Chapter

7 What Next for African Parastatal Enterprises?

Author(s):
Laura Wallace
Published Date:
May 1997
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Author(s)
John Nellis

In contrast to the rest of the world, where the economic and financial weight of parastatal corporations is declining, parastatals in Africa still account for a large amount of economic activity (as measured by GDP), nonagricultural employment, and investment. It is certainly true that the total number of African public enterprises has fallen considerably over the past decade as more and more African governments have undertaken privatization and divestiture programs. The World Bank estimates that the total number of public enterprises in Africa has decreased by as much as a third in the past decade.1 Nonetheless, because the vast bulk of African firms privatized have been small, low-value units, African parastatals remain highly important economic, financial, and social actors (see Figure 1).

Figure 1.African Parastatals Still Play a Major Role …

Source: Ahmed Galal and Mary Shirley, Bureaucrats and Business: The Economics and Politics of Government Ownership, World Bank Policy Research Report, Statistical Appendix (Washington: World Bank, 1995), pp. 268-97.

1 1991 data for all three panels.

The continuing large size would not be a problem if African parastatals were performing well—but they are not. All over the continent, parastatals have not lived up to the expectations of their creators and funders. Estimates are that African parastatals, even with the recent privatizations, still consume about 20 percent of available human and physical capital but contribute only about 10 percent to value added. Regrettably, examples of poor performance are not hard to find:

  • In Kenya, government calculations show that the very large amount of capital invested in the parastatal sector over the past 30 years has yielded a rate of return of zero.
  • In Ghana, the former Minister of Finance, speaking of parastatals, was quoted as saying in late 1994 that “huge sums of money are placed at the disposal of the public sector annually without the money yielding any dividend.”
  • In Burundi, over a three-year period, total net flows from the government to the parastatals averaged 12.5 percent of total government expenditure—and one should recall that the original justification of parastatals was that they would generate resources for the government, which would use the surplus to develop the rest of the economy. Now their persistently poor financial performance is justified for noneconomic reasons, such as employment generation and maintenance or regional development.
  • A 1993 study of five African countries showed that total direct transfers to parastatals from governments ranged from 14 to 22 percent of government expenditures. Indirect flows—cheap credits, forgiveness of customs duties and taxes, and conversion of debt to equity—amounted to an additional 14 percent. In these cases, more than a quarter, and much more in some instances, of all government resources were used to support a small number of companies, employing a tiny fraction of these countries’ workforces.
  • In Uganda, subsidies in the 1990s have averaged $180 million a year—five times the spending on health—while the return flow to the government has been tiny. The sum transferred is equal to $6,000 per parastatal employee per year, over and above the wage bill.

The conclusions are all too evident: too many African parastatals still lose money, produce an insufficient quantity or a poor quality of product—sometimes both—and soak up human, physical, and financial resources that could be better applied to other, pressing societal needs. All this has long been known. The question is, what can be done to resolve these problems?

For at least 20 years, African countries, with and without donor assistance, have struggled to impose reforms and performance improvement measures on their parastatals. They have tried to:

  • impose sound accounting, financial, and management information systems;
  • clarify objectives and make commercial profitability a prime goal (entailing the elimination of noncommercial objectives, or the transparent costing-out and reimbursement of the firm for such activities);
  • give managers the autonomy and incentives to achieve the assigned objectives (meaning the power to hire and fire, to set prices, to buy inputs from least-cost suppliers, to locate plants according to commercial, not social criteria, etc.);
  • create supervisory systems allowing the owner to hold management accountable (setting out clear objectives, measuring management performance in terms of the objectives, rewarding success, and sanctioning persistent failure); and
  • wherever possible, allow and encourage competition for the firm, ideally without barriers to entry or exit.

But after years of effort along these lines (I personally have worked on attempts to install such programs in Côte d’Ivoire, Kenya, Madasgascar, Niger, Senegal, Tanzania, and Togo)—and despite a few successes—these reform packages have produced only modest or disappointing results. Why is this so? Because they tend to be only partially put in place, and even when put in place, the packages tend not to endure—they do not last. Thus, enterprise performance has rarely improved, or at least not by enough to make a major difference. In particular, financial performance has remained weak, continuing to pose a great burden on strained government budgets and on the banking system. Moreover, returns on government investment are woefully low and in some cases negative and utilities still do not provide the efficient, reliable, cost-effective services that are so necessary for increased investment and growth.

Progress Report on Privatization

Disappointed with the mediocre results of reform, African governments began, in the mid-1980s—often prodded by donors and the international financial institutions—to turn to privatization. At first glance, African privatization accomplishments look impressive. At least 2,000 African divestiture transactions were reported by the end of 1995, with a total value of more than $2 billion2—about one-third the total estimated number of parastatals in the region. But 66 percent remain in the public portfolio. Moreover, progress has been limited to a rather small number of countries; one-fourth of all reported transactions took place in just one country—Mozambique. If one adds Angola, together they account for almost 40 percent of all divestitures. If one also includes Ghana, Guinea, Kenya, Nigeria, Tanzania, and Zambia—just eight countries account for two-thirds of all African privatizations.

But much more important than the sheer numbers sold or retained is the fact that the majority of firms divested have been small and medium-sized companies. The big parastatals containing the bulk of state assets—electricity, telecommunications, mines, transport, ports, and refineries—tended until recently not to be touched by the privatization process (Figure 2), with a few notable exceptions such as SODECI, the water utility company in Côte d’Ivoire. Kenya offers an interesting case in point. Despite the efforts over the past ten years of various task forces, working groups, parliamentary commissions, and a parastatal reform and privatization program, the percentage of state assets divested has been very small; prior to 1996 and the partial sale of Kenya Airways to KLM, only one or two big companies were divested. The economic weight of the Kenyan state is only slightly less today than it was in 1985.

Figure 2.Sub-Saharan Africa Lags the World in Infrastructure Privatization

Source: Michael Kerf and Warrick Smith, Privatizing Africa’s Infrastructure: Promise and Challenge, World Bank Technical Paper No. 337 (Washington: World Bank, 1996), p. 6.

Why has this been the case, not only in Kenya, but also in so many other African countries? The reasons are several.

  • African governments are fearful that privatization will increase unemployment.
  • African governments are fearful that the only buyers of divested firms will be foreigners, the domestic elite well-connected to the political system, or a particular ethnic group—and in many cases none of these are regarded as acceptable or optimal buyers.
  • Some within African governments are fearful of losing their last bastion of patronage and resources (in terms of board directorships, access to cheap loans, employment possibilities for themselves and their constituents, cars, and other perks).
  • Some governments are concerned that the privatization of African industries, and their subsequent operation in freer markets, would lead to the bankruptcy and liquidation of many of these companies. To put it starkly, there is fear that privatization would lead to the de-industrialization of the continent.
  • Other African officials and observers think that while privatization in Africa may eventually be a good thing, they also think that it cannot and should not come about at the present time because of the absence or weakness of local capital markets, and the deficiencies of the court system, the customs office, the tax administrators, or other parts of the administrative system. This is something of a paradox in that perceived weaknesses of the public sector are used to justify keeping activities in that very same public sector.

Faced with these daunting obstacles and perceptions, what can be done to advance parastatal reform and privatization in Africa?

First, we—the African governments and the donor community—can take steps to improve information. Primarily, there must be a better, more transparent accounting of the financial and economic performance of the parastatal sector. If African populations knew precisely how weakly parastatals were performing, the amount of resources they were absorbing, and what activities were being forgone because of these poor operations, they would be much more likely to support reforms. And if investors and the population at large had more faith in the transparency of the transaction process, there would be more public support for privatization.

Second, we can work toward better and more consistently applied policy. Parastatal reform and divestiture do not take place in a vacuum: they flourish and pay off to society when the macroeconomic fundamentals are sound, when the framework for competition is established and enforced, and when the government shows itself to be a credible and reliable partner, providing investors with a stable, predictable business environment.

Third, we must strive for better functioning institutions. Parastatal reform and privatization, particularly of the large, problem-causing infrastructure firms, require that the government have the capacity to negotiate, monitor, and enforce contracts, and where markets cannot be restructured to make competition a prospect, a modicum regulatory capacity needs to be in place. This is easier said than done: developing such capacities will, in many instances, take quite a bit of time.

This is precisely why partial privatization—bringing in the private sector as manager, financier, or part equity owner—is gaining so much popularity in Africa in the last few years. Many governments know that they acutely need efficiency improvements in the big parastatals, but they feel they cannot be sold because of the fear of foreign domination, combined with concerns about deficiencies in the country’s regulatory capacity. In these cases, the mechanisms of management contracts, leases, concessions, and “BOOTs” and “BOOs”3 are becoming more widely used, and justifiably so (Figure 3).

Figure 3.New Forms of Infrastructure Privatization Offer Varied Benefits

Source: Michael Kerf and Warrick Smith, Privatizing Africa’s Infrastructure: Promise and Challenge, World Bank Technical Paper No. 337 (Washington: World Bank, 1996), p.10.

1 For an explanation of BOOTs (Build-Own-Operate-Transfer) and BOOs (Build-Own-Operate), see text footnotes 3.

Policy Prescriptions

The practical implications of this brief resumé are several. First, African governments should not hesitate to privatize those parastatals producing tradable products and operating in competitive, or potentially competitive, markets. To make this policy work requires dropping barriers to purchase by noncitizens or citizens of a supposedly “wrong” ethnic group. It also means avoiding unreasonable floor prices for companies being sold and writing off uncollectible debts that have long been disguised as assets. It will also mean accepting that some parastatals can neither be sold nor kept in the state portfolio, and that liquidation is the only rational solution.

Second, governments should search for all available ways to involve the private sector in the running of the infrastructure parastatals, in particular, the very largest ones with the greatest economic weight. This is starting to happen all over Africa; the process should be vigorously pursued (Table 1).

Table 1.Infrastructure Privatization in Africa Takes Many Forms
SectorManagement ContractLease CentralConcession BOOTDemonopolize BOODivestiture
WaterGabon

Gambia

Mali
Central African

Republic

Côte d’Ivoire

Guinea

South Africa

Côte d’Ivoire

Guinea
ElectricityGabon

Gambia

Ghana

Guinea

Guinea-Bissau

Mali

Rwanda

Sierra Leone
Côte d’Ivoire

Mozambique
TelecommunicationsBenin

Botswana

Guinea

Madagascar
Guinea-BissauBurundi

Ghana

Guinea

Madagascar

Mauritius

Namibia

Nigeria

South Africa

Tanzania

Uganda

Zaire
Sudan
RailwaysCameroon

Tanzania

Togo
Burkina Faso

Côte d’Ivoire

Gabon

Zaire
AirportsTogoBenin

Gabon

Guinea

Madagascar

Mauritania
Cameroon

Mali
PortsSierra LeoneCameroon

Mozambique
Mali

Mozambique
South Africa
Source: Michael Kerf and Warrick Smith, Privatizing Africa’s Infrastructure: Promise and Challenge, World Bank Technical Paper No. 337 (Washington: World Bank, 1996), p. 19.

For an explanation of BOOTs (Build-Own-Operate-Transfer) and BOOs (Build-Own-Operate), see text footnotes 3.

Source: Michael Kerf and Warrick Smith, Privatizing Africa’s Infrastructure: Promise and Challenge, World Bank Technical Paper No. 337 (Washington: World Bank, 1996), p. 19.

For an explanation of BOOTs (Build-Own-Operate-Transfer) and BOOs (Build-Own-Operate), see text footnotes 3.

Neither of these general prescriptions will be easy. But both are essential if Africa is to rebound into sustained growth.

1See Oliver Campbell-White and Anita Bhatia, Privatization in Africa (Washington: World Bank, forthcoming, 1997).
2Ibid., p. 56.
3BOOTs and BOOs are privatization mechanisms that are becoming increasingly popular. BOOT (Build-Own-Operate-Transfer) is a situation in which a long-term concession (normally between 20 and 40 years) is given to a private firm for the exploitation of a particular service or facility. The firm has the responsibility to finance, build, and operate the facility for a given period of time. The private firm also takes property title to the facility in the construction period and transfers it back to the government at the end of the long-term concession. This is often used in cases in which loan guarantees or collateral are required. BOO (Bui ld-Own-Operate) is similar to BOOT, but in this case the property is not transferred back to the government at the end of the concession period.

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