Chapter

8 Parastatal Reform and Privatization in Côte d’Ivoire

Author(s):
Laura Wallace
Published Date:
May 1997
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Author(s)
Jean-Claude Brou

Following its independence in 1960, Côte d’Ivoire opted for a liberal economy that was built around the agricultural sector, especially export crops such as coffee and cocoa, and that actively sought private foreign capital. This policy enabled the country to record a high sustained rate of growth—averaging 7 percent annually during the first 20 years following independence—with a GDP that increased more than 15-fold.

Faced with a desire to diversify the economic base and develop basic infrastructure, yet saddled with a weak domestic private sector, the government adopted a policy of actively supporting economic activity, particularly by creating a large number of public enterprises in almost all sectors: agriculture, industrial processing, distribution, the financial sector, and transportation, to name but a few. The government acted alone or jointly with domestic and foreign investors, as the need arose.

By 1977, there were 113 public enterprises, employing one-third of Côte d’Ivoire’s labor force, using 27 percent of public investment resources, and receiving close to 40 percent of government loans. The high rate of economic growth, buoyed by the surge in international prices for the main export crops, favored the pursuit of this policy of active government participation in production activities. As a result, the number of public enterprises grew steadily year after year, reaching 140 by 1982. But economic trends would soon lead to a change in this policy.

Evaluation of the Parastatal Sector

By the early 1980s, Côte d’Ivoire’s economic situation had deteriorated markedly with the unprecedented decline in world prices for its two main export crops, coffee and cocoa. The economic crisis pointed to significant structural rigidities as well as weaknesses in the management of the economy, which were reflected in a serious fiscal deficit, a high level of overall debt, an unprecedented decline in economic activity and per capita income, and a significant loss of competitiveness.

One of the main reasons for these difficulties was the inefficiency of the parastatal sector and its excessive weight in the economy. An evaluation of the entire parastatal sector in 1982–88 revealed that its total net profits over the period were about CFAF1 39 billion, despite total subsidies of CFAF 568 billion (including CFAF 165 billion for public and semipublic enterprises).2 A more extensive analysis during the same period also revealed that:

  • the subsector in which the government was sole shareholder had total net losses of CFAF 85 billion;
  • the subsector in which the government was majority shareholder had total net losses of CFAF 10 billion; and
  • in contrast, the subsector in which the government was minority shareholder had recorded a total profit of CFAF 134 billion.

Moreover, the subsector in which the government was sole shareholder paid the least taxes but received the most government transfers and subsidies. During the period 1989-91, direct government subsidies to parastatal sector enterprises totaled close to CFAF 330 billion, representing more than 20 percent of tax revenues for the same period.

Why did the public enterprises perform so poorly? The main reasons are the well-known factors mentioned above, which tend to explain the relatively lower economic efficiency of the public enterprises. I would mention in particular the weak management systems, very low productivity levels, a certain amount of rigidity in the regulation system, the existence of uncompetitive contracts, and the lack of effective controls within the enterprises.

The government tried to deal with the problem by attempting to reform the parastatal sector, as part of a number of structural adjustment programs it undertook in the 1980s. Several public enterprises were liquidated, while others were merged; restructuring and rehabilitation programs were introduced; and economic and financial performance indicators were established. However, although a slight improvement was recorded, the results remained below par.

Overall Economic Performance

Of course, public enterprise reform efforts must be viewed in the context of what was happening to the economy as a whole. During the period 1988–93, per capita GDP declined steadily by an average of 5 percent a year, largely as a result of weak economic performance and a high population growth rate (about 3.8 percent). Furthermore, in 1993, macroeconomic imbalances reached unsustainable levels: the overall fiscal deficit was close to 13 percent of GDP, the balance of payments current account deficit stood at 11 percent of GDP, and outstanding external public debt was about 173 percent of GDP.

Following the 50 percent devaluation of the fixed parity of the CFA franc—the common currency of the seven members of the West African Economic and Monetary Union—with the French franc in 1994, the authorities undertook an ambitious stabilization and economic recovery program. The program included a series of budgetary and monetary measures, along with various structural measures aimed at bringing the economy back on the road to strong, sustainable economic growth, particularly by restoring its competitiveness.

It is essential to remember that the strategy adopted by the authorities was twofold: a more efficient use of public resources, notably by means of more consistent expenditures in the social sectors, such as education and health; and a greater role for the private sector in economic activity, particularly through privatization.

Foreign and domestic trade were broadly liberalized, nontariff barriers were almost totally eliminated, and the number of goods and services subject to price controls was significantly reduced. In addition, a new, more flexible labor code and an investment code were introduced to offer greater incentives. Various sectors of the economy were liberalized. The public enterprise sector was restructured, and a major privatization program was begun. As a result, economic performance in 1994 and 1995 was satisfactory to say the least. Economic growth stood at 1.8 percent in 1994 and rose to 7 percent in 1995—and should hold at that level in 1996. Inflation was reduced considerably, down to 7.7 percent in 1995 from 32 percent in 1994. The current account deficit was narrowed by 10 percentage points to 4 percent of GDP in 1995, and the overall budget deficit was reduced significantly, to less than 3.5 percent of GDP.

Restructuring Public Enterprises and Privatization

In the parastatal sector, the policy of the authorities has focused on two complementary aspects: completely restructuring the institutions and public enterprises that would remain in government hands, and divesting the government’s interests in the productive sector through privatization.

Public Enterprise Reform

In this area, the primary objective was to boost the effectiveness of the enterprises, particularly by increasing management autonomy and improving the auditing and monitoring of their administration and financial and technical management. To this end, a detailed database on these enterprises was created, along with a system for reporting key financial indicators on a quarterly basis. In a general policy statement on the parastatal sector, the authorities reiterated the principle of strengthening internal and external controls of public enterprises and establishing financial equilibrium and profitability targets.

As a result, performance contracts are to be negotiated between the government and public enterprises. Measures to streamline the operations of public enterprises are to be introduced—including merit pay, monitoring of public enterprise investments and their consistency with the public investment program, monitoring of net bank credit to the parastatal sector, and elimination of cross-arrears between public enterprises. Moreover, specific restructuring plans have been prepared and implemented for the largest public enterprises.

Privatization

The government’s most significant and successful efforts have taken place in the privatization program itself. This program affects about 60 enterprises and covers almost all economic sectors—including infrastructure sectors such as electricity, telecommunications, the railroad, petroleum, and agricultural processing.

The program was initiated in 1991 and stepped up significantly in 1994–95. Since 1991, 31 public enterprises have been privatized, generating CFAF 45 billion in revenue—which amounts to 7 percent of nontax revenue during the period. In addition, the privatizations allowed most of the enterprises concerned to undertake restructuring programs and become profitable again. These privatizations took place chiefly in the electricity, petroleum, railroad, and rubber processing sectors.

The privatized enterprises invested significant amounts in rehabilitation and renovation to benefit from the rising aggregate demand that resulted from the economic recovery that began in 1994. A recent survey of the major privatized enterprises reveals investment levels of over CFAF 58 billion in 1994-95, with investments of CFAF 115 billion forecast for 1996–98. Moreover, the improved general economic environment has enabled the privatized enterprises to increase the number of jobs created by more than 6 percent.

Thus, privatization has not only reduced the weight of these enterprises on the government by reducing subsidies but it has also contributed to public resources in the form of profits. The electricity sector, which went from a chronic deficit to a profit in the first year following privatization, is a good example of the advantages of privatization.

Indeed, whereas the public electricity company had recorded a high cumulative deficit with no returns to the state, privatization has enabled the company to show a cumulative net profit of CFAF 5.5 billion and to return almost CFAF 80.2 billion to the government in the form of royalties during 1991-94. This financial improvement—in part thanks to a bill collection rate of 98 percent, compared with 80 percent previously—was also accompanied by an improvement in the quality of service (notably, a reduction in the length of power cut per year and per client from 50 hours to about 20 hours).

Lessons on Privatization

When we consider what lessons can be drawn from the privatizations in Côte d’Ivoire, five essential points come to mind.

First, as in most countries that have implemented successful privatization programs, a balanced macroeconomic environment is essential. In the case of Côte d’Ivoire, the existence of an overvalued real effective exchange rate during 1987–93, along with fiscal imbalances and balance of payments disequilibria, constituted a serious barrier to the implementation of the privatization program. Between 1990 and 1993, only nine public enterprises were privatized, generating barely CFAF 4.5 billion in revenue.

However, following the realignment of the parity of the CFA franc, and the implementation of budgetary and monetary measures—as well as measures to liberalize the economy and increase competition—the privatization program took off. During 1994–95, 22 enterprises were privatized, bringing in close to CFAF 40 billion in revenue, or more than nine times the revenue mobilized in 1990–93. In 1995, privatization receipts reached CFAF 32 billion, or 3.5 percent of total tax revenue. Estimates for 1996 give privatization receipts of about CFAF 40 billion, equivalent to 4 percent of total tax revenue.

Thus, an appropriate macroeconomic framework, by altering the expectations of potential investors, especially as regards the profitability of investments, is key to the success of a program of structural reforms, and especially a privatization program.

Second, privatization must take place in the context of a competitive market so as to ensure an optimal allocation of resources. However, in some sectors, especially infrastructure sectors such as electricity, the size of the market in developing countries does not yet allow for the existence of a competitive market. In Côte d’Ivoire, to take this into account, an agreement was signed between the government and the private operator of the electricity network defining their respective responsibilities, especially on establishment of the rates.

Third, privatization must have full political support as well as the support of a majority of the people. Political support is a decisive factor for a privatization program, especially when the targeted enterprises are deemed to be strategic or closely linked to the national interest—such as in the electricity, telecommunications, or other infrastructure sectors. In Côte d’Ivoire, this political support has resulted from the endorsement of privatization by the highest levels of government and the passing of a law by the National Assembly. Furthermore, particular attention must also be paid to the perception of the role played by foreign investors purchasing national public enterprises. In Côte d’Ivoire, the solution was to encourage partnerships between domestic and foreign private operators.

Public support, for its part, is closely linked to what might be called the democratization of the privatization process. Privatization is unlikely to succeed if it is perceived to be a way for a minority, be it domestic or foreign, to appropriate the public enterprises. Public support was not achieved in Côte d’Ivoire until the first privatization operations on the stock exchange allowed a large number of small domestic investors to purchase shares in the privatized companies, particularly the electricity company. Indeed, almost systematic reservation of a portion of shares for small national investors was a critical element. Through such participation, privatization becomes a reality and social acceptance becomes possible.

Another aspect of public support that should be mentioned is the improvement in the quality of service following privatization. For example, after an initial negative reaction, the privatization of the electricity sector was accepted, mainly because of the improved service that followed.

Fourth, the prior definition of a clear, transparent, and rigorous process is also a prerequisite for successful privatization. Any deviation from these principles, however small, can slow down and even obstruct the privatization in two ways:

  • the perception that the “deck is stacked” can discourage some potential investors; and
  • a very negative public reaction to a perceived lack of rigor and transparency in the process—and concomitantly, an “undervaluing” of the government’s shares and assets—can also slow down the process.

Fifth, it is essential to be flexible and pragmatic in implementing privatization. Despite the existence of a predetermined, prioritized schedule, the privatization program must be implemented flexibly, taking into account the interests of the investors. In Côte d’Ivoire, the privatization operations in the rubber processing and railroad sectors were begun at the specific request of investors interested in developing these sectors.

Conclusion

The existence of efficient public enterprises and privatization are today an international reality. The globalization of the economy makes the implementation of a privatization program inevitable. If well designed and well implemented, privatization can help developing countries improve the performance of their economies. In Côte d’Ivoire, despite the difficulties encountered, the process has enabled the country to make important advances in the area of structural reform, particularly in the public enterprise sector. It is expected that the privatization process will be completed in 1997.

1US$1 = CFAF 302.95. This is the exchange rate at the end of 1988. After the devaluation in 1994, the exchange rate has hovered around US$1 = CFAF 500 during the period 1995-96.
2The parastatal sector includes public and semipublic enterprises, as well as autonomous public agencies (Etablissements publics).

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