PSD Blog - The World Bank Group

The heavy hand of regulation and the hidden cost of information

In his presidential address to the American Economic Association, Avinash Dixit (2009) notes that laws and regulations are necessary for security of property rights, enforcement of contracts and overcoming collective action problems – something that the private sector cannot function without. However, laws and regulations are unlikely to have much beneficial effect if private agents are simply not aware of them. How easy is it for firms to obtain information on laws and regulations? What are the sorts of factors that determine this level of ease?
 
These are important questions that have received virtually no attention in the literature. One exception is Amin (2008). This study uses data for 50 countries from the World Business Environment Survey (WBES, 1999, World Bank). The survey asked managers to respond on a 1 (fully disagree) to 6 (fully agree) scale to the following statement: “In general, information on the laws and regulations affecting my firm is easy to obtain.”

Mass privatization and mortality

This January the British medical journal the Lancet caused a kerfuffle with an article that claimed that privatization in post-communist countries was responsible for massive numbers of deaths. The authors of Mass Privatisation and the Post-communist Mortality Crisis argued that privatization resulted in massive layoffs, which in turn resulted in a staggering increase in mortality rates, particularly in Russia. Could it possibly be true that privatization is that bad for the health? The Economist was quick to rebut the argument, pointing out both that correlation is not causation and that countries such as Poland that implemented shock therapy did not experience the rise in mortality that Russia did.

A new paper from John Earle, a Professor of Economics at the Central European University and a Senior Economist at the Upjohn Institute, extends the rebuttal much further. Earle points out that a very basic link in the chain of reasoning of the Lancet authors is missing - namely, mass privatization did not lead to substantial job loss. In fact, the effects on employment were typically neutral or positive (click on Figure 1 below). For the full argument, check out Mass Privatization and Mortality: Is Job Loss the Link? It's quick but well worth the read.

Privatizing health care in Georgia

Big changes are underway in Georgia's health sector. The central government is taking steps to privatize both publicly owned hospitals and health insurance. As it stands, the public health care system inherited from the Soviet era is bloated - only about 30 percent of its hospital beds are being used, and many of the 250 hospitals need renovation. An article in Transitions Online cites the Minister of Labor, Health, and Social Affairs on the current state of things:

It is absolutely impossible for [a] state like Georgia to retain...254 publicy owned hospitals...Therefore, private medical insurance and [a] private hospital network [are] something that we think is the only way out of the situation.

China vs. India - a battle of the brains

In this brave new world of knowledge-driven economies, it is a battle of the brains. And in perhaps the biggest battle of them all—China versus India—a winner is emerging. If you guessed India, I’m sorry, you get the consolation prize. China is far outstripping India in the race to expand tertiary enrollment. Data collected by the UNESCO Institute for Statistics indicate that in 2006, China achieved a gross enrollment ratio of 22 percent, compared to only 12 percent in India. Granted, raw numbers don’t take into account variations in the quality of education. Nevertheless, India is clearly a laggard at 12 percent—and perhaps even less than that, according to data from the Program for Research on Private Higher Education.

What could explain India’s poor marks? One part of the explanation is India’s ambivalent relationship with the private sector as a provider of higher education. While private higher education has grown rapidly in India, both in terms of number of institutions and enrollments, many barriers still remain. According to the Program for Research on Higher Education, there is

Privatization in 2006 - the year of Chinese IPOs

Our privatization database – listing transactions of at least $1 million from 2000 to 2006 - has been updated again.  In 2006, 48 developing countries carried out 249 privatizations for a total value of $105 billion – a figure comparable to the record year 1997.

The graph below depicts the value of privatization transactions in developing countries between 1990 and 2006. The figure excludes the two IPOs of the Industrial and Commercial Bank of China and the Bank of China, which combined accounted for $35 billion - one-third of all proceeds in 2006:

Russia and Turkey followed China into the second and third place, while Poland bucked the general trend toward privatization that year.

Our interactive map has the full picture.

Big bang or gradualism - which way to reform?

Oleh Havrylyshyn, former deputy minister of finance of Ukraine, looks back at the transition experience of post-communist countries from centrally planned to the market economy. The author contrasts the two opposite reform approaches: big bang, also known as the "shock therapy," with gradualism.

The study finds that the main motivation behind pursuing gradualism – the fear of a rise in inequality – was unsupported. And though the early and rapid reformers did not avoid an increase in poverty altogether, they suffered less of it and more than fully recovered by 2000.

Based on the initial speed and scope of reforms, Georgia was classified as a gradualist but for the last two years managed to become the top-reformer in the Doing Business report.

Lastly, a word from Mr. Havrylyshyn:

Statements about the need for transparency, a level playing field for SMEs and better rule of law, have more effect when they come from a CEO of a leading multinational, rather than when they come from World Bank or IMF officials

Privatization in Africa

Privatizing your largest bank to foreigners certainly invites scrutiny if not criticism especially in Sub-Saharan Africa. A recent study asseses the sale of government-owned Uganda Commercial Bank to the South African Stanbic and suggests that the privatization has been relatively successful.

The portfolio of the privatized bank, which was cleaned prior to sale, remains fairly strong and profitability and credit growth are now on par with other Ugandan banks. Though market segmentation still is a concern, since Stanbic faces little or no direct competition in many remote areas, early results suggest that access to credit has improved for some hard-to-serve groups.

Who's going to lend to rural Chinese?

Seven hundred and fifty million Chinese live in rural areas and most have a limited access to finance. The Enterprise Surveys found that in 2003 nearly 30 percent of firms named access to and cost of financing a "major or severe" obstacle. To address the situation, banking regulators in China began to loosen the restrictions on establishing of small rural financial institutions.

A new Wharton article analyzes the difficulties that for profit microfinance programs encounter. According to World Bank's Jun Wang:

There are still many people who hold the view that rural and microfinance cannot be commercially sustainable. They believe that farmers are a vulnerable group of society, they have limited means of production and opportunities, and deserve government support. Most of these people demand subsidized interest rates, which is problematic.

Everyone's doing it - stock market in Kenya

What promises the excitement of gambling without the adverse social consequences? For a growing number of Kenyans it's the Nairobi Stock Exchange (NSE).

The NSE has come a long way since 2002. The paper system which required up to three days just entering trading orders, is finally gone. The number of investors grew to 750,000 from 50,000 and the market capitalization is at $12 billion.

Can Africa attract more investment? So far the NSE has drawn Goldman Sachs.

Protectionism for development

Economic development requires tariffs, regulation of foreign investment, permissive intellectual property laws, and other policies that help […] producers accumulate productive capabilities

Says Ha-Joon Chang, a Cambridge economist and the author of "Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World." He argues that rich countries should not deny the poor ones the very same route they had once themselves taken to develop.

[The] truth of the matter is that [developing] countries have grown significantly more slowly in the "brave new world" of new-liberal policies, compared with the "bad old days" of protectionism and regulation in the 1960s and the 1970s.

Solution to Africa's cotton problem

John Baffes lists six reasons why West and Central African cotton-producing countries can't afford to postpone the sector reforms any longer.

Belarus privatizes

"If someone wants to buy Belarusian enterprises dirt cheap, it will not be so" explained Prime Minister Syarhey Sidorski, reported a subscription-based Belarusian news service BelaPan. Belarus needs cash to pay for higher prices for the energy it imports from Russia. More details from Oxford Analytica:

Sidorski claimed that prices would be set by the market; however, for shares in the Belshina tyre plant, he said the government wanted more than 1 billion dollars. Controlling stakes may be sold in two leading banks, chemical plants, oil and sugar refineries, the Beltelekom fixed-line operator, the Minsk car plant and the Krynitsa brewery. However, attempts to sell off parts of the oil refining industry have failed over the unrealistic prices demanded.

Want to know more about who's who in privatization? Check out a new analysis of privatization trends – based on new data we highlighted a few days ago.

Quiet resurgence of privatization

Just launched data for privatization trends – latest year 2005 – shows near record levels. Transactions are concentrated in China, Czech Republic, Hungary, Pakistan, Poland, Romania, Turkey and Ukraine and the top ten deals are largely in banking and telecommunications. For more check out the online database. Only Bolivia, Russia and Venezuela defied the pattern: either through nationalization or restrictions of foreign investment.

Update on Rwanda's privatization campaign

Rwanda's privatization drive of the last decade is showing signs of success. From an FT article:

• Telecommunications. After the October 2005 sale of the state telecom to Terracom for $20m, high-speed internet connections are up, hundreds of miles of fiber-optic cable have been laid, and connection prices are 10% of 2003 prices. All this helps Rwanda in its battle with Kenya and Tanzania as the technology hub for East Africa.
• Banking. The Banque Commerciale du Rwanda was no longer lending in 2003, but thanks to a $6m deal with Actis, it's now the country's second largest commercial bank.

Unfortunately, the energy sector's key privatization, of Electrogaz, has been a failure by virtually any account.

Privatization has fallen out of favor among many politicians, but Rwanda illustrates the benefits it can bring. In particular, the deals above increased government revenue and freed up resources. BUT much more importantly, the private sector firms made huge investments of capital and technical know-how that directly benefit Rwandan customers.

Export promotion agencies do increase exports

Many thanks to Pablo for pointing me to an excellent note (PDF) from the World Bank on export promotion agencies (EPAs). It's the first cross-country statistical analysis of the impact of these agencies on exports, and it covers 119 countries. The main message (via Jonathan Dingel):

For each $1 of export promotion, we estimate a $300 increase in exports for the median EPA. However, there is heterogeneity across regions, levels of development and types of instruments. Furthermore, there are strong diminishing returns, suggesting that as far as EPAs are concerned small is beautiful.

After a brief summary of the economic debates to date around these agencies, the authors give specific recommendations based on the data:

Kremlin Inc.?

There is a strong lobby within the [Russian] government to subject all foreign investors seeking minority stakes in certain industries to an approval process controlled by the FSB, the domestic successor of the KGB.

A little scary. From a WashPost story on renationalization, Russian-style.

Meanwhile, in Bolivia traditional nationalization is largely complete on paper, but continues to move slowly in practice. See excellent discussion on the topic from our PSD Blog commenters.

Managing public-private partnerships

Public-private partnerships (PPPs) have sprouted like mushrooms after a rain. The trend seems likely to accelerate, as PPPs are advocated in areas as diverse as education, prisons and infrastructure. Governments will ultimately be held accountable for delivery of public services, whatever the contract form. How are they managing these complicated and long-term contracts?

Many countries have organized special units that cut across existing agencies to handle all of a country's PPPs. The arrangements for these so-called PPP units vary by country, and consensus on how they should function has yet to emerge. We're running an online discussion on the topic, based in part on a recent World Bank policy note on the subject.

The policy note describes PPP units in Canada, India, Europe, South Africa, Australia and the Philippines. Managing diverse PPPs is one area where rich countries haven't necessarily advanced much further than developing countries, yet it's important for both groups. So, please join the discussion on whether and how PPP units should be organized.

Public-private partnerships promise prosperity

Intel chairman Craig Barrett is quite enthusiastic about public-private partnerships for technology transfer in the European Union. The subject is one of five at the EU's OPEN DAYS European Week of Cities and Regions, which closes tomorrow. A few thoughts from Barrett's interview in theparliament.com:

• The EU's new member states are more interested in public-private partnerships (PPPs) than the old ones, since they're eager to catch up on technology.
• The intersection of universities, business and venture capitalists drives innovation and competitiveness, and Europe must leverage it to prevent brain drain to the US and Japan.
• The internet is only really important for human capital development if there is rich content in the local language.

Intel supports the formation of a new EU spectrum authority to coordinate radio frequency allocations across member states to guarantee service compatibility and provide predictability for Intel and other companies. Barrett thinks Viviane Reding and Luciano Caveri are on the right track.

Several more PPP-related interviews where that came from to tickle your fancy.

Update: Also, a World Bank policy note on PPP units that help governments cope in the age of public-private partnerships.

Special economic zone or land grab?

The Indian government has approved proposals for 170 special economic zones (SEZs) and counting. SEZs can invite foreign direct investment, provide jobs, and promote the development of secondary industries to service firms. Why, then, the spirited outcry over India’s recent moves in this direction? For one thing, many of the approved sites are located on prime agricultural land – leading to complaints that the SEZs are more of a coordinated land grab by the rich than coordinated economic development.

Creating so many SEZs would seem to exacerbate widening inequality in India – both in terms of individual income and national infrastructure. We’ve already seen the results of the technology revolution emanating from Bangalore: isolated areas of development with limited benefit to the broader economy. Destroying valuable agricultural plots seems especially ill-conceived, as farmers are not likely to make an easy transition to the jobs on offer at these SEZs.

India isn’t having too much trouble attracting foreign investment as it is. Okay, so maybe the government hasn’t hit the $10 billion a year target, and India lags China. But most observers expect FDI to India to continue to rise. In the next two years, Goldman Sachs plans to invest $1 billion in real estate and infrastructure. The Indian government would do better to focus on the real barriers to its foreign investment goals – namely inflexible labor laws and poor roads and other infrastructure.

See the recent World investment prospects to 2010: Boom or backlash? for more FDI predictions. Also, a while back we held an online discussion on whether the benefits of SEZs outweigh their costs. Finally, I highly recommend Goldman Sachs' slick new video projecting fantastic growth to 1950 for the BRICs (Brazil, Russia, India and China), if only for its beautiful presentation style.

Tanzania: East Africa's best hope?

The Economist this week says Tanzania is an "African country that deserves the money it gets". While still very poor, Tanzania is set for 5.8% GDP growth this year and perhaps 6.7% next. A popular president, former foreign minister Jakaya Kikwete, hopes to build up the country's sparse infrastructure, expand access to drinking water, and improve agricultural productivity. What’s so different about a president who makes big plans? Just this:

Mr Kikwete travels with minimal security. He scrolls through several hundred text messages on his mobile phone each day, most of them from ordinary citizens who have somehow obtained his number. Sometimes he texts back.

Suggestions for further reading...Pienso shares a snippet from Business in Africa on the over 350 state-owned enterprises privatized in Tanzania in less than 15 years. One of the promising results from the privatization drive is the tourism sector, as shown in MIGA's case study of the Kilimanjaro Hotel.

Also don't miss Heliotropic on why this renewable energy guru is both hopeful and frustrated by Tanzania's prospects for sustainable energy.

Next up for eBay: water rights?

Okay, maybe not quite yet. But in an article on TCS Daily, AEI's Roger Bate argues that trading water rights would be much more effective than the bureaucracies who now decide who gets water and at what price.

The main water allocation problem is the result of Soviet-style management over agricultural water. In most places around the globe, governments decide who gets how much water, when they can use it and often what for, and if they don't use their allocation (regardless of how they use it) they will lose it. Once governmental allocations are made, officials rarely reallocate, even when massive changes in agriculture, industry, mining, domestic and rural demand occur. The result is politically favored allocation and grotesque situations where farmers often pay 100 times less than other types of users, and the poorest in slums often pay 10 times what rich domestic consumers pay, and for unsafe water.

Bate suggests that India and China could learn a lot from Australia’s rights trading system, in which users can trade water access and distribution along Australia’s Murray Darling Basin by going online. Impressive. He also alludes to benefits gained by both farms and the poor in Chile and South Africa as a result of trading water rights.

I look forward to his book out August 14, All the Water in the World. I’d like to see some clarification of how the poor’s needs are safeguarded, as some form of subsidy will inevitably be necessary to meet their daily water requirements. In an auction between farmers and golf course owners on the one hand and city slum-dwellers on the other, it’s obvious that the poor can be outbid pretty easily.

Improving administration of nature parks

Public-private partnerships are being used in nature conservation with good results. Much of the world’s biodiversity is found in developing countries, yet their national park agencies often lack the resources to protect biodiversity and promote tourism. Only 12% of global spending on protected areas occurs in the developing world. The IFC’s Nico Saporiti recently published a policy note on how public-private partnerships can aid conservation.

Even though African Parks has only begun to restore the integrity of the parks under its management, and transport and lodging facilities are almost nonexistent, the results have been encouraging. Revenue from its park in Zambia, for example, rose from less than US$100 in 2002 (before the partnership was launched) to US$42,000 in 2005, with local communities earning an additional US$9,000 from tourism.

These types of partnerships are also enhancing conservation in Brazil. See a post from Rachel Kyte on preventing biodiversity loss.

Privatize the stars or the duds?

Bloomberg columnist Andy Mukherjee believes India should start its privatization program concentrating on the duds, not the top-performers:

The real candidates for asset sales in India are the ones that nobody is trying to sell. In the year ended March 2005, 73 unprofitable companies controlled by the federal government incurred total losses of about $2 billion, of which two-thirds was accounted for by just 10 companies, including two from the fertilizer industry and two from coal, one telephone-equipment manufacturer, one drugmaker and one railway operator. Why not start asset sales with this group?

Thoughts? Via New Economist.

Water privatization in the US

Water privatization is not just a headache in developing countries. See RWE AG’s troubles in the US:

Dreams of heady profits evaporated amid heated opposition in places such as this town of 6,500 people, south of San Francisco in California's coastal redwood forests. Today, RWE is in the midst of dismantling an international water empire that cost more than $10 billion to assemble and spanned more than 40 countries at its height.

Water turns out to be less like electricity than RWE had hoped. It's heavy and hard to transport, making it difficult for a big company to build economies of scale. Regulation is never predictable. In the United States, RWE found itself fighting in town referendums and state legislatures across the country, winning many battles but losing the war.

So where does private participation in water stand in the US?

Stiglitz defends nationalization in Bolivia

Joseph Stiglitz believes the nationalization plans of the Morales government in Bolivia should be praised and criticizes the conditions under which previous oil deals were penned:

As with many privatizations elsewhere, there are questions as to whether the foreign investors have kept their side of the bargain… The problem in Bolivia is a lack of transparency, both when contracts are signed and afterwards. Without transparency, it is easy for citizens to feel that they are being cheated – and they often are. When foreign companies get a deal that is too good to be true, there is often something underhanded going on. Around the world, oil and gas companies have themselves to blame: too often, they have resisted calls for greater transparency. In the future, companies and countries should agree on a simple principle: there should be, to paraphrase President Woodrow Wilson’s memorable words, “open contracts, openly and transparently arrived at.”

For now, the world should celebrate the fact that Bolivia has a democratically elected leader attempting to represent the interests of the poor people of his country. It is a historic moment.

Privatizing roads - to foreigners even!

Having lived in Latin America for much of my life, I am used to highways being operated by foreign companies. Though here in the US the news that the state of Indiana has agreed to lease a toll toad to a Spanish-Australian joint venture has caused considerable comment:

Amy Goldstein:

Half a century after President Dwight D. Eisenhower persuaded the nation to build the interstate highway system, the allure of privatization is a rethinking of the relationship between the government and its roads. It reverses the view of highways as a public responsibility, ingrained since the first half of the 19th century, when states took over roads, bridges and canals that had gone bankrupt in private hands.

Subsidizing inefficiency

...a large part of that [Indian fiscal] deficit goes to financing the losses of the electric companies. Two and a half percent of GNP goes into power subsidies [emphasis added]; only half the electricity that's generated actually gets paid for. Some of the other half goes in unfortunate (we economists think) programs to give free power to the farmers. Unfortunately, the farmers who qualify for free power are the ones who are rich enough to be able to afford power in the first place. But having gotten free power, they let their neighbors tap into it. That's another portion of the power goes that way.

Microfinance and privatization in China

Knowledge@Wharton looks at the growth and struggle of microfinance in China:

NGOs, including PlaNet Finance, ProCredit and CPAF, are making an effort to increase private sector activity. "Why did we get involved in this in the first place?" asks Gabrielle Harris, executive director of PlaNet Finance China. "It's because the banks were not willing to lend to people without collateral, and poor people in rural areas had no access to credit." To get city commercial banks and rural credit cooperatives involved, organizations like PlaNet Finance will have to first build up trust and convince banks that microfinance is a legitimate business with worthwhile returns. "It's not going to happen at the emotional level," she says, adding that her job is to convince local banks that NGOs have a good track record and that there is a potential for good partnerships.

Citigroup certainly is interested in the potential. The same issue of K@W looks at the country's privatization trends and guesses about the future.

The push for nationalizing utilities

The Washington Post reports on the increasing calls for de-privatization in Latin America:

Across Latin America, a growing number of people say the privatization of public services, a movement that swept the region in the 1980s and 1990s, has failed. Protests have erupted over the issue in several countries, and some governments are beginning to reverse these policies. Last week Argentina announced it was rescinding its 30-year contract with the French company Suez and reinstating government control of the water supply.

The article details cases of poor service delivery and the protests that are occurring throughout the Andean countries and Central America. Though some would caution that these anti-privatization movements have short memories:

World Water Forum – Day 3

Katherine Sierra, World Bank Vice President for Infrastructure, in Mexico City this Saturday:

In addition all investment, whether public or private, needs to be supported by robust regulations and monitoring, and designed with the active participation of water users and civil society. Investment, must be safeguarded so every dollar delivers a real benefit. As in development more broadly, principles of good governance and vigilance against the corrosive impact of corruption are essential to delivering real results.

Bright spots in water privatization

New IDB President Luis Alberto Moreno writes about the current Latin American landscape for water privatization in the WSJ (subscription required). He points out that while the industry’s past has been turbid, this should not cloud the lessons from recent successful private ventures. Among other things, he argues that public-utilities have benefited from private-sector innovation, that low-income areas need not be marginalized by private investors and that a new class of domestic Latin American companies are stepping into the void left by retracting multinationals. He also stresses the importance of small-scale providers:

Small-scale water companies thrive in almost every Latin American country. In Colombia, more than 150 such enterprises provide water and sanitation services under contract to municipal governments. Most of these are small businesses located in remote rural areas. Paraguay and Bolivia have dozens of water entrepreneurs who use their own capital to build networks in communities not reached by public utilities. These providers are succeeding because they offer reliable services at competitive prices with the support of local governments and citizens.

What remains of state enterprises?

After two decades of privatization, has government ownership and control of enterprises declined substantially? Ongoing research suggests that while privatization has helped reduce the state’s role in some developing countries and regions, in most others the stock of state enterprises remains relatively large… Despite the privatization push of the past 20 years, government’s role remains prevalent in almost all regions and sectors, with adverse implications for growth and productivity.

So say Sunita Kikeri and Aishetu Kolo in their latest journal note. Also see their summary note on privatization trends and what's been done.

Update: Another new paper by John Nellis, Back to the Future for African Infrastructure? Why State-Ownership Is No More Promising the Second Time Around.

Just don’t call it privatization

Peru has lots of fresh water – though Peruvians have very little access to it. The problem is not just geography, but also poorly run state enterprises and a lack of investment. The government is cautiously turning to the private sector:

The government wants to offer private investors long-term contracts, known as concessions, to operate some of the country's 45 water and sewerage companies. The idea is that each contract will be a locally determined variant on a public-private partnership. Soft loans from the Inter-American Development Bank and from the German government will be used as subsidy, to prevent the steep rises in charges that proved explosive in Bolivia. The first contract, for Tumbes, a small city in the north, was awarded last July to an Argentine-led consortium. It is supposed to invest $30m to more than double coverage from its current level of 40%.

I lived in Peru for five years and know that public hostility to privatization is fierce. It will be interesting to see how the idea is sold from city to city. The Government’s strategy:

“We're trying to show people that while privatisation is like selling grandma's jewels, a concession is merely renting them out for the ball but still owning them.”

The Economist asks: what about coupling private management with targeted subsidies for the poor?

The failure of shock privatization?

Rapid privatization is harmful if you don’t first address institutions. So say Sergio Godoy and Joseph Stiglitz in ‘Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries’:

In the mid 90s a large empirical literature attempted to relate growth to policy measures. A standard conclusion of this literature was the faster countries privatized and liberalized, the better… Our results suggest that, contrary to the earlier literature, the speed of privatization is negatively associated with growth, but is confirms the result of the few earlier studies that have found that legal institutions are very important.

Privatization has been an easy target for critics. Several high-profile failures have certainly damaged the brand – though I predict things may slowly begin to change. Don’t be too shocked if we begin to see a gradual pick-up in privatization announcements. And while I very much agree that in the past some countries moved too quickly and that great emphasis needs to be placed on proper institutions and regulations – creative and appropriate management of reforms will also be pivotal. Oh, and more raps too. (Ht to AdamSmithee)

Update: Also see Stiglitz & Hoff on the emergence of rule of law and property rights following privatization.

Privatization in developing countries

Many public policies move in and out of fashion, but few have shifted in pendulum-like manner to the extent of privatization.

For more, see John Nellis’ new paper on ‘Privatization in Developing Countries: A Summary Assessment’:

Despite the comparative success, infrastructure privatization remains a problem, especially in low-income countries, and most acutely in the electricity and water and sewerage sectors. There, because of the essential nature of the goods produced, because of the level of decrepitude of the businesses being privatized, because of the unwillingness or inability of governments to impose costs on elites, and because of the relative power of the private investors vis-à-vis the civil servants they deal with before and after the transaction, it has proven hard to construct credible and enduring transactions. A number of renegotiations, nonrenewals, and outright cancellations of contracts have occurred (Harris 2003). Because of the problems, it has proven easy to cast privatization—not just in infrastructure but across the board—in the role of a (or even the) social villain; the tool of the rich, the foreign, the corrupt. In sum, privatization has everywhere and inevitably proven to be an intensely political event, even more than most other economic reform measures.

He of course uses our privatization database. At the end of the paper also find a presentation by Nellis at ECES with questions and feedback from the audience. More?

The triumph of India's reforms

Arvind Panagariya writes, for the Cato institute:

The response of the economy to the reforms has been an order of magnitude weaker in India than in China... despite considerable growth, the share of industry did not rise in India.

So?

The necessary steps are now common knowledge: bring all tariffs down to 10 percent or less, abolish the smallscale industries reservation, institute an exit policy and bankruptcy laws, and privatize all public-sector undertakings.

Also see Ravikiran Rao on 'Why we reformed what we did'. And the Cato Institute have a new experiment, 'Cato Unbound' - this month about the US Constitution, but an interesting new blogging format.

What matters - ownership or competition?

Interesting debate in the Indian blogs about what matters more for economic performance: private ownership, or competition? Ravikiran Rao thinks that ownership is key. Ramnath thinks competition is more important.

I think it's a false dilemma. A private monopoly is likely to be a disaster - but most private monopolies are monopolies because governments have tilted the playing field in their direction. And a government-owned firm in a genuinely competitive market is fine - but who expects that market to stay genuinely competitive if the government firm gets into trouble? Private ownership and competition tend to go together - not inevitably, but typically.

The next debate, of course, is whether to privatise first and liberalise later, or vice-versa...? Comments are open.

How to create good utility businesses

John Kay, one of Britain's leading authorities on the privatisations of the 1980s, writes in the Financial Times:

From the 1980s deregulation and privatisation swept around the world. The men in charge were encouraged to believe they were leaders of international business rather than chief engineers. Many traditional professionals resented this change, or failed to adapt to it, and sought early retirement. Others revelled in their new roles as strategists, visionaries and deal-makers. They assumed the arrogance and personal aggression they thought characteristic of business. The transformation was encouraged by their new colleagues from the private sector. These changes had many good consequences and some bad...

Two views on water privatization

From South African blogger Mzansi Afrika:

Can you afford to wash today? Although not all areas have been affected, pre-paid paid water metres have become a growing problem in Soweto.  In Soweto, water is supplied by Johannesburg Water, and under the slogan “Gcina manzi”- meaning "save water", government has put a system in place that if people want access to water they need to first pay a set amount - and then they will recieve their water... There are many problems that come with pre-paid water: sewage pipe blockages, the low amount of free water supplied means that residents have to be very cautious when using water so that they don't exhaust the 6000 liters supplied by Joburg Water.

From Paul Gertler, with co-authors (HT Marginal Revolution, now published in the Journal of Political Economy)

In the 1990s Argentina embarked on one of the largest privatization campaigns in the world, including the privatization of local water companies covering approximately 30 percent of the country’s municipalities... we find that child mortality fell 8 percent in the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas.  We check the robustness of these estimates using cause-specific mortality. While privatization is associated with significant reductions in deaths from infectious and parasitic diseases, it is uncorrelated with deaths from causes unrelated to water conditions.

Since writing this paper, Paul Gertler has joined the World Bank. Comments are open.

Rapping (and singing) for privatization

In late 2002, Tanzania was looking to privatize major companies affecting many people. People needed to understand in detail the benefits of these privatizations. The Government turned to a popular rapper and Maasai warrior.

Listen to Mr. Ebbo’s rap (.wmv), or learn more about the project. [Great chorus and dance moves included. I am a big fan of 'the train.']. If you’re not a huge rap fan, Captain Komba was also recruited to record the pop-single ‘Ubinafsishaj’, or ‘Privatization.’ (.mp3 or .wmv).

Here are more examples of innovative communications and outreach strategies.

Warning: Mr. Ebb's rap may get stuck in your head for the rest of the day. Good times!

Performance of state owned enterprises

Last chance! We have received numerous requests to extend the deadline of our current online discussion on ‘how to improve the performance of state enterprises' – so the discussion will now be closing on Nov. 2nd. 70 people have already sounded in.

New Latinobarómetro poll

The latest version of the always interesting Latinobarómetro poll on Latin American is out. Some findings include:

• Just 31% of Latin Americans think their country is progressing (up from 27% last year)
• A clear majority believe that a market economy is the only means by which their country can develop
• Sentiment towards privatization is improving
• Latin Americans continue to see their main problems as being unemployment, crime and poverty
• 41% of respondents knew someone who had been a victim of crime in the past 12 months (up from 33% last year)
• 70% agree that democracy is the least bad system of government
• 62% say that in no circumstances would they support a military coup (though only 51% in Ecuador, 49% in Peru, and 31% in Paraguay)

For more see Latinobarometro.org.

Update: Seems they have a blog as well.

Ukraine privatizes to Mittal

In its biggest privatization deal to date, the government of Ukraine sold the country's largest steel mill for $4.8 billion to the steel magnate Lakshmi N. Mittal, the world's third-richest person.

Via the NYTimes. Just the sort of deal that will be discussed at the upcoming Nov. 9-10 IFC-FT Southern Multinationals conference. There is still time to sign up.

Update: More commentary via The Economist.

France to privatize power

France’s conservative government has finally given the go-ahead for the partial privatisation of EDF. Some 15% of the vast company—the world’s biggest generator of nuclear power—is set to revert to private ownership in the next few days.

Well sort of, 15% is just 15%. The Economist questions whether 15% will be enough to allow the firm to compete with its European competitors (with looming EU deadlines approaching). However, they praise the government for their bravery in light of France’s strong unions and the national sentiment that EDF evokes.

If the upcoming public offering goes well, further tranches of EDF shares may be sold, but only the bravest government would pass a controlling interest into private hands. Still, if the government is serious about allowing its national champion to compete and become a European champion, that is probably what it must contemplate.

For more, see our reading lists on the impact of infrastructure privatizations and on how to manage such reforms.

Reality check

From the Center for Global Development, a new book, 'Reality Check' by Nancy Birdsall and John Nellis:

The privatization of state-owned enterprises has been among the most controversial of market reforms. This new edited volume brings together a comprehensive set of country studies on the effects of privatization on people—and answers the overarching question: who are the winners and losers of the wave of privatizations that swept across the developing world in the 1980s and 1990s?

We'll review it when they send us a copy. A quick and probably unfair precis from Nellis's Q&A is as follows: privatization does no harm, but the more slowly and carefully you do it, the better.

Don't forget our brand-new privatization database.

Update: Don't forget our discussion on how to improve the performance of state enterprises, either.

How to improve the performance of state enterprises?

State enterprises on average account for 15% of GDP in Sub-Saharan Africa and more than 50% of GDP in MENA. In India, more than 40 percent of the capital stock is state-owned. Heavily represented in infrastructure, finance, and energy sectors, state-firms are often two to three times less productive than private firms. Their lack of investment capital affects the delivery of critical infrastructure services while their losses are a fiscal burden. High levels of state ownership also create negative perceptions of the overall investment climate.

So what should we do about it? How can we improve their performance? When should you privatize vs. when should you reform? How can market discipline be brought to bear on state enterprises, and how can their corporate governance be improved? Join in on our current online discussion and let us know what you think. So far 28 comments are up.

New privatization database launched

One of the most frequent requests we get is for privatization data. Accordingly, we have launched a new privatization database. Building upon the efforts of previous World Bank privatization databases -and with kind collaboration from colleagues at Privatization Barometer, OECD and the EBRD- the database provides information on more than 9,000 developing country privatization transactions from 1988 to 2003.

New economic survey of China

The OECD has released its first economic survey of China, which claims that the private sector has become the basis of economic expansion.

Precise measurement of the size of the private sector is difficult, but a definition which considers as private all companies that are controlled neither by state nor collective shareholders suggests that the private sector was responsible for as much as 57% of the value-added produced by the non-farm business sector in 2003. Even amongst larger companies in the industrial sector, the private sector produced over half of value-added in 2003 and that share appears to have risen even further in the following two years.

The report also highlights (i) a more modernized business framework and (ii) better enforcement of business laws as the two reform areas which would have the greatest impact on private sector growth.

See the concise Policy Brief, a summary of Chapter 2: Improving the Productivity of the Business Sector, or the rest of the report.

Update: The China head at UBS Securities Asia tells us in the FT that China’s private sector remains in the shadow of the state. (Thanks Anthony)

Emerging market sponsors dominate infrastructure investments

Our latest Viewpoint highlights recent trends in private sector participation in infrastructure. All in all, flows increased by a welcome 12% in 2004, though this growth was mostly limited to the telecommunications sector. Greenfield projects also continued to be the main mode of entry. Perhaps the most interesting story is the increasing importance of sponsors from emerging markets.

Bank privatization and productivity

Two Brazilian researchers have examined the recent history of Brazil’s banking industry, evaluating the impact of privatizations and an increasing trend of mergers and foreign entry. Their conclusion:

.. state-owned banks are less productive than private owned ones.… privatization has had a positive impact on productivity. Moreover, the positive effects of privatization seem to take some time to materialize. Privatization proved also to be a superior strategy than restructuring and keeping the bank under state control.