy resources, in particular the country’s overwhelming dependence on dwindling stock of fuelwood supplemented by imported oil products. Fourth was the deterioration which had occurred in the finances of parastatal enterprises. Fifth was increasing budget deficits at the end of the 1970s, caused by expenditure growing much faster than tax revenues. Finally, there was the rigidity and unpredictability caused by the system of administered prices and wages.
Structural Adjustment Loan 2
The second SAL, approved in November 1983, stands in marked contrast to its predecessor. First of all, the economic background was different, because over the two years of the first SAL the problem in the balance of payments and in public finance had become more acute, and it was evident that tougher corrective measures would be necessary. Second, the Bank now had the experience of two years’ engagement with the general problems of the Malawi economy and most of the studies commissioned in conjunction with the first SAL had been completed. Thus the Bank felt that, in dealing with the Malawi economy, it had moved a good way down the learning curve. It now had an agenda of policy changes and institutional reforms which it was prepared to press hard in negotiations with the government.
The financial performance and efficiency of the parastatals and of the Press Group was now a major issue in the dialogue between the Bank and the government. In the case of the parastatals, the main thrust of the Bank’s advice was that tariffs should be raised to a level which eliminated the need for subsidies and/or borrowing to cover operating deficits plus debt repayment.
In reviewing the two SALs to Malawi, there are a number of features that can be noted. The first SAL was characterized by mild conditionality and recognition that structural problems can best be tackled in a medium-term perspective. The Bank did not believe that it knew all the answers, and much of the work of the first SAL was directed towards identifying issues and studying them. The resources provided by the SALs were of a sufficient scale to avert a drastic curtailment of the government’s development program and its recurrent spending. Over the period of the SALs it has been possible to continue to expand the government’s main “poverty focused” program, rural development projects in peasant farming areas. At the same time, the Bank has been discussing with the government measures to improve primary health care and primary education, although significant World Bank investment in these areas has yet to occur, and in some of the proposals the poverty focus is markedly less keen.
The background of the two SALs created a niche for liberalization, and parallel studies, mostly commissioned by the international financial institutions supporting privatization. The World Bank (1989) study on Malawi manufacturing provided the first evidence available to the effect that foreign owned firms were found to be more efficient than locally owned ones and that private firms were more efficient than publicly owned ones. The study was undertaken during a period before trade liberalization reforms and when the economy was characterized by acute foreign exchange rationing.
4.5. Consultations
Prior to 1996, a number of workshops and meetings took place on privatization. The institutions involved were mostly The World Bank and the donor community, Malawi Government and parastatals that were directly related to private sector development. Civil society was hardly involved. Such workshops, seminars and meetings were mostly supported by the World Bank. As sponsoring organization, the Bank used the platform to convince the government on privatization. For example, during one of the workshops (MIPA, 1994), the Deputy Resident Representative of the World Bank Malawi Mission gave a long lecture on the positive aspects of privatization. He emphasized on the development of private sector as paramount importance to the country, as well as a clear hint of more money coming in if the government were to go into such a program. Among other issues he said:
“Properly planned and executed, privatization has the potential to achieve the following:
- Broaden Malawi’s ownership base. In the past, entrepreneurial initiative was dampened by policies that favored, explicitly and implicitly, some businesses and firms over others. The result is a high level of concentration in the economy which has crowded out additional private investment and initiative and has been detrimental to consumer welfare
- Help reduce budgetary burden for the government. In the 1960s and 70s, government budget was able to support infrastructural developments and subvention to the public enterprises. Today, Malawi’s government budget can no longer provide everything it once did. Building and operating of its infrastructure must be privatized to make space for increased social spending with the aim of alleviating poverty. Clearly, the private sector has to and seems to be willing to take up part of the traditional functions that are currently carried out by the public sector
- Increase economic efficiency and thus free resources for growth and development. The 1989 World Bank Industrial Sector Memorandum noted that in terms of resource costs, private sector firms were nearly twice as efficient as parastatals.
- Free-up valuable managerial capacity of Government. Malawi, as we all know, has a large unfulfilled agenda in respect to poverty alleviation, such as schools, medical facilities, etc. Government’s human resource capacity is too limited to implement a broad based poverty alleviation package without compromising in other areas of public of the public sector. Privatisation of selected public enterprises will free up the delay needed resources that are needed in hanging social sector and poverty related issues.
- Lastly, as studies have shown – for Africa as well as for other LDCs – an important benefit of privatization is the inflow of direct investment. Malawi needs to attract such investments and in doing so it is in sharp competition with its neighboring countries. Therefore it is even more important that the country sends the right signals to potential investors and private entrepreneurs about conduciveness of its business environment.”
The most revealing part of his presentation was on World Bank assistance.
“with the limited resource base, Malawi will continue to require substantial amounts of external financing. On its part, the World Bank will continue to support the central areas in Malawi’s development agenda, namely: (a) poverty reduction; (b) liberalization of the environment for private sector investments; (c) enhanced productivity of smallholder farmers; (d) natural resource conservation; and (d) macroeconomic stability.
“The reforms supported by early World Bank-financed structural adjustment operations encompassed public enterprise reform, agricultural pricing and marketing, and fiscal and external policies to support restoration of macroeconomic stability. More recent reforms have focused on underlying issues critical for generating broad-based and equitable participation in the economy, giving smallholders access to key high-value cash crops, and removing policy obstacles to entrepreneurship that continue to constrain physical capital investment and limit access to financial and human capital. The next set of structural issues to be addressed will concern trade and distribution, and aim at reducing obstacles posed by market concentration and promoting ease of entry.”
4.6. Malawi's Privatisation Programme (PP)
With all the push from World Bank, the second government that came in in 1994 made parastatal sector reform a priority. The reasons and arguments for this reform aligned to what the Bank had said during the SALs and in several fora: that the government was spending a lot of money subventing unprofitable SOEs, there was need to increase efficiency in private sector, need to do away with monopolies and increase competition. Department of Statutory Bodies was created and a privatization policy drafted which was passed into law in 1996.
The Act set out four very clearly stated objectives of the programme. The Privatisation Commission (PC) was established to begin the process of privatising SOEs.
The government, not the Commission, devised a Divestiture Sequence Plan. This was essentially a list of 100 SOEs earmarked for privatization. “The government determines who; the Commission only determines when and how”.
Of those original 100 SOEs in the DSP, by 2002 about 50 had been privatized. This started with the small ones and intended to that the "biggies" in the utilities sector - MTL and ESCOM, would come in at a later stage. Most of the utilities are still undertaking preparatory work for the privatisation process, though MTL has recently completed its privatisation (Dec 2005). The actual sequence chosen by the PC has been influenced by many factors, including how much time might be required to find a buyer or to restructure the SOE to make it saleable, and how the sale might affect the Malawian consumer.
There are several methods of privatization: the government can sell all or some of the shares in the entity (as was done with NICO); they can sell the assets as bits and pieces (for example, Malawi Book Service), they can sell it as a going concern (Portland Cement), or they can offer it as a concession (Malawi Railways).
When the government wholly owns (either directly or through Admarc Investment Holdings, or MDC, or MPICO or another holding company) an enterprise, it may first be necessary to change the legal status of the entity to meet the requirements of the Companies Act. This is what happened with MPTC - the telephone side was restructured as a private company, Malawi Telecoms Ltd, while the post office side, which is not being privatized at this time, remains a parastatal.
Many of the enterprises on the DSP list were operating as private sector companies with government ownership. This includes Packaging Industries (government shareholding sold), Encor (management buyout) Chillington Agrimal (sold to Malawi-based investor), Bata Shoe, and Leopard Match. In these cases, there are often pre-emption agreements - if a shareholder wants to sell its shares, they must first be offered to the other shareholders. In some cases the other shareholders ended up as majority or sole shareholders. Nampak, the South African technical partner with PIM, bought a majority shareholding. Chillington of Chillington Agrimal on the other hand, chose to sell its own shares instead of buying government's. Bata and Leopard Match have not yet been privatised although discussions are underway.
Table 4.2 gives a complete list of Divesture Sequence Plan (DSP) as at the end of 2002. This DSP is a list, as approved by Cabinet, of public enterprises categorized according to the sequence in which the whole or part of Government's shares will be disposed of. Cabinet last approved the DSP in 1997.
Table 4.2 Divesture Sequence Plan
COMPLETED TRANSACTIONS
PUBLIC ENTERPRISE
NO. OF UNITS
TRANSACTION CLASSIFICATION
1
Auction Holdings Ltd
1
Local and Private Placement
2
Bain Hogg Insurance Brokers
1
Sale to Shareholders
3
Blantyre Dairy
1
Competitive Sale
4
Blantyre Lodge (formerly Blantyre Rest House)
1
Competitive sale
5
Brick and Tile Company
1
Transfer of shares
6
Capital Hill Dairy Farm
1
Competitive sale
7
Central Tobacco Properties Ltd.
1
Reorganisation
8
Chemicals and Marketing Ltd
1
MBO
9
Chillington Agrimal Ltd
1
Concession
10
Chiphazi Farm
1
Competitive sale
11
Chitipa Inn
1
Competitive sale
12
Chintheche Inn
1
Concession
13
Choma Ranch
1
Concession/ Competitive sale
14
Commercial Bank of Malawi Ltd.
1
Public offer / share sale / MBO
15
Dwangwa Sugar Corporation (DSC)
1
Dept-equity/ sale to shareholders
16
Dzalanyama Ranch
1
17
Encor Products Ltd.
1
Dept-equity/sale to shareholders
18
Finance Corporation Ltd.
1
Competitive sale
19
Forestry Rest Houses
1
Concession
20
Government Hostel
1
Concession
21
I&E
1
Dept-equity/sale to shareholders/comp
22
Kaombe Farm
1
Completed-competitive sale
23
Kasikidzi Farm
1
Distributed to the people
24
Kasungu Inn
2
Concession and purchase
25
Katete Farm
1
Competitive sale
26
Kuti Ranch
2
Competitive sale
27
Likhubula Lodge
1
Concession
28
Luwawa Lodge
1
sale to shareholders
29
Chigumukire Ltd
1
30
Mchenga Coal Mine
1
Competitive sale
31
National Bank of Malawi
2
Public offer/stock exchange transaction
32
National Insurance Co. Ltd.
2
Public offer & MBO
33
New Building Society
1
sale to shareholders
34
VIPCOR
1
liquidation
35
VIPLY Ltd
1
sale to shareholders
36
Zomba Trout Farm
1
Concession
37
Smallholder Coffee Authority
1
Commercialisation
38
Smallholder Sugar Authority
1
Commercialisation
39
Ngabu Inn
1
Concession
40
Optichem (Malawi) Ltd.
1
sale to shareholders
41
Packaging Industries (MW) Ltd.
4
sale to shareholders/IPO/private sale
42
Premier Mining Ltd
1
Sale to shareholders
43
SUCOMA
4
Sale & Public offer
44
Malawi Lake Services Ltd.
1
Concession
45
Malawi Railways (1994) Ltd.
1
Concession
46
Mpwepwe Boatyard Company Limited
1
MBO
47
Mangochi Lodge
1
Concession
48
Mining & Investment Development Corporation
1
liquidation
49
Limbe Rest House
1
Competitive sale
50
Malawi Book Service
1
liquidation
51
Kachere lodge
1
Concession
52
Dzalanyama Lodge
1
Concession
53
Ntchisi Lodge
1
Concession
CURRENT TRANSACTIONS
1
ADMARC
GOVERNMENT
2
Air Cargo
GOVERNMENT
3
Air Malawi Ltd
GOVERNMENT
4
Alexander Forbes (formerly MIBRO)
5
Blantyre Milling Company Limited
Sold competitively
6
Blantyre Water Board
GOVERNMENT
7
Bwemba Dairy Farm
GOVERNMENT
8
Chileka International Airport
9
Cold Storage Co Ltd
ADMARC
10
David Whitehead and Sons (Malawi) Limited
ADMARC
11
ESCOM Limited
GOVERNMENT
12
Grain & Milling Ltd
ADMARC Sold competitively
13
Kasungu Flue Cured Authority
GOVERNMENT
14
Leopard Match Co. Ltd
MDC
15
Lifidzi Farm
16
Lilongwe Water Board
GOVERNMENT
17
Malawi Catering Services
GOVERNMENT
18
Malawi Dairy Industries
19
Malawi Finance Co. Ltd
GOVERNMENT
20
Malawi Rural Finance Company
GOVERNMENT
21
Malawi Tea Factory Co. Ltd
ADMARC
22
Malawi Telecommunications Limited
GOVERNMENT
23
Mchenga Coal Mine
24
Meru Ranch
GOVERNMENT
25
MPICO Ltd
GOVERNMENT
26
National Investment Trust Limited
27
Plastic Products Ltd.
MDC
28
Portland Cement Co. (1974) Ltd
MDC
29
Smallholder Tea Authority
GOVERNMENT
FUTURE TRANSACTIONS
1
ADMARC Investment Holdings Ltd
ADMARC
2
Bata Shoe Co. (Malawi) Ltd
MDC
3
Borehole Construction Fund
GOVERNMENT
4
Capital City Development Fund
GOVERNMENT
5
Government Press
GOVERNMENT
6
Malawi Housing Corporation
GOVERNMENT
7
Shire Buslines Ltd
ADMARC
8
Lilongwe International Airport
GOVERNMENT
9
Malawi Development Corporation (MDC)
ADMARC
10
Stockbrokers Malawi Limited
ADMARC
11
TDIC / Sunbird Tourism
MDC
12
Central Government Stores
GOVERNMENT
13
Central Medical Stores
GOVERNMENT
14
District Rest House Chain
ADMARC
15
Indefund
MDC
16
Indebank
ADMARC
17
Lilongwe Smallholder Poultry Project
GOVERNMENT
18
Manica Freight Services
GOVERNMENT
19
Mzuzu Smallholder Poultry Project
GOVERNMENT
20
National Seed Company
ADMARC
21
UNDP Housing Fund
ADMARC
Source: PC Annual Report
5. CHALLENGES OF PRIVATISATION
Very few studies have attempted the task of undertaking a complete analysis of privatisation in Malawi. Assessing performance of such a complicated venture would not give a good picture if done over a short period. A clearer impression will probably start showing some years (maybe 5-10) after the complete privatisation process. This does not mean that the immediate effects are not important. The controversial water privatisations proposals in Ghana and Tanzania in the past three years show how bitter the issues can become (see Box 5.1 below).
Box 5.1 Tanzania and Ghana Water Experiences
TANZANIA [DAWASA Water Privatisation]
(40-50% of the population have no access to clean water)
[2002]
The International Monetary Fund (IMF) and World Bank in Tanzania included conditions within their aid programs related to the divestiture of Dar es-Salaam Urban Water and sewerage Authority (DAWASA), the semi-autonomous government body previously responsible for running water supply system. This was part of the conditions for having Tanzania on debt relief under HIPC program. But then there was a lack of investor interest. The first bidding process was stopped after two French companies; Saur International and Vivendi were rejected. Donors agreed to waive the privatisation only to push it again through giving a loan (of $145m) which was meant to improve the water system.
GHANA
Current official statistics state that 62-70% of the urban population has access to treated water and 35-40% of the rural population. However, these figures mask the fact that far less has piped water. In urban areas, only 40% of the population (and 25% of the urban poor) have access to running water in their homes.
In July 2001, the World Bank approved a new $110 million structural adjustment loan for Ghana. Before disbursing the loan, however, the Bank forced the government of Ghana to implement seven “prior actions,” including a requirement to “increase electricity and water tariffs by 96 percent and 95 percent, respectively, to cover operating costs.”
(By 2002) A bucket of clean water in Ghana became more expensive than in the UK. This meant that a family making minimum wage had to spend almost half of its daily income for just three buckets of water. As a result, many families could not afford clean drinking water, and women and children bore the burden of collecting water, often from polluted streams and rivers.
The effort to attain “full cost recovery” is a prerequisite to privatization. Private companies want to operate systems where consumers meet the expenses of running the systems and pay enough for company profits, too, so that they earn a return on their investment.
Pressured by the World Bank, the government of Ghana plans to lease the Ghana Water Company to two as yet undetermined multinational water companies to provide urban water service. The World Bank included water privatization as one of many conditions that determined the extent of Ghana’s access to the portfolio of loans in the World Bank’s Country Assistance Strategy (CAS).
5.1. Privatization and Technical Efficiency
A study evaluating the impact of privatization on the technical efficiency of about 15 companies in the manufacturing sector was undertaken around the year 2000 (Chirwa, 2000). This was a very technical evaluation. Enterprise level data was used in the manufacturing sector spanning the period 1970 to 1997, by selecting industries in which privatization took place during the 1984-91 period in Malawi, in which privatized enterprises had been under private ownership for at least five years. The study, therefore, contributed to the limited empirical evidence on the privatization-efficiency hypotheses, particularly in developing countries by taking into account oligopolistic interdependence and the impact of other liberalization measures.
The sample for this paper was drawn from eight privatization activities (excluding asset swaps). Each of the five privatized enterprises was grouped into three-digit industry classification level. Data was obtained for private enterprises and other state-owned enterprises competing in the same industry. The privatized manufacturing industries were three-digit industries in which privatization occurred between 1984 and 1991. The three privatized manufacturing industries were food processing, manufacture of other chemical products and manufacture of transport equipment, and the sample included six privatized state-owned enterprises (PSOEs), three state-owned enterprises (SOEs) which had never been privatized and six private enterprises (PVTs) which had never been under state enterprise during the period of analysis.
After computing technical efficiency scores for firms using Data Envelopment Analysis (DEA) based on industry specific inter-temporal frontiers at three-digit industry level, the statistical results, overall, show that technical efficiency improved among privatized state enterprises, state-owned enterprises and private enterprises. However, there was significant evidence that changes in technical efficiency were higher in privatized enterprises, and that the proportion of the variance in technical efficiency attributed to privatization was also higher among privatized enterprises compared with that among state-owned enterprises and private enterprises.
The approach in this paper had been to study all firms competing in the same industry to discern the industry effects and to control for the many other sources of technical efficiency. The results from the econometric analysis, which accounts for other sources of technical efficiency showed that improvements in technical efficiency could not be attributed to privatization alone. The empirical results, particularly among privatized enterprises, showed that after controlling for the many other sources of technical efficiency, privatization improved technical efficiency and efficiency scores were at least 25 percent points higher in the period after privatization. The positive impact of privatization was also supported by the significant negative relationship between technical efficiency and state ownership in the industry effects model. These findings implied that the technical inefficiency associated with state ownership could be reduced by transferring their ownership to the private sector and partial privatization may not maximize efficiency. Furthermore, technical efficiency is higher in competitive industries, among firms with high capital intensity and among subsidiaries of multinational corporations. The latter implied that foreign participation in the privatization process in Malawi had positive implication on efficient domestic production. Structural adjustment programs by removing market rigidities enhanced the role of the market mechanism and provided further incentives for input allocation to maximize output.
Overall, from a policy point of view, the findings showed that the objective of promoting efficiency materialized in the first phase of privatization in Malawi even when other factors that influence technical efficiency are taken into account. Nonetheless, the competitive environment which was partly reinforced by the sequential implementation of structural adjustment policies played a critical role in facilitating the positive impact of privatization.
5.2. Impact of the Privatization Program
A comprehensive performance evaluation was done in 1998 covering three main indicators, a) the macro-level indicators which measure impact on economy-level variables, b) the meso-level indicators, which deal with the impact on markets, and c) micro-level indicators, which measure results at the enterprise level (Kaluwa, 2000). Often, one may add political level indicators, which might deal with issues like when to privatize, what enterprises, mode of privatization, immediate beneficiaries, reserve price of offer, use of proceeds etc.
5.2.1. Treasury Effects
According to the World Bank, by 1997 there had been 44 privatization transactions including those outside the Privatization Program with total sales of US$56m. By July 1999, the Privatization Programme itself raised around MK850m, which translates to 1% of GDP. These are one-off and short-term treasury effects. However, one may also wish to look at the long term effects like tax revenue and savings on subsidies to formerly government supplied inputs in sectors such as forestry and veterinary services. Table 5.1 summarises available information that facilitates an impressionistic view of treasury effects associated with current financial flows.
Table 5.1: Treasury Effects: Total Flows of Funds, Tax revenue and Net Flow of Funds
Year
Total Flow(1)
Tax: SC (2)
Tax: Major “Divested” Companies
SUCOMA
CBM
NICO
PIM
Total Tax
Net Flows (3)
1993
126.92
0.70
0.02
6.54
2.96
3.57
13.79
112.43
1994
187.85
0.90
0.02
30.80
6.09
1.38
39.19
147.76
1995
593.35
54.87
38.42
79.67
6.49
4.69
184.14
354.34
1996
37.96
2.01
68.42
67.58
12.39
4.03
154.43
-118.48
1997
701.38
29.71
65.20
70.89
10.95
9.60
186.35
485.32
1998
572.84
7.80
26.19
110.22
10.58
25.03
179.82
385.22
Notes:
(1) To Statutory Corporations, (2) Commercial Statutory Corporations, (3) +net of all taxes
Source: B. Kaluwa (1998), Economic Reports, various company Annual Reports
Total financial flows from central government to statutory corporations include “grants and transfers” on the recurrent budget as a large item (representing 99.9% of the total in 1998), and net long term lending on the development budget as a minor item. Return flows to central government include consolidated tax payments from commercial statutory corporations plus tax payments by large corporations “divested’ by central government and its agencies, which have since been listed on the Malawi Stock Exchange.
Although the picture presented in Table 5.1 incorporates trends which are not due to the Privatisation Programme it still allows a number of observations:
- The largest of divested companies (SUCOMA and CBM) have individually been associated with larger tax payments on a consistent year to year basis and cumulatively higher than all the commercial statutory corporations from 1996 although for CBM this trend pre-dates the Privatisation Programme.
- The trend of tax revenues from SCs has been erratic compared to those of the four listed companies and a major culprit is likely to be capital investment costs/revenue structures for the larger infrastructure SOEs such as ESCOM and the Water Boards
- The trend in the total net flows dominated by flows to statutory corporations which still represent large outflows towards that sector despite the large gains made from divested companies implying a persistent fiscal drag from subsidized SOEs.
From the table and accompanying statistics, the average share of flows to SOEs in total government expenditure has gone down since 1996 to 3.02% from 5.26% between 1987 and 1995 and implies a lowered burden on the government. Nevertheless there appear to have been some compensation effect since their share in total domestic credit has gone up from an average of 2.39% in the earlier period to 6.71% after 1996. This represents some sort of switching effect from dependence on government to market dependence which itself may be a sign of inadequate internal revenue generation coupled with heavy investment requirements.
5.2.2. Use of Privatization Proceeds
According to statutory provisions, the proceeds of privatization are held in the Privatisation Revenue Account for use in “funding the direct costs of the Commission and the Privatisation Programme, funding the restructuring public enterprises to be privatized including payment of retrenchment benefits, …” Among the uses of potentially contentious issue has been the pre-empted in the sense that residual revenues from this one-off exercise, after privatization related expenditures, could also be used in one-off development projects, rather than government recurrent expenditures (B Kaluwa, 2000).
5.2.3. Malawian participation and Ownership De-concentration
The overall assessment of the privatization programme shows that there has indeed been a commitment to relinquish government control. According to figures presented by World bank (World bank Reports, 1998/99), by 1997, 86% of privatization transactions involved transfers of the majority ownership to the private sector, 64% of the transaction involved shares while much of the rest involved asset sales.
Malawian participation too has been fulfilled. When we look at statistics of the first 38 transactions, about 50% involved Malawians as new owners, concession holders, or shareholders while 13% involved a mixture of Malawians and foreigners and 37% involved only foreigners.
Politically conscious decisions have been made to affect share-ownership, sales and asset transfers to special interest groups namely: tobacco growers and employees in the case of Auction Holdings Ltd; growers in the case of the former Kasinthula Rice Scheme and the Smallholder Coffee Authority; management buy-outs in cases of Mpwepwe Boatyard and New Capital Dairy (B Kaluwa, 2000). The major problem has been that Malawian participation could not be guaranteed in all cases of privatization despite stated preferences and softer loans. Part of the reason could be thin domestic financial capital base and management capacity, which have in a number cases contributed slow uptake by successful Malawian bidders. These problems have influenced the role of foreign ownership which has been beneficial in terms of providing foreign linkages for investment capital, technology, management and marketing in different available sectors.
5.2.4. Impact of Listed Companies on Capital Market Development
Privatisation has been a big boost to the development of capital markets in Malawi. Malawi has been a capital scarce economy and an obvious outcome of privatization has been a good base for stock exchange activity. This can be a catalyst for foreign investment inflows although so far these have not been large due to small capitalization and an inflationary environment. Privatisation boasts of about MK10 billion of its capitalization in the Malawi Stock Exchange. As can be seen from Table 5.2 below, by 1998, barely three years after the commission was put in place, the firms divested under privatization accounted for 73% of the stocks listed on the Malawi Stock Exchange.
Table 5.2: The Impact of the Privatisation Program (PP) on MSE Capitalisation
Company
Capitalization (MK)
Privatisation Program Companies
Commercial Bank of Malawi
1130.00
NICO
170.00
PIM
174.85
SUCOMA
4054.51
Total PP
5529.36
Other
BL
143.91
PCL
1981.91
OML
378.91
Grand Total
8034.09
PP/Grand Total (%)
73.54
Source: MSE
5.2.5. Employment
Looking at 20 mixed firms that had privatized (and were able to supply the information) by 1998, there was an 11% decline in employment for manufacturing firms (B Kaluwa, 2000). This is however tricky because most proponents of privatization look at this as temporal. It should be noted that post-privatisation employment changes reflect empowerment of management to effect changes that reflect commercial discretion so that from the enterprises perspective cutbacks can be in their best interest. Overall for the 20 firms, there was 55% rationalization of employment.
****
There are several factors this report could go into where privatization has been assessed and impact quantified. These include Import Substitution and Exports, Number of Products / Services changed, Debt/Equity Performance, New Investment and Technology, Staff performance and Staff benefits, Profitability and Efficiency Performance. However all these look at company level performance. The studies that link these micro performances to national socio-economic factors which the World Bank was trying to address when they came up with the initiative are hardly available. The next section attempts to look at these national areas that have been affected by privatization, through a discussion.
5.3. Discussion – has privatisation achieved its objectives?
Did privatization achieve its objective? At firm level there appears to be some indication of an improvement in performance. However, when one looks at national level with the fact that The World Bank’s core mandate is to eradicate poverty, there is some doubt that privatization achieved its goal. Privatisation, a central World Bank policy, should be able to contribute to this goal. Malawi’s indicators have gotten worse since liberalization and privatization came in, though these are not the only factors that impact on poverty indicators. The per capita income has gone down from $210 in the early 1980s to $170 in the late 1990s/early 2000. Obviously, the World Bank’s analytical framework is inconsistent, and damaging outcomes on privatization are still emerging.
ADMARC and Agricultural Sector
Let’s take for example, one of the sensitive areas which have received a lot of criticism from the civil society, that is, the proposed privatization of ADMARC, an agricultural marketing board. The World Bank has been demanding the commercialisation of the Malawian agricultural marketing board as a condition of its latest structural adjustment loan. Actually, the privatization of the state marketing board in Malawi (ADMARC) has been an objective of the World Bank for 10 years. It represents a central element in an approach to agriculture that holds that full liberalization of the sector will be best for poor women and men. This approach has been increasingly questioned in Malawi and other countries in the region, particularly in the context of the recurrent food crises. Many commentators believe the full liberalization of other elements of the agriculture sector under the Bank greatly contributed to the cause of the food crisis and the subsequent deaths in 2002.
Malawi’s economy relies on agriculture. State intervention in the agricultural sector in Malawi dates back to as early as 1926 when the colonial government established the Native Tobacco Board. Two more boards were later established in 1949: the Cotton and Maize Control Boards. In 1956, the three boards were merged to form the Agricultural Production and Marketing Board, which was renamed Farmers Marketing Board in 1962. In 1971, the Agricultural Development and Marketing Corporation (ADMARC) was established to replace the Farmers Marketing Board. Its main mandate was to market agricultural inputs and outputs, but was also allowed to make investments in anything that would contribute to the development of the economy.
Until the late 1970s and early 1980s, ADMARC performed reasonably well (Scarborough 1990) in terms of coverage. In particular, it was able to provide assured and reliable markets for smallholder produce in most remote areas. Further, it paid farmers cash on delivery, subsidized the cost of inputs, and subsidized the consumption of maize and rice. Between 1971 and 1979, ADMARC made about MK181.9 million from its marketing activities in the small-holder sector (Kydd and Christianssen 1982). This money was used to cross-subsidize the cost of inputs to small-holder farmers, consumption of maize and rice by food-deficit and urban households, and making investments in other sectors of the economy.
Towards the late 1970s, ADMARC started facing financial difficulties. The literature identifies a number of factors, both internal as well as external, that were responsible for ADMARC’s problems. Internal factors have included poor management of the corporation, mainly due to its large size and poor investment policies. On the other hand, external factors have included bad weather, poor pricing policies by the government, and increased transportation costs due to civil war in Mozambique that led to the closure of Malawi’s traditional route to the sea. Increased political interference played its part.
As ADMARC was going through financial problems, the economy of Malawi as a whole also found itself in a crisis. When the SALs came in, not surprisingly, ADMARC was one of the targets of reforms. Indeed, since then, the corporation has undergone various changes. These have among other changes, included market liberalization, a phased removal of input subsidies, and rationalization. ADMARC is on the list of current privatisations.
After all the reforms, including partial commercializing ADMARC and closing some of its outlets, several problems have occurred. Oxfam Study (2002) identified some of these as:
(a) Although private traders were allowed to complement the marketing activities of ADMARC, a problem still exists in the sense that these private traders find it difficult to go to some remote areas due to poor roads. Thus, some farmers in areas where ADMARC withdrew have found it difficult to sell their produce and to buy food and inputs. This poses a problem to the government since it has a duty to ensure that these areas have access to markets for produce, food, and inputs. Consequently, ADMARC has found itself being called upon to service such areas. But since government has to support ADMARC's commercialization programme for the benefit of World Bank, one reality it has had to face is that if ADMARC were to make a commercial decision when operating in these areas, the poor would be adversely affected. For example, if ADMARC were to supply maize to food-deficit households in such areas, the commercially viable price would be beyond their reach. The government has therefore entered into memoranda of understanding with ADMARC to the effect that it will undertake to pay ADMARC for the costs it incurs while performing such social roles on its behalf. However, the problem that still remains is that in most cases, the government has not lived up to its obligations and separating the social role is not easy.
(b) Related to the problem discussed in (b) above, is the fact that a cost-effective mechanism is not yet in place for the supply of food to food-deficit areas. For example, sometimes ADMARC moves maize from one corner of the country to another during the buying season, only to be asked to transport it to another far corner of the country during lean months. But as already mentioned, the government usually does not fully reimburse the transport costs that ADMARC incurs in undertaking such operations.
(c) Certain areas of the country, such as Likoma Island, are perpetually food-deficit. But there is no long lasting solution to ensure that such areas have access to food at reasonable prices, but without jeopardising the financial position of ADMARC.
(d) The commercialisation programme that ADMARC is undertaking is in some cases being frustrated by political interference. For example, even when ADMARC feels that the closure of a certain non-viable market will not adversely affect the poor, politicians usually resist the move because they fear that it will be politically costly. A case in point is one where a suggestion by ADMARC to replace a permanent market with a mobile one is resisted simply because of the view that development is non-existent unless one can see a permanent physical structure.
This is one area that gives some true colours to privatization at grassroots levels. A number of factors are not taken into consideration as international institutions give their conditions. Mostly, these have to do with poor understanding of the local and remote situations, knowledge of the infrastructure available and real levels of poverty.
Privatization of Utilities (Water)
Privatization of utilities is another case in point where there have been a lot of blunders in a lot of African countries.
Every day 30,000 children in the Third World die of preventable causes. Many of them could be saved if they had access to safe water. The World Bank argues that governments in impoverished countries have to privatize their water supply and distribution systems if they are to get the efficient delivery of water that is needed.
On the face of it, the argument makes sense. The adequate supply of water and other public services is too often frustrated by inadequate funding, inefficient bureaucracy or lack of political will. Promoters of private ownership say it brings investment and cost-effective service.
Experience and common sense say otherwise. Private investors aren't attracted by poor and rural communities. Any improvements that might come with private ownership are in areas that generate profit. Private water, telecommunications and electricity companies tend to focus on efficiency in collecting tariffs, but not on improving service, though it can be argued otherwise. In most cases, these companies will ignore long term major investments, and any investment is transferred to the customers. Costs of services usually leap up quickly, annoying middle class and wealthy customers but potentially in most cases leaving the poor without service at all.
People in affected communities do not have a voice in how or if they want their services privatized. People in impoverished countries want efficient services, sometimes even if the cost is higher as lack of services can carry hidden costs (especially in utility services). In some, privatization may be the way to go. They need to be allowed to choose if it is appropriate for them.
Looking at number countries in Sub-Saharan Africa, high prices and disconnections must mean that the poorest segments of society are likely to be the main losers from the privatization process. However, the privatisation process can also be helpful if the SOEs are very inefficient and do not provide the services at all to the poor, who cannot afford any alternatives or backup. In certain key sectors, like water, if privatisation leads to increases use of unsafe water sources, the consequences will be disastrous for public health (Kate Bayliss, 2001).
5.4. Solutions / Alternatives
Liberalization era came with a lot of unrealistic proposals in Malawi. For example, in health, user fees were suggested putting the majority of the population in difficult situation because they could hardly afford the services. Deregulation of the health sector too has resulted in deteriorating public healthcare services.
Repercussions due to privatization of water have been obvious in a number of countries. Malawi’s population that has access to clean water is about 50%. The privatization process of water sector led into some problems as early as 2001. In May 2001, 350 water workers were sacked for strike action. Workers were protesting at poor wages (most earned about $50 a month) and working conditions, as the company started implementing “stringent measures” to be more effective. Some employees were subsequently rehired but to regain their jobs, the workers had to sign a letter agreeing not to strike again and accepting their previous pay and working conditions.
Other utilities like telecommunications and electricity equally threaten the countries development goals if they go in private hands. Over 60 percent who do not have access to electricity can forget it should the electricity company go into the wrong hands. Nevertheless, with the current standing, there is very little effort by the SOEs and the government in improving the status.
Indeed private sector has a role in the delivery of public services, in particular, where capacity was lacking for extension of services. However, long-term concessions and splitting up of agencies were not seen as part of the private sector’s role. The state should maintain overall control and ownership for provision of services. In terms of different alternatives, below are some suggestions for some of the important sectors.
Joining Campaigns
Opposition to water privatization has taken place across the globe. Table 5.3 below lists major cases where privatisation was opposed with some definite degree of success. A number of campaigns are continuing, with no final outcome yet visible. However the fact that the campaigns are still going demonstrates a degree of success – Brazil was close to privatising much of its major cities’ water in 1999, for example.
Table 5.3: International campaigns against water privatisation
Country
City
Year
Type
Poland
Lodz
1994
Privatisation prevented
Honduras
Honduras
1995
Privatisation prevented
Hungary
Debrecen
1995
Privatisation prevented
Sweden
Malmo
1995
Privatisation prevented
Argentina
Tucuman
1996
Termination and reversion to public
Germany
Munich
1998
Privatisation prevented
Brazil
Rio
1999
Privatisation prevented
Canada
Montreal
1999
Privatisation prevented
Panama
1999
Privatisation prevented
Trinidad
1999
Termination and reversion to public
Bolivia
Cochabamba
2000
Termination and reversion to public
Brazil
Limeira
2000
Incomplete termination
Germany
Potsdam
2000
Termination and reversion to public
Hungary
Szeged
2000
Incomplete termination
Mauritius
2000
Privatisation prevented
Thailand
2000
Termination and reversion to public
USA
Birmingham
2000
Termination and reversion to public
Argentina
BA Province
2001
Termination and reversion to public
France
Grenoble
2001
Termination and reversion to public
Brazil
current
Continuing campaign
Ghana
current
Continuing campaign
Indonesia
Jakarta
current
Continuing campaign
S Africa
current
Continuing campaign
Uruguay
current
Continuing campaign
Source: David Hall, 2001, South Africa Labour Bulletin
There have also been a number of effective campaigns against water privatisation in sub-Saharan Africa. Two good examples are South Africa and Ghana.
South Africa
Water privatisation has been strongly and effectively opposed in South Africa (see above). These protests had an impact beyond national borders, affecting the privatisation of water in Mozambique. When the water privatisation contract award was first announced in September 1999, it was reported that Mozambican Public Works and Housing Minster, Roberto White, promised that not a single one of the country's current 850 workers will be retrenched or otherwise dismissed. This was described as an attempt to ”head off looming labour union protests” following concerted union protests in South Africa that have held back commercialisation schemes.
Ghana
There has been well-organised and effective widespread protest against the planned privatisation of water in Ghana. This has been dominated by the Integrated Social Development Centre (ISODEC), a Ghanaian NGO. The campaign has been reinforced by research from Christian Aid and benefited from widespread international support from academics and NGOs. Many of these participants have not protested against other water privatisations so the level of support must be a testament to the success of ISODEC in bringing the issue to international attention.
6. CONCLUSION AND RECOMMENDATIONS
Privatization is now widespread in industrialized, developing and transitional economies. The World Bank has played a key role in the implementation of privatization in low-income countries, attaching privatization to aid disbursements and promoting a pro-privatization culture.
The World Bank’s core mandate is to eradicate poverty. Privatization, a central World Bank policy, should therefore contribute to this goal, and is expected to do so by reducing poverty through the development of the private sector. In Malawi, the benefits of privatization mostly exist at company levels. The linkages to the poor and marginalized are weak or absent in some cases. The poor, who are supposed to benefit are getting worst outcomes of privatization, consequently affecting overall development negatively. However, despite all this, privatization is still pushed at the policy level.
According to this paper, however, the status quo has also got several weaknesses. Most SOEs have been performing below standard, with inefficient use of the government subvention that would have benefited the poor. Political factors also come in, where disconnections do not take place when people connected to the government are involved. Furthermore, sometimes the SOEs have been used as channel to siphon funds for the ruling political party’s activities.
Overall, privatization, as currently conceived by policy makers, will not help and may be detrimental to development prospects. Privatization policy goals must be reassessed, based on a more realistic perspective, and in particular there must be examination of what privatization, as opposed to alternative measures for public sector reform, can provide. There is need for proper and detailed cost-benefit analysis to guide restructuring processes, and to determine the public interest. More importantly, this analysis provided the basis for engagement between government and labor. Unfortunately, such studies have not been comprehensive as countries sometimes go into hurried privatization.
Recommendations, therefore, include:
· The government of Malawi should revisit the contracts made with the Bank, and change conditions after proper consultations with different stakeholders including civil society. At the same time, the World Bank and IMF should stop requiring privatisation of public services and utilities as a condition of loans.
· Reform strategies should start with assessing the strengths and a weakness of an enterprise in the context of the specific national and regional circumstances - not with the premise that private is best.
· Governments and donors should look at examples of best practice in public as well as private provision. Advisers and consultants need to be selected from the best performing service providers – not from consultancies who depend on the World Bank for a large proportion of their fees.
· Reform options should always include a plan for restructuring within the public sector. This and other options then need to be evaluated in an open and transparent way, using a fair basis for comparison.
· Effective regulation of private companies requires, first, clear and quantifiable objectives (for example, technology transfer, management and financial systems development, construction etc); second, adequate resources for monitoring and enforcement. If the capacity for this is lacking, then privatisation will only create a new set of problems.
The civil society needs to continue fighting the rights of the consumers in either case: where the SOEs are still in control or privatisation has taken place. We can say no to privatisation, but this may not improve the services. There is need to keep up pressure for improved performance among the service providers.
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Appendix 1
PRIVATISATION POLICY
Introduction
In this policy document commercial public enterprises are defined as those entities owned directly or indirectly by Government which by the nature of their activity are commercially oriented and have or should have financial autonomy. These encompass statutory corporations, trusts, authorities, treasury funds and limited liability companies in which the Government directly or indirectly has a shareholding.
It is recognised that efforts to promote agricultural and industrial development and increase the standard of living of the indigenous population through market intervention and establishment of public enterprises have not met with expectations. The Government of Malawi, taking into account the legacy of past inefficient interventions, has adopted a policy of liberalization of the economy and move to market based incentives and allocation of resources. In accordance with this policy, the Government has decided to divest its interests in commercial public enterprises and encourage and promote the private sector. Ultimately, the Government will seek no role in the competitive market beyond that of neutral arbiter.
Objectives of Privatisation
The declared policy of the Government of Malawi is to diminish the size of the public enterprise sector through privatisation with a view to:
Foster increased efficiency in the economy;
Increase competition and reduce monopoly in the economy;
Promote participation by the Malawian public in enterprises; and
Raise revenue for the Government.
By realizing these objectives, the Government will create an economic environment conducive to private sector development and also free public resources for investment in infrastructure and social programmes.
Institutional Arrangements
A "Public Enterprises (Privatization) Act" was passed by Parliament in March 1996 and it was assented to by His Excellency the State President on 17th April 1996. The Act which sets out the objectives and guidelines for the privatization programme also establishes the institutional set-up for the execution of the privatization programme.
The Privatization Commission shall be the sole authority in Malawi to implement the privatization of the direct or indirect government ownership of any public enterprise. Its functions include, but are not limited to, the planning, management implementation, and control of the privatisation of public enterprises in Malawi. It will also be the duty of the Commission to report to the Cabinet the details of the sale of each public enterprise.
Membership of the Commission includes ex-officio representatives of Government, representatives nominated by each political party represented in the National Assembly, a representative nominated by the Malawi Congress of Trade Unions, and members representing professional and commercial business interests.
A Secretariat of The Privatization Commission has been established comprising an Executive Director and subordinate employees. The Executive Director of the privatisation Commission is responsible for the effective administration and implementation of the provisions of the privatization programme.
Scope of Privatisation
Approximately one hundred and forty public enterprises exist to which should be added some thirty other assets managed by various ministries such as ranches, farms, fish farms and rest-houses.
In excess of one hundred of these enterprises or assets have a commercial orientation and have or should have financial autonomy. These entities will all fall within the scope of the privatization programme, and be included in a divestiture sequence plan prepared by the Privatisation Commission and submitted to the Cabinet for their approval. Some of these entities will need to undergo a 'commercialization' process with a view to preparing them for privatisation and ensuring greater operating efficiency in the interim period leading up to their eventual privatization.
This will entail changing their status to that of limited liability companies and granting them greater autonomy in their day to day management.
Remaining public enterprises, which are not presently considered to have a commercial orientation, will revert to the control of the appropriate ministry. In those cases where there is no apparent need for financial autonomy the enterprise will be absorbed directly into the relevant line ministry. A number of entities which are dormant will be liquidated and any surplus assets sold to private buyers.
Principles of Privatization
The privatisation programme will be carried out in accordance with certain guiding principles. To the extent possible, subject only to limitations imposed by existing rights conferred by shareholders' agreement, for example, pre-emption rights, etc., the following fundamental principles will apply:
Each transaction will be fully transparent to the public at large. In this regard thePrivatisation Commission will publicise details of all completed activities of the privatisation programme.
All investors, irrespective of ethnic group or source of capital (foreign or local) are free to participate in the privatization programme. In order to achieve the objective of increased participation by the Malawian public at large, shares in or assets of certain enterprises may be made available at a discount to citizens of Malawi. Where discounts are available, this fact and the quantum of the discount will be publicized in the invitation for competitive bids and a precondition of the discount being granted is that the shares or assets are subsequently retained for a period of not less than two years.
The privatization process will be fair and efficient. An independent opinion of value will be obtained for each enterprise to be privatised. Full disclosure of the details of the enterprise will be available to the investing public and fair and equitable bidding procedures and criteria for ranking bids will be established and published.
Sales will be primarily on a cash basis. However, mechanisms will be developed to facilitate broader participation by Malawian citizens in the privatisation process.
It is the intention of Government to sell all of its interest in public enterprises and not to maintain a minority position or set any conditions concerning the future operations of a privatised enterprise. In certain exceptional circumstances, where the existing regulatory framework is considered inadequate, Government may with the agreement of parties to the sale of an enterprise, retain a shareholding conferring special rights to, in the national interest; intervene in the operations of the privatized enterprise.
To the greatest extent possible, privatization transactions will be designed to reduce concentration of ownership and avoid creation or maintenance of consumer market monopolies. To this end, Government will not divest unregulated monopolies or grant any privileges or guarantees to purchasers of privatised enterprises.
The Commission may elect to privatise public enterprises in various ways including, but not limited to, a public offering of shares, sales by competitive tender of the shares or assets and business of a public enterprise, management or employee buy-out or, where pre-emption rights exist, negotiated private sale of shares. The Commission may also create and offer for sale additional shares in a public enterprise in order to dilute Government's existing shareholding in that enterprise.
Retrenchment
One of the principles of the privatisation programme is that Government will not set any conditions regarding the future operations of a privatised enterprise including requirements as to number of employees. In privatised enterprises where the number of employees is high, some level of retrenchment may be a prerequisite to being able to operate efficiently in a competitive market.
Where employees are made redundant as the result of privatisation or commercialisation of a public enterprise, retrenchment benefit will be promptly paid to all retrenched employees in addition to any other entitlements (excluding redundancy pay entitlements) provided for in their conditions of service or the rules of the enterprise's staff pension or provident fund.
To protect employees who are retained in the employ of a privatised or commercialised enterprise and therefore not entitled to retrenchment benefit, the newly privatised or commercialized enterprise will be required to give a legally binding undertaking to incorporate in their conditions of service provisions to provide for retrenchment benefits at least equal to those of staff retrenched during privatisation.
Proceeds Of Privatisation
A fund entitled the Privatisation Revenue Account will be established and placed under the control of the Ministry of Finance. The proceeds of the sale of all direct Government interest in public enterprises will be paid into this fund.
In the case of indirect Government interests, a public enterprise selling its interest in another public enterprise may be permitted by the Minister, on the advice of the Commission, to retain all or part of the proceeds of sale with the balance being paid into the Privatisation Revenue Account.
The funds being held on the Privatisation Revenue Account may with the approval of the Minister of Finance, be used for a limited number of purposes, namely, funding the direct costs of the Commission and the privatisation programme, funding the restructuring of public enterprises to be privatised including payment of retrenchment benefits, the remainder of the fund will be applied to projects included within the Government development budget.
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For Comments and Questions, please contact:
Collins Magalasi
Mobiles Malawi: +265 888 826 092 / +265 992 655 467
Email: cmagalasi@gmail.com
[1] Bretton Woods is the term commonly used to mean the International Financial Institutions (IFI) formed at the Bretton Woods meeting after the Second World War. In this report this term is used interchangeably with IFI or IMF and World Bank.
[2] This is more applicable in developing economies and in infrastructure and network industries. See Sunita Kikeri and John Nellis, An Assessment of Privatisation, The World Bank Observer, Vol 19, No 1. 2004.
[3] See Kalonga Stambuli, State Hegemony, Macro Effects and Private Enterprise in Malawi, SIGERE Working Paper 2002/34/pub Econ. Surrey Institute of Global Economics Research. 2002
[4] Seasonal markets are satellite markets of unit markets. They are mobile selling points that can be opened on demand with a temporary sales force. They operate mainly in the harvesting seasons and are mainly used to purchase produce from farmers. Unit markets have permanent structures such as small storage facility and office, with staff. They generally operate throughout the year and buy produce, sell produce and inputs. Parent markets combine permanent storage facilities with an administrative office that oversees unit and seasonal markets.
[5] The full text of the Privatisation Policy is in Annex 1.
