DEVELOPING REFORM STRATEGY

3.1. The Scope of the Public Sector

In many countries the public sector embraces a very large range of activities, organised in a variety of ways. In addition to traditional state activities, it is common to find public sector ownership or control of:

• utilities, such as gas, electricity, water, post and telecommunications;
• local services, such as fire, street lighting, road maintenance and refuse collection;
• health and educational services;
• broadcasting;
• transport, such as railways, bus services, air and shipping lines;
• industries perceived to have a strategic role in the economy, such as banking, steel-making, insurance, mining and commodity production;
• industries or companies brought into public ownership because their private sector performance was considered inadequate;
• activities which grew out of public sector responsibilities and have remained in the public sector through inertia rather than design.

3.2. Setting Objectives — Key Issues

3.2.1. Setting Objectives in General

Agreeing on objectives is a necessary precondition to successful public enterprise reform. Objectives should be publicly discussed, agreed and articulated so that those involved in the process are clear as to what can and cannot be expected. It is recommended that this statement of objectives be in the form of a public document which can serve as a reference to those involved in the process and to the general public.

3.2.2. Problems of Management and Control

Authority and responsibility are often unclear and diluted in public enterprises. Objectives are rarely clear and often conflict with one another. These issues have damaged the commercial effectiveness of public enterprises. In the case of post communist countries, management, though technically very capable, almost totally lack traditional free market “business skills” in the areas of marketing, financial management and human resource management.

Broad interest has developed in structural changes which would: define more clearly the demarcation between public and private activities; enable swifter and better responses to changing circumstances; and promote greater economic efficiency and commercial effectiveness.

3.2.3. Economic Efficiency

Economic efficiency is a key issue in the examination of options for structural change. Structural change may improve technical efficiency by altering the framework of management control and enabling new policies to be adopted by management. Liberalisation can open a monopolised market to competition, which may eliminate cross-subsidisation and bring prices more closely into line with costs.

3.2.4. Political and Social Considerations

Although enterprises sometimes remain in the public sector as a result of inertia, in most cases there is a genuine public interest aspect to their operations. They may have a monopoly position and/or provide an essential service, have a strategic role in the economy, occupy a sensitive position in relation to foreign-owned concerns, or undertake a politically sensitive activity.

3.2.5. Employee Attitude Problem

This is particularly prevalent in post communist economies where years of political indoctrination changed people’s attitudes towards business and work in general. Workers were accustomed to remote and ponderous government ownership. Lack of identification with “the company” resulted in negligent work practices, low productivity, material waste and little pride in workmanship.

3.2.6. Summary

We have drawn attention to the key issues arising from reform and privatization. These issues must be understood and carefully addressed if the reform exercise is to be a success, requiring knowledge, skills and experience which neither the government nor the enterprise may have readily available.

3.3. Resolving Policy Issues and Impediments

Resolution of policy issues and impediments will be necessary, requiring close cooperation with the Executing Agency and others involved in and affected by the process.

3.3.1. Resolving Policy Level Concerns

Governments must balance their legitimate concern to protect national sovereignty with the need to attract foreign investment. A successful strategy for public enterprise reform requires a clear articulation of the role of foreign investment, the range of activities which the Government deems strategic, and agreement on the mechanisms which can protect the government’s perceived interests. Additionally, privatization is typically a threat to vested interests. This produces a range of issues which must be addressed (discussed in Section 7).

3.3.2. Impediments

Impediments will continue to be identified throughout the study. The privatization process must identify possible means of resolving them, including assessment of Government policy, consideration of internal public enterprise issues, identification of supplier and customer concerns, and consideration of political factors that will affect overseas or internal investment or competition.

3.3.3. Evaluating Official Support/Resistance

In the course of the project, the Project Team must form a view on the level of official support for the task of privatization. This involves identifying supporters and potential resistance, negotiating areas of consensus, developing incentives to privatize, and crystallising governmental resolve.

3.4. Evaluating the Investment Environment

Prospects and procedures for increasing private investment should be examined. Policies should be formulated to encourage foreign private investment in those enterprises offered for privatization. The following areas should be evaluated:

• Tax Issues — Income taxes, VAT, capital gains taxes, customs duties, tariffs, excise taxes, withholding taxes.
• Import/Export Regulations — Banned and restricted items, quotas, free trade zones, bonding arrangements, local content requirements.
• Investment and Securities Regulations — Regulations affecting local and off-shore investors, initial public issues and secondary trading.
• Price Controls and Other Market Distortions — Extent of market distortions caused by price controls and other regulatory devices.
• Labour Laws — Existing Labour laws relating to hiring, disciplining and firing workers, pension and health benefits.
• Land Ownership Issues — The right of foreign individuals to control land use or buildings.

3.5. Establishing a Legal Framework

The success of parastatal reform can be enhanced by ensuring a commercial environment which encourages and protects private investment. This typically requires a thorough review of the existing legal and accounting framework. Government must provide and protect workable commercial laws relating to property, contracts, company law, accounting, auditing, banking, creditor’s remedies, debtor’s protection, liquidation, bankruptcy, investment laws, capital markets, securities, labour, taxation, and dispute settlement.

3.6. Promoting Reform

Recommendations will cover each of the critical areas:

3.6.1. Regulatory Environment

Tax issues, import/export regulations, investment regulations, price controls, labour regulations, and land ownership issues.

3.6.2. Promoting a Competitive Environment

Addressing price supports, subsidies, credit guarantees, and government purchasing regulations.

3.6.3. Banking Reform

A systematic program of banking reform should be implemented in parallel to parastatal reform. Often, the state owned banking system will not be in a position to promote the privatization or restructuring of public enterprises. These banks are generally not experienced in lending to private sector borrowers. A complete restructuring of the banking sector is often needed, which would normally include the installation of modern responsive banking systems, comprehensive training, and meaningful central bank supervision.

Admiralty International understands this interdependence. It has developed a range of comprehensive and sophisticated services and products to assist the process of banking reform, including “turn-key” credit systems, treasuries, information technology systems and trade finance departments, as well as training programs covering the full range of banking activities.

3.6.4. Encouraging Small Scale Enterprises

The future economic success of most developing nations lies in the promotion of a robust and diverse range of small scale enterprises. These small scale businesses can be resourceful, resilient and efficient producers. They provide the testing ground from which larger, more efficient commercial enterprises grow. For these reasons, Admiralty International and its associates have targeted small scale enterprise development as a critical part of any successful privatization strategy.

3.6.5. Socio/Political Issues

Significant social, political and structural issues which could impact upon the success of the privatization will be considered as a basis of relevant recommendation.

3.6.6. Public Relations Campaign

The acceptance of a privatization and restructuring project will depend largely on how it is viewed by those affected. Our recommended approach would include engaging a public relations firm with experience in promoting the privatization exercise.

3.6.7. Role of Multilateral Agencies and Donor Nations

The multilateral agencies (such as the World Bank, the IMF, the UN agencies, European Community, etc.) and donor nations can and do play a crucial role in promoting reform. These agencies provide guidance and funding to reform measures and can be relied on to maintain high levels of professionalism and to monitor the process of reform.

3.7. Parastatal Reform and Divestment

3.7.1. In General

Our previous experience has shown the following aspects are central to a successful divestment program: involvement of Senior Government Ministers and Officials; a Project Director of high standing; adequate consultation with affected interest groups; a transparent approach; detailed research on potential investors; experienced consultants; effective internal communications; and early identification and pragmatic resolution of impediments.

3.7.2. Involvement of Senior Government Ministers and Officials — Steering Committee

It is essential that senior, accountable Governmental officials, with the power to make day-to-day decisions, are involved in the divestment process. The creation of a Steering Committee with members of appropriate high standing in Government is normally suggested to demonstrate the Government’s support of the policy and the processes needed to implement it.

3.7.3. A Project Director of High Standing

The Project Director assigned to the team must be of high standing within the Government and committed to the process. The Director must be able to access key officials and ministers on an as-required basis and will also have a key role in maintaining public credibility of the process.

3.7.4. Adequate Consultation with Affected Parties

Successful restructuring and divestment can best be effected after careful and thorough consultation with affected parties. There is a natural human resistance to the restructuring and divestment processes. Programs of public relations and the implementation of a social safety net can help. Divestment must be thoroughly and skilfully marketed within government, with public enterprise management, staff and labour, and to the public.

3.7.5. A Transparent Approach

The methodology must ensure that it does not generate impediments to divestment. It must be seen as producing unbiased recommendations and fair to all parties.

3.7.6. Detailed Research on Potential Investors

Review of potential investors, the local and international capital markets and sources of capital is a vital early step in the divestment process.

3.7.7. Senior and Experienced Consulting Team

The consultants assigned to the project must be people who have the necessary technical knowledge and experience in corporate restructuring and divestment, as well as experience at working with senior Government officials and in developing countries.

3.7.8. Effective Internal Communications

Regular communications between the Steering Committee of government, line ministries and the project team is vital to the success of the project. This includes Minutes, Working Papers, Monthly Reports by the consulting team, and Appraisal Reports on enterprises evaluated for divestment, restructuring or liquidation.

3.7.9. Effective Communications with the Multilateral Providers of Assistance

In most cases, the divestment program will be sponsored by a loan or grant from a multilateral donor. Regular meetings are recommended to update the multilateral Task Manager and his team of progress.

3.7.10. Early Identification and Pragmatic Resolution of Impediments

There will be impediments to the restructuring and divestment processes. The project team must aim to identify impediments early in the process and recommend to the Executing Agency various possible ways of eliminating them or circumventing them in as practical a way as possible.

3.7.11. Balance of Considerations

Several balancing acts must occur in the successful implementation of a divestment program. Successful implementation of the process of divestment, restructuring and, as necessary, liquidation of public enterprises requires steady progress. This balance of hands-on involvement and “big picture” objectivity requires considerable maturity, experience and understanding of issues.

3.8. Skills Transfer

The reform strategy should deliberately incorporate a methodology of skills and technology transfer. A successful strategy to ensure maximum skills transfer has two components: the creation of a body of carefully selected local counterpart professionals and the selection of expatriate experts with both experience and interest in training, education and skills transfer.