Learning from Africa’s Experience of Privatization
Ewnetu Haile
It has been a while now since Ethiopia announced that it is set to partially and wholly privatize a number of its major State Owned Enterprises (SOEs). These SOEs include some of the largest and well greased profit machines like Ethiopian Airlines and Ethio-telecom. Others include moderately successful SOEs engaged in energy generation while the rest comprise of poorly performing sugar factories and hotels.
The issue has, however, been raised this week by Ethiopians living in the U.S. during Prime Minister Abiy Ahmed’s (Ph.D.) “Demolish the wall and build a bridge” tour of the states. Citizens both in Ethiopia and abroad have been voicing their concern about the sale of national resources, especially Ethiopian Airlines, potentially to wealthy foreign companies. In his response, PM Abiy noted that the privatization will be carried out with utmost attention to its impact on economic growth and social welfare. He underscored the need to make the process successful unlike the numerous failed attempts in other African countries.
I have thus ventured out in this article to take a closer look at privatization activities in African countries and the level of success they have enjoyed. I will also look at the decisive factors that influence the level of success of privatization schemes with a bid to take some lessons from the experience in the field.
Accordingly, I will start with the trend of privatization in African countries since the 1990s. Numerous sources indicate that privatization activities started in Africa, especially in Sub-Saharan Africa, in successive waves. Francophone West African countries including Benin, Guinea, Niger, Senegal and Togo were the pioneers of privatization in Africa as they started the process in the late 1970s and the early 1980s. The second group of Anglophone and Francophone African countries adopted the move under the pressure of international monetary institutions in the late 1980s. These countries include: Ghana, Nigeria, Ivory Coast, Mali, Kenya, Malawi, Mozambique, Madagascar and Uganda. The third group started in the early mid 1990s. A London School of Economics paper on privatization in developing countries states: “Among these countries (the late starters) Tanzania, Burkina Faso and Zambia have shown a strong political commitment to privatisation, whereas in the other three countries (Cameroon, Ethiopia and Sierra Leone), only minimal progress had been made by late 1995.”
A small number of SOEs were privatized in Africa in the decade between 1991 and 2001. African states privatized a smaller percentage (around 40%) of their SOEs than other developing regions such as Latin America and the transition economies. Most privatization activities took place in South Africa, Ghana, Nigeria, Zambia and Cote d’Ivoire. The London School of Economics paper notes that privatization was general slow in Africa in the 1990s. Accordingly, it states:
The lack of significant progress in privatisation in the 1990s was due to a lack of political commitment compounded by strong opposition from entrenched vested interests (senior bureaucrats in ministries and SOEs themselves, as well as public sector workers concerned about their job security). For instance, in Cameroon, only five of the 30 SOEs scheduled for privatisation were sold by the end of 1995. In other countries, such as Nigeria, the privatisation program started well but then stalled. Despite the fact that Nigeria’s program had been one of the most successful in SSA in the 1990s, it was suspended in early 1995 in favour of a mass program of “commercialization”. In Madagascar, the privatisation program was also suspended in mid-1993 due to serious mismanagement and its unpopularity among the population. In addition to the lack of political commitment, there were also intense nationalist concerns about the possible political and economic consequences of increased foreign ownership as a result of privatisation.
The 1990s marked a period of transition from a largely socialist political economic orientation to a capitalist one in a large number of African countries. Therefore, the prospects of selling SOEs to private companies and foreign ones at that was a hard pill to swallow for most. Although privatization has become more fashionable these days, there are still strong concerns about the transfer of strategic assets to private interests. Considering Oxfam’s reports which indicates that over 60% of the world’s wealth is controlled by about 50 individuals, privatization should rightfully be considered as a risky business for governments that have their people’s interests at heart.
The source indicates that between 1988 and 1999, the total proceeds from privatization in Sub-Saharan Africa amounted to US$9.8bn, with the manufacturing and services sector accounting for 36% of the total, the infrastructure 28%, the energy sector 17%, the primary sector 14% and the financial sector and other 6%. Privatization activities then picked up momentum between 2000 and 2008 with the total proceeds amounting to US$12.654 bn in the region. Nigeria comprised 51% of this amount, followed by Kenya (10%), Ghana (9%) and South Africa (6%). Infrastructure represented 73% of the total amount of the deals, followed by the manufacturing and services sector (17%), the financial sector (6%), energy (4%) and the primary sector (1%). The paper indicates that privatization activities stalled between 2008 and 2015. This period is identified by the strain of the international economic crisis on the globe and one in which the buyers had a hard time themselves. Such conditions understandably ease the pressure from international organization to sale and this was a time when the world began to focus mainly on the income gap between the rich and the poor. Resource distribution became a major issue especially with reports like those of Oxfam uncovering how acute the problem has become.
Various sources indicate that privatization in Sub-Saharan Africa has largely been unsuccessful. The success or failure of privatization activities is measured by gauging performance against key objectives that include: improvement of efficiency, fighting corruption, improved service delivery, encouraging investment, providing fiscal savings for the government budget by eliminating subsidies, widening scope for tax collection, etc. The 2015 London School of Economics paper states: “Overall, the studies on developing economies show that private ownership alone rarely generates economic gains.”
Unsuccessful privatization programs are associated with high levels of corruption, poor value for money to the tax payer and increasing levels of inequality. On the contrary, the paper notes, positive indicators for success would include strong government ownership of the process, well-designed and sequenced reforms, the implementation of complementary policies, the creation of regulatory capacity and good corporate governance structures, attention to poverty and social impacts, and strong public communication.
There are also analysts who argue that the success of privatization depends on the kind of service the organization to be sold provides. Those with this opinion argue that a telecom service provider is more likely to benefit from privatization as the incentive for profit would raise its efficiency. On the other hand, claim the analysts, privatizing health care and public transport may not be as successful as the profit motive is less important than public interest.
Strong political derives to see through a successful privatization program is also vital for the realization of the goals set. Therefore, it is vital that the Ethiopian government communicates well with the public about the privatization activity, creates strong regulatory capacity, properly assess poverty impacts and follows up on the creation of strong corporate governance structures in the privatized organizations.