privatisation in transforming and developing economies: strategies â€” consultancy â€”...

Klenk/PhilipplReineke/Schmitz

Privatisation in Transfonning and Developing Economies

Jiirgen Klenk/Christine Philippi Rolf-Dieter Reineke/Norbert Schmitz

Privati s ation in Transforming and Developing Economies

- Strategies - Consultancy - Experiences

GABLER

Jiirgen Klenk is advisor in the Private Sector Promotion and Industrial Consultancy Division of the Deutsche Gesellschaft fUr Technische Zusammenarbeit (GTZ) GmbH in Eschborn, Germany.

Christine Philipp is a management consultant at Kienbaum Development Services GmbH, Dusseldorf, Germany.

Dr. Rolf-Dieter Reineke is Professor of Business Administration with special focus on International Management at the Hochschule fUr Technik und Wirtschaft in Dresden, Germany.

Dr. Norbert Schmitz is a member of the Managing Board of Kienbaum Development Services GmbH, Dusseldorf, Germany.

Die Deutsche Bibliothek - CIP-Einheitsaufnahme

Prlvatlsatlon In transforming and developing economies : strategies - consultancy - experiences I Jiirgen Klenk ... -Wiesbaden : Gabler, 1995 ISBN 978-3-409-13598-6 ISBN 978-3-663-05892-2 (eBook)

~:K1enk, Jiirgen

Gabler Verlag is a subsidiary company of Bertelsmann Professional Information.

© Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH, Wiesbaden 1995 Lektorat: Barbara MaIks I Annegret Heckmann

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DOI 10.1007/978-3-663-05892-2

v

Foreword

Many countries throughout the world are currently striving to limit government activities

to core tasks. A central element of these reform measures is the privatisation of public

enterprises. The Deutsche Gesellschaft fUr Technische Zusammenarbeit (GTZ) GmbH

supports these efforts in the reforming countries of Central and Eastern Europe as well as

in developing countries. Kienbaum Development Services GmbH (KDS) is frequently

involved with the rehabilitation and privatisation of public or state enterprises. It was

therefore suggested that the experiences and conceptual approaches of both companies be

brought together in a synergistic manner. The result is herewith presented to the broader

public.

A holistic approach has been developed in this handbook. The distinguishing element of

this concept is that the complexity of the privatisation process is taken into account

through comprehensive and extensive consultation. Measures on the macroeconomic

level should therefore be conneCted with the microeconomic and mesoeconomic levels.

This handbook aims to present international experiences in privatisation processes in a

compact and clear format, and concurrently to clarify the special features of the

GTZlKDS approach. Both basic theory and concrete practical examples underpin the

concepts presented. The handbook is aimed at professionals in the field of privatisation,

GTZ and KDS consultants, and managers, programme planners and others affected by or

involved with privatisation in both public and private sectors.

The aspirations of this handbook also set its limits: the discussion of a comprehensive

privatisation concept cannot answer every individual question in detail. Generalisations

are, in view of the heterogeneity of questions surrounding privatisation, not always easy.

At the same time, this handbook cannot be expected to provide a self-validating

privatisation concept. Each case of privatisation has its own history and its own

dynamics.

Against the background of the concurrent treatment of both transforming and developing

countries, it is also the reader's responsibility to flexibly combine elements from the

various modules for his or her particular purposes - under consideration of differing

cultural and economic developments - in order to choose or construct the most

appropriate approach for the particular situation.

VI

The conceptual bases of privatisation processes are explained in Chapter 1. In addition

to introducing specialised terms, a typical or ideal privatisation programme under the

holistic approach is portrayed. The question of the basic underlying differences between

privatisations in developing countries and eastern reforming countries is of particular

importance and is discussed in Sub-Chapter 1.3.

The remaining three chapters follow the logic of the holistic privatisation approach, which

distinguishes between measures on the macroeconomic level (Chapter 2), on the

mesoeconomic level (Chapter 3) and on the microeconomic level (Chapter 4).

The treatment of measures on the macroeconomic level in Chapter 2 is divided into

structural framework and process-political measures. The important steps in these areas

are discussed from the point of view of supporting privatisation programmes and

therefore do not encompass all aspects of system transformations.

Chapter 3 discusses the building and strengthening of institutions on the mesoeconomic

level - institutions operating between the enterprise and macroeconomic levels. Points of

emphasis lie in the discussion of alternatives for structuring privatisation agencies,

associations, and export and investment promotion bodies.

Necessary privatisation steps on the enterprise level are discussed in Chapter 4. This

chapter begins with a discussion of whether enterprises should be rehabilitated prior to

privatisation or vice versa. This discussion is followed by the treatment of appropriate

privatisation measures which result from enterprise analysis and evaluation, valuation and

sale. Finally, measures for securing the sustainability ofprivatisations are suggested.

The correlations between theory and practice is presented in numerous practical examples

resulting from current GTZ and KDS work (identified in the case studies throughout the

handbook). Further ideas for practical applications are found in the appendix. Sources of

relevant literature are indicated at the end of each chapter for those readers who wish to

engage in further research. Finally, it should be noted again that this handbook should

serve as a working instrument. Readers' suggestions and comments are most welcome.

VII

We would like to express our gratitude, also in the name of the authors, to the numerous

GTZ and KDS colleagues who contributed valuable insight to the working discussions in

the course of developing this manual.

Eschbom and Dusseldorf, Federal Republic of Germany

Christian Pollak

Head of the GTZ Department "Management ConsultinglPrivate Sector Promotion"

Dipl.-Ing. Gerhard Kienbaum

Minister for Economics (ret.) Kienbaum und Partner GmbH

IX

Table of Contents

Foreword ........................................................................................... V

Table of Contents ................................................................................. IX

List of Case Studies .............................................................................. XI

List of Figures ................................................................................... XII

1. Conceptual Foundation of Privatisation ..•.•.•••.•.......•....•.•.•..•.. l

1.1 Privatisation and Reform Discussion: The Role of State and Private Sector .. 1

1.2 Privatisation as Central Reform of the Public Sector ............................. 7

1.3 Fundamental Differences between Privatisation in Developing Countries

and Eastern Reforming Countries ................................................ 12

1.4 Typical Process Flows of an Ideal Privatisation Programme .................. 18

1.5 Selection of Enterprises for Privatisation ........................................ 22

1.6 Privatisation Methods .............................................................. 24

1.6.1 Material Privatisation .................................................. 27

1.6.2 Pdvatisation of Management .......................................... 32

1.7 Obstacles to Privatisation .......................................................... 33

1.8 The Holistic Approach to Privatisation ........................................... 36

Bibliography ............................................................................... 40

2 . Measures on a Macroeconomic Level ..•.......•.••.......••.•..•..•.•. 43

2.1 Macroeconomic Determinants ..................................................... 43

2.2 Market-oriented Economics as Prerequisite for Successful Privatisation .... 44

2.2.1 Legal and Institutional Framework ................................... 46

2.2.2 Securing and Promoting Competition ............................... 50

2.2.3 Establishing a Working Price System ............................... 53

2.2.4 Financial Market Reform .............................................. 54

2.2.5 Adapted Economic Opening .......................................... 56

2.2.6 Development of a Consistent Tax System ........................... 58

2.2.7 Labour Market and Socio-Political Order ........................... 61

2.3 Stabilisation Measures ............................................................. 64

2.4 Regional and Sectoral Structural Reforms ....................................... 66

2.5 Labour Market and Social Policies ............................................... 74

2.6 Information and Public Education ................................................ 80

2.7 Timing of Individual Reform Measures .......................................... 83

Bibliography ............................................................................... 87

x

3. Measures in the Enterprise-Relevant Environment •.••.....•.......•• 90

3.1 The Important Position of Meso Level Institutions ............................. 90

3.2 Conception of an Efficient Privatisation Agency ................................ 92

3.2.1 Independent Institutions or Subordinated

Government Entities? .................................................. 95

3.2.2 Where do the Ownership and Control Functions lie? .............. 98

3.2.3 How are different Interests represented? ........................... 100

3.2.4 Which Organisational Structure is recommended? ................ 101

3.2.5 Use of Extemal Experts? ............................................. 103

3.3 Institution Building and Strengthening of Enterprise-Relevant

Entities .............................................................................. 104

3.3.1 Commercial Associations and Chambers of Commerce .......... 104

3.3.2 Export and Investment Promotion Entities ......................... 108

3.3.3 Finance Institutions ................................................... 116

3.3.4 Supervisory Institutions .............................................. 120

3.3.5 Strengthening Enterprise-Relevant Services ....................... 122

3.4 Creation of a Privatisation Network ............................................. 125

Bibliography .............................................................................. 127

4 • Measures on the Enterprise Level .••••••••••.••••.••.•........•...... 129 4.1 The Relationship between Privatisation and Rehabilitation ................... 129

4.2 The Most Important Privatisation Steps in Time Sequence ................... 134

4.3 Privatisation Strategy on the Basis of a Company Analysis .................. 136

4.4 Company Valuation ............................................................... 143

4.5 How to promote the Sale of State-run Companies ............................. 148

4.6 Negotiations with Potential Investors ........................................... 153

4.7 Measures for ensuring the Sustainability of Privatisations ................... 155

Bibliography .............................................................................. 159

Appendices A Checklist for evaluating the Legal Policy of the Status Quo .•....• 161

B Checklists for Support of Company Analyses ••••••••••••••.•••.•••• 163

XI

List of Case Studies

• Private Property as a Means of Welfare Gains .......................... ................. .. 5

• Support of Legislative Reform in Transfonning Countries .................. ....... .... 49

Support of the Tax Administration ......................................................... 60

• Support of the Labour Administration in Kirgistan ...................................... 62

Social Security in Transforming Countries ............................................... 63

• Measures towards Active Public Participation ........ ............................ " .... .. 70

• Programmes to support Livelihood as Assistance to Structural Change ............... 73

• Integration and Occupational Support Programme in EI Salvador ..................... 78

• Vocational Training for the Integration of the Unemployed ............................. 79

• Information Campaign in the Privatisation of NCB Bank ............................... 83

• Is the Concept of the Treuhandanstalt transferable to

Developing and Transforming Countries? ................................................ 96

• Privatisation in Zambia: Problems resulting from the Separation

of Privatisation Responsibilities and Disposal Rights ................................... 99

• Albania's National Agency for Privatisation (NAP) as

an Example of a Decentralised Privatisation Agency Concept ....... , ................. 102

• Knowledge and Experience Transfer through Partnership Projects ................... 107

• The Small Industries Development Board (SIDB) in Pakistan ........................ 108

• The Trafalgar Development Bank Ltd. (TDB), Jamaica ................................ 119

Supporting the Standards and Industrial Research Institute of Malaysia ............. 121

Rehabilitation - An Approach with a Promising Future .............. " ............. " .123

Strategic Options for the Privatisation of the Zambian Copper Mines ................ 141

• Privatisation and Sale of Morogoro Canvas Mill Ltd., Tanzania ...................... 151

• Privatisation and Rehabilitation of Mount Kenya Textiles Ltd., Kenya ........... , .. 157

XII

List of Figures

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Figure 6

Figure 7

Figure 8

Figure 9

Figure 10

Figure 11

Figure 12

Figure 13

Figure 14

Figure 15

Figure 16

Figure 17

Figure 18

Figure 19

Figure 20

Figure 21

Figure 22

Main Tasks of the State .......................................................... 5

Privatisation as Part of a Comprehensive Reform ............................ 8

Framework Conditions as the Prerequisite for the

Development of Dynamic Enterprises ........................................ 15

Privatisation Stages and Need for Support. ................................. 17

Privatisation Process Orientation .............................................. 20

Classification of Enterprises to be privatised ................................ 23

Privatisation Methods ........................................................... 25

Major Obstacles to Privatisation ............................................... 34

The Holistic Approach to Privatisation ....................................... 37

Important Legal Foundations of a Market Economy ....................... .47

Characteristics of Competitive Markets ....................................... 51

Regional and Sectoral Measures for the Promotion of

Economic Development ........................................................ 68

Measures for Active Public Participation in the

Privatisation Process ............................................................ 71

Socio-Political Accompanying Measures ..................................... 75

The Most Important Steps of Public Information and

Educational Campaigns ......................................................... 82

Classification of Meso Level Institutions ..................................... 90

Structure and Relationship Network of a Privatisation Agency ........... 93

Factors influencing the Organisation of Privatisation Agencies ........... 94

Formation and Development of Associations... . . . . . . . . . . . . . . . . . . . . . . . . . .. 105

Export Promotion Measures ................................................. 110

The Most Common Mistakes made by Enterprises in Transforming

Countries with Regard to Fair and Exhibition Participation .............. 111

The Twelve Most Frequent Investment Promotion Measures ........... 113

Figure 23

Figure 24

Figure 25

Figure 26

Figure 27

Figure 28

Figure 29

Figure 30

Figure 31

xm

Important Steps in the Creation of a Financial Fund

with an Integrated Consulting Unit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 118

The Institutional Framework of Privatisation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 126

Comparison: Rehabilitation prior to Privatisation ......................... 130

Measures at the Enterprise Level ............................................ 133

Privatisation Process at the Microeconomic Level ........................ 135

Areas of Enterprise Analysis ................................................. 138

Approaches to the Evaluation of Different Privatisation Methods. . . . . .. 140

Overview of Important Company Valuation Methods .................... 144

Selected Instruments for Privatisation Marketing .......................... 151

Chapter 1: Conceptual Foundation of Privatisation 1

1 . Conceptual Foundation of Privatisation

1.1 Privatisation and Reform Discussion: The Role of State and Private Sector

Privatisation measures both in western industrialised nations and in developing and

transforming countries have almost always been triggered by economic and/or political

crises.

During the western economic crises in the late '70s and early '80s, the conviction

developed that too much state influence through the public sector could lead to negative

effects for the whole economy. The critical argument against the belief in control of the

economy through state intervention became apparent in the deregulation and privatisation

measures in Great Britain. There was also a change of view in development policies.

While the World Bank supported nationalisation as a means of eliminating the economic

and social problems of developing countries in the 1970s, the essence of its prescribed

structural adjustment programmes since the beginning of the 1980s has been privatisation

measures. With the collapse of Eastern European economic systems in 1989 - again as a

result of economic and political crises - privatisation has finally acquired a new

dimension: it has become the guideline for the transformation of the former centrally

planned economies into market economies.

During the 1960s and 1970s, the policies of most developing countries and at that time

planned economies were still characterised by trust in the ability of government to be the

driving force behind development and compensation for market inefficiencies. State

enterprises were a central steering element.

The following arguments provided the motives:

• The private sector was underdeveloped or not sufficiently developed, so that goods and services were not being made available in the required quantities or quality. The investment required would overstrain the private sector.

• Entrepreneurial potential did not exist. In addition, one feared an inequitable distribution of economic power - in particular the dominance by multinational

corporations.

• The lack of market transparency led to risk-averse strategies by the private sector; investments were not made.

2

•

•

•

Chapter 1: Conceptual Foundation of Privatisation

Insufficient money and capital markets hindered the economic growth of private business; public enterprises had easier access to credit.

"Natural" monopolies arising from the small scale of the markets should be efficiently controlled; monopoly rents should flow to the state.

Direct influence in attaining social goals was promised (i.e. full employment, fair prices, equitable income and wealth distribution, etc.) through public enterprises. In addition, access to new sources of state income was to provide the necessary financial means to support the development process.

• The state wanted to take the development of strategically important sectors "into its own hands" and not leave them in the realm of the private sector.

• Finally, it was believed that the ownership structure ultimately had no influence on the success of enterprises. The quality of management was decisive and this could be steered by state measures.

In many countries, however, the expansion of the public sector led to considerable

inefficiencies. Public enterprises became important employers but contributed little to

remedying underdevelopment. Numerous studies have shown that public enterprises are

less efficient than private ones. 1

This was true, for example, in 10 out of 12 privatisation cases examined by a World Bank

study on welfare gains in 1992.2 In eight of the twelve cases, the productivity of the

enterprises was increased after privatisation, and in the other four it remained at the same

level. Fears of an increase in unemployment were proven unfounded. To attain efficiency,

of course, some jobs were eliminated; these however were made up for by newly created

positions. In nine of the surveyed cases, the overall employment level benefited directly

as a result of privatisation. An improvement in investment regulations and market

deregulation ultimately led to a significant expansion of business. Finally, not only the

investors in the privatisations benefited - but also the consumers, who, because of the

2

Kikeri S., Nellis J., Shirley M.: Privatisation: The Lessons of Experience, The World Bank Country Economics Department, Washington 1992, p. 10 Kikeri S., Nellis J., Shirley M.: Privatisation: The Lessons of Experience, The World Bank Country Economics Department, Washington 1992, p. 10


increase in competition in nine of the twelve cases, either retained or improved their

welfare levels.3

Public enterprises suffer from the following weaknesses:

•

•

•

•

•

•

State directives and intervention, both in strategy and planning, as well as in day-today management.

no market orientation, inefficient information flows.

no discipline through possible financial losses, easy access to state credit.

frequent monopoly position and therefore lack of competitive pressure.

missing commercial and entrepreneurial business spirit, insufficient management qualification.

unclear, multiple and contradicting goals.

The burden of inefficient public enterprises on the state's budget can be substantial. For

example, in 1989 in Argentina and Poland public enterprises produced losses accounting

for 9% of GNP, while in Ghana 14 public enterprises received state support from 1985 to

1989 at an annual cost of 2% of GNP. Less profitable state investments and inefficiently

operating public enterprises have thus contributed to a slowing of economic growth and

an increase in public debt.

It was not only in the case of public enterprises that failure of state ownership and control

proved to be just as expensive and have just as serious consequences as market failure.

The following are examples of further state interventions in the economy which had

negative consequences: keeping prices down for the benefit of consumers has

discouraged production, thus creating shortages of goods and resulting in increased

import dependence. State intervention in the distribution of credit and provision of low

interest loans led to the distortion of credit flows in favour of capital-intensive industries.

Exaggerated, poorly planned and improperly implemented regulations have contributed to

the development of shadow economies.

3 In the discussion of possible positive effects of privatisation, it should be made clear that the negative effects are predominate in many cases. This can be traced to some extent to insufficient accompanying economic and socio-politicai measures and deficiencies in the enterprise-relevant environment.

4 Chapter 1: Conceptual Foundation of Privatisation

These - in theory not new - causalities have been examined empirically for developing

countries: a recent Ifo study4 also confrrmed that market-oriented economic systems lead

to higher development rates and investment levels than planned economic systems with

interventionist strategies.

Such developments have led to a critical examination of the role of the State. The

difficulty in reforming the public sector in industrialised, developing and transforming

countries lies both in employing the resources and capabilities of the private sector, and in

limiting state intervention to an acceptable level. The new order between the State and the

private sector, as well as between different public institutions, is defined by the so-called

principle of subsidiarity. This principle stipulates that responsibility for tasks always lies

at the lowest level possible. With the separation of private and public concerns, priority is

given to individual personal responsibility. Only when private involvement leads to

negative effects, for example with natural monopolies or the provision of public goods,

should the state intervene. In such cases, the principle of subsidiarity suggests resolution

through small collective entities (municipal government, associations and chambers).

Only when institutions at this level cannot effectively handle the situation should it be

delegated to the attention of higher level entities.

In this context, excessive limitation of state functions in the process of reform and

transformation should be warned against. The state plays a very important role in the

establishment of a social market economy as well as in the creation of the conditions for

successful world market integration. Privatisation should therefore not be understood as a

strategy that aims for the full withdrawal of the state. A reduced, specialised and effective

public sector is much more necessary and useful, on the one hand to push privatisation

through, and on the other to support the newly emerging private sector. The figure on the

following page outlines the main tasks of the modern state.

Only a strong state can create an appropriate framework for private economic

development. To this end, not only must it employ stable, long-term macroeconomic

policies, but it must also control and direct the political changes of the modernisation

process. In addition, the state must ensure the creation of necessary institutions and

organisations in the business environment. A laissez-faire state is unable to realise the

4 Helmschrott H., Osterkamp R., SchOnherr S.: Stagnation in the Third World. Has Economic Policy Failed? Empirical Studies on the Relations between State, Market and Development. Ifo Studies for Development Promotion, Cologne 1992.


complex control and supervision of privatisation and transformation work. and foster the

creation of competitiveness in the entire economy.

Main Tasks of the State

• Protect the country from external threats (i.e. foreign policy)

• Safeguard the country from internal unrest (i.e. police and controlling tasks)

• Create and secure the economic and sociopolitical framework (i.e. economic laws, anti-trust laws etc.)

• Plan and coordinate (i.e. national and regional planning, traffic planning, research tasks etc.)

• Undertake societal tasks, possibly with private organisations (i.e. health and social welfare, education, environmental pollution control etc.)

Figure 1: Main Tasks of the State

Case Study:

Private Property as a Means of Welfare Gains

I

A theoretical background explaining why privately owned factors of production are

superior to public ones is found in the theory of property rights.

This approach distinguishes between different dimensions of property rights: on the one

hand they can be expressed as the rights to use an asset or a resource, to alter its form or

to transfer it. On the other, they can be expressed as the right to retain profits created by

that use or alteration.


With private property, the owner has the rights of use and alteration and the right to

profits. In public enterprises, on the other hand, there exists a division between the

abstract owner (local government, society, or state) and the real user. Consequently a

separation between the rights of user and the rights to returns also exists. Because the

profits in this case do not accrue to the users, there is little incentive to economise and

fully utilise production possibilities. On the contrary, they create disincentives andfoster

the exploitation of collective property.

With such a separation between owner and user, the so-called "Principal-Agent" problem

is created: how can the owner ensure that the user of his property will operate along his

way of thinking (economic operation, asset maintenance, increase in productivity, etc.)?

Since an internal incentive for discipline is lacking in public enterprises, and as a rule the

lack of competition does not allow impersonal control mechanisms to foster necessary

adaptation, administrative controls must be established. This kind of administration,

however, causes extra costs and is associated with problems such as inflexibility,

dependence on political decision makers and the danger of corruption. In this respect, the

appointed management of the controlled enterprise often has better knowledge of the

situation on site, and can therefore enforce or reduce controls as it desires.

But the problem of the relationship between the principal (owner) and agent (manager)

can also occur in the case of private property if a private enterprise is not managed or

directly controlled by the owner. In joint-stock companies that are not under direct control

of the owner, for example, the problem of how to control management also exists. This is

especially true for small shareholders, who, because of their insignificant voting power,

have little influ~nce on the management. Furthermore, supervisory and management

boards are themselves not free from imperfections.

Joint-stock companies underlie indirect control through the capital market: the

performance of management is assessed by the stock market. Poor management of an

enterprise will lead to a fall in share price and can create the danger of a take-over or the

dismissal of management. A private interest on the part of the management therefore

exists to run the business successfully. The management can be depended on to strive for

the success of the enterprise as a whole because its own self-interest is at stake. For these

reasons, the principal-agent problem can be addressed and solved in market economies

with private ownership, but not in centrally planned or other economic systems where

private ownership does not exist.

Chapter]: Conceptual Foundation of Privatisation 7

Private ownership of the means of production - together with a free market - fulfils a

number of important economic functions:

• Through the definition of property rights, individuals are assigned accountability,

responsibility and liability, and conflicts over the use of scarce resources can therefore

be resolved.

• Costs and benefits of resource use are concentrated on the owners. Owners have personal incentives and non-personal control over rational use of property (incentive

and control function of ownership).

• Private ownership, in connection with incentive and control functions, also fulfils a

co-ordinating and allocative function for the means of production through the price mechanism. Because the owner of the means of production can realise the greatest profits when he produces goods in demand, an efficient allocation of resources takes

place in competitive markets.

• Finally, private ownership stimulates innovation because the innovator - at least in the product introduction stage - can often operate from a monopoly position and realise

greater profits. These profits will then be reduced by other entrants into the market.

Under effective competition, there is a constant push for innovation because competitive disadvantages can lead to elimination from the market. Private ownership

therefore strengthens the general innovativeness of an economy.

1.2 Privatisation as Central Reform of the Public Sector

Theorists and practitioners are divided over the exact definition of the concept of

privatisation. In a rather broad definition, privatisation is understood as any transfer of

state activities into the private sector; in a more narrow sense, it is defined merely as the

legal reconstitution of a hitherto public enterprise into a private one.

This handbook adopts the broader definition of privatisation: hence, it is not only the legal

reconstitution of public enterprises that is to be understood by privatisation, but rather

much more - including the denationalisation of the economy. Denationalisation means a

division between state and private enterprise and the introduction of decentralised

regulations and mechanisms that not only stimulate the performance of the economy, but

also ensure more efficient control for management, workers and owners.


Privatisation is therefore a multi-level and complex task: in the first instance, management

is legally transferred in the framework of the privatisation programme from public to

private (formal privatisation as a legal basis for the wider privatisation process). Then the

property rights are transferred to private ownership. Thirdly, the owner assumes the full

business risk and therefore an incentive to operate efficiently (forced by the removal of

subsidies, the promotion of competition etc.). It should be noted that privatisation of the

economy can also begin with the development of new private and newly privatised

enterprises (privatisation from underneath). In India, for example, emphasis was placed

on the exclusive promotion of new private enterprise activities rather than the privatisation

of existing public ones. Privatisation programmes should thus not be viewed in isolation,

but rather, as an integral part of an extensive public sector reform policy. This relation is

illustrated by the following figure.

Privatisation as Part of a Comprehensive Reform

Creation of a stable macroeconomic

environment

(Property rights, contract law, currency stability, social

security etc.)

Promotion of competition

(Opening of markets, deregulation, anti· trust

legislation etc.)

Figure 2: Privatisation as Part of a Comprehensive Reform

The success of privatisation is closely related to carrying out other elements of reform; of

special importance is the promotion of competition. The privatisation of a monopoly, for


example, will not lead to the expected increase in efficiency if it is not accompanied by

measures geared towards increasing competition, such as the opening of markets.

Privatisation and promotion of competition constitute elements of a more flexible

economy. Through the profit incentive, the economy is pushed forward into

competitiveness, which finally enhances the welfare of all parties in the economy.

It must be realised that private economic activities require a certain degree of stability and

security. It must also be assured, for example, that private property rights are lasting and

that signed contracts are binding and supported by corresponding legislation. Further

elements' of a stable environment are currency stability and the creation of a system of

social security. The creation and strengthening of such legal and institutional frameworks

fall within the State's domain. Finally, private economic activities can receive further

support through qualified institutions in the business environment, such as associations,

chambers of commerce or fmancial organisations.

Privatisation programmes are not an end in themselves. The development policy objective

. of privatisation consists of reaping positive common benefits for the entire population of a

country through the creation of solid and competitive businesses and through increased

economic participation of the general population.

Privatisation programmes can be aimed at different goals:

• The primary goal is to increase efficiency through the creation of clear ownership. Privatisation can lead to an increase in overall efficiency because private production provides more gains than production by the state. Three different gains can be pointed out:

Gains through allocation efficiency

An improvement in the economy's resource allocation is accomplished through the introduction of incentive-compatible structures. These are, however, only partly dependent on the ownership structure; they depend mostly on the market structure.

For example, the privatisation of an enterprise in a competitive market will not lead to a significant increase in allocation efficiency if it is protected by political

measures (such as subsidies and maintenance of monopoly position).


Gains through production efficiency

Such gains are created through higher internal efficiency in a particular enterprise. As previously discussed, the inefficiencies which are found in the majority of state enterprises could be corrected or eliminated by privatisation.

Increase in efficiency through market co-ordination of economic activities

The assumption that state authority is not a substitute for decentralised, coordinating market mechanisms underlies the realisation of such efficiency gains. Because all information on an economy cannot be captured in its entirety, it is also not available for making key decisions. The attempt to centrally handle information and innovation processes results in what Hayek termed a "presumption of knowledge". Many governments have, in the framework of central control of the economy, overstrained their administrative, technocratic and entrepreneurial resources. This should be reversed within the framework of privatisation and the introduction of decentralised supervisory and control mechanisms.

• Social acceptance and wide participation of the population

Privatisation is associated with the reallocation of ownership and property rights in many countries. The domestic popUlation, however, often possesses only limited savings and investable funds. Therefore the danger of a "sell-out" of the entire economy exists, which would result in a division of the population between powerful capital holders (often foreigners or ethnic minorities) and destitute wage earners. Privatisation should therefore be implemented in as egalitarian and equitable a way as possible to ensure that every citizen has equal starting opportunities.

The participation of a larger part of the society in privatisation creates the basis for wider economic development and raises the acceptance of the implemented measures and therefore the likelihood of political stability.

• Fiscal aims

Proceeds from privatisation can lead to improvements in a country's fiscal situation (reduction of the budget deficit). The funding of the budget through the sale of state

capital is especially important in privatisations in western industrialised nations.

In developing and transforming countries, the governments also tend to have high proceeds expectations from privatisation. In these cases, the realised profits are frequently lower because of poorly managed state enterprises. Governments do receive budgetary relief, however, since explicit and implicit state subsidies to the


enterprises concerned are reduced when privatisation occurs. The fact that private enterprises produce more efficiently than public ones, and in so doing lead to positive economic development effects, can further be witnessed by the additional state income generated from taxes and duties.

In addition, extensive privatisation does not only bring financial relief to the state but also a reduced burden on government/civil service personnel. Through the new division of labour between the state and private sector, the government is now able to concentrate on its particular state functions - such as the enactment of important legislation, and the establishment of a modem administration, an efficient infrastructure and an active long-term structural policy.

Many theorists, as well as those who actually implement privatisation measures, support

as rapid a privatisation as possible in order to ensure the desired increase in

efficiency as quickly as possible. They especially point out the danger of dysfunctional

behaviour inherent in the transition between the announcement of a wide privatisation and

its actual implementation. During this time, sometimes described as "the vacuum", the

enterprise in question receives neither clear "orders from above" nor is it forced to direct

itself by the market. Employees of public enterprises can exploit this transitional phase to

arrange, for example, relatively high wages and salaries, for which they will later not be

accountable. Such problems appear mostly in transforming countries, for example, in the

workers' administration in Poland, but asset stripping is just as evident in developing

countries.

The danger also exists that with a slow privatisation and restructuring of the economy the

positive welfare effects will not be readily visible. This can lead to social dissatisfaction,

especially in the event of rising unemployment. In order to avoid the danger of failure in

economic, social and political reform from the outset - and so as to steer clear of a half

hearted return to pre-reform conditions - a rapid privatisation process should be aimed

for.

Of course, speed alone is not everything. It must be made clear that a speedy but

inconsiderate privatisation can have numerous negative effects that could similarly lead to

social unrest and jeopardise the reform process. The privatisation of many enterprises in a

relatively short period of time led to a significant slump in the former East German

economy which had to be cushioned by considerable state support in order to fulfil the

government's social obligations. Only a few other countries are in a position to finance


such deficits. The consideration of these factors suggests the adoption of a more moderate

privatisation with the motto: "As fast as possible, as slow as necessary".

It has been shown that it is not possible to fulfil all desired aims at the same time; aims are

often conflicting. One alternative, for example, is to increase sales proceeds - and

therefore the state's direct privatisation income - by granting concessions to potential

investors such as the maintenance of monopolistic structures or long-term subsidies.

These concessions, however, contradict the goal of increasing efficiency. The social

groups involved in the privatisation process should be aware of such conflicts in advance

and articulate their corresponding priorities.

1.3 Fundamental Differences between Privatisation in Developing Countries and Eastern Reforming Countries

Although the general problems of privatisation and reform processes are similar in most

developing and transforming countries, the priorities and the required procedures differ

according to the country, the level of development, and economic and cultural

circumstances. Differences exist between developing countries and Central and Eastern

European transforming countries which have to be borne in mind during the conception

and implementation of privatisation programmes.

A quick look at the different starting points with regard to the contribution of the private

sector to GNP shows distinct differences: while the contribution of the public sector in

developing countries lies between 20 and 40% (compared with 5-15% in western

industrialised countries), in the former centrally planned economies of Eastern Europe the

larger share went to the public sector. In Poland in 1985, the state contributed 81.7% to

the country's GNP, in the former Soviet Union 96%, and in former Czechoslovakia even

as much as 97%.5

The dimension of privatisation, however, is not only a question of volume. In developing

countries, privatisation is a question of redefining the roles played by the state and the

private sector. The majority of economic activity already lies in private hands; and market

structures, such as property laws and competition laws, already exist so that the

conditions for a functional market economic system are at least partly provided. The

5 The Czechoslovak figure of 97% was reached in 1986.


population of these countries has often had experience with the functioning of market

systems. Frequently, there is an elitist group, who, during their studies in western

institutions, have learned and experienced the application of market economics and

behaviour. The general educational level of the entire population, however, is usually

considerably lower than that of most of the eastern transforming countries. A lack of

technological and administrative competence is more prevalent in many developing

countries than in transforming countries.

In Central and Eastern Europe, privatisation is applied to create a market economy - in

other words, to transform the entire economic system. Privatisation in these countries is

an essential part of a radical social metamorphosis. Many Eastern European decision

makers possess neither the knowledge of market-oriented economic policies and

management, nor the practical experience in the field. Furthermore, countries that had no

tradition in market economic thinking before the emergence of Communism will have to

go a long way before developing such a mentality.

The new phenomenon of risk taking - such as capital risks by owning shares, or the risk

of losses by business management - has caused more problems in former eastern

communist societies than in southern developing ones. For the majority of eastern

populations individually and directly responsible economic action is completely alien and

contributes to the dearth of entrepreneurial behaviour and domestic investors. Moreover it

is difficult to help the people understand that their jobs are not to be directed and

guaranteed by the state, but that the content and the improvement of their work depend on

their own personal performance.

Thus privatisation is a double-edged sword. On the one hand, it is a conditio sine qua non

for the creation of a market economy. On the other, efficient progress in the field of

privatisation demands market economic structures such as determination of prices by the

market, financial institutions, and appropriate legal frameworks (property rights, tax

laws, unemployment systems, etc.). While such structures and mechanisms have hitherto

hardly been available in Eastern Europe, developing countries can at least build upon an

existing foundation.

Because of this special situation in Eastern Europe, the question arises whether

privatisation measures should be carried out first, followed by further transformation

steps (such as market liberalisation, a market-driven price system, outward opening of the

market), or vice versa. When, for example, an enterprise is first privatised and prices only


subsequently set free, it is questionable whether the assessment of the privatisation will be

realistic. Such problems fall under the so-called "sequencing" discussion and are

examined in Chapter 2.7.

Special problems in transforming countries lie with the confusing situation in the field of

property rights: during the first reform attempts in the planned economies, property

patterns were created that were more complicated than the simple picture of state

ownership. Former owners' claims create additional complications that lead to

considerable delays. The question of whether the state should return the property to its

former owners or pay compensation lies at the forefront of unresolved property disputes.

In addition, it is often impossible to talk in terms of functioning market-economy-style

private property in transforming countries, even in terms of newly privatised enterprises.

With mass privatisations, too broad a spread of ownership and, subsequently, ineffective

control mechanisms often exist.

A further special feature of the transforming countries is the extent of close vertical

interlocking in their economies. Some businesses often have only a single supplier and a

single buyer. Through this interlocking, the danger that the entire chain will break down

exists with the closing of one business. In addition, this interlocking causes further

assessment problems: it is very often difficult to determine which liabilities and which

resources are classified where. In most cases, no reliable and consistent accounting

systems exist.

Technical co-operation in privatisation must take these fundamental differences between

developing and transforming countries into consideration. Added to this, it must be made

clear that there are unique differences within every developing and transforming country.

The comparison of two transforming countries, for example, the Czech Republic and

Uzbekistan, will illustrate this. While the Czech Republic, because of a long tradition, can

rereach a free economic system with a relatively modern economic structure and well

trained population, Uzbekistan still faces the tasks of administrative reform and

modernisation processes. Uzbekistan especially is negatively affected by the former

centrally planned Soviet economic system. This had led to the "planting" of monopolies

on Uzbek soil and to rigid trade patterns within the Soviet Union: Uzbekistan thus became

one of the greatest cotton producers of the world without providing any significant wider

development such as a textile industry. It now finds itself forced to import textiles. In

comparison to the Czech Republic, which can also profit from its close proximity to the


German and other Western European markets, the essentially lower level of economic

development in Uzbekistan makes the implementation of the adjustment measures more

difficult. Further problems for Uzbekistan present themselves in the rise of Islamic

fundamentalism and the existence of 120 different nationalities in the country.

This picture suggests that, in spite of the different starting positions between developing

and transforming countries, a mutual basis for similar measures of handling privatisation

can exist. In addition, as the following figure depicts, the conditions necessary for the

development of a dynamic and efficient private sector are the same for all of the countries.

Prerequisite Framework Conditions for the Development of Dynamic and Efficient Enterprises

• Institutional aspects (private ownership, company and anti-trust legislation, degree of competition, possibilities for formation and closure of enterprises, rendering of accounts and accounting systems, availability of economic, technological and market information etc.).

• Politicoeconomic regimentation (market orientation: among other things by the level of prices, trade, duties, taxes, labour market flexibility, direct investments, licences etc.).

• Economic stability.

• A functioning financial system, including interest rate policy, mobilisation of savings, capital markets, bank and credit development, access to foreign exchange etc.

• Infrastructure, human resources, supply of energy, transport and communication systems, marketing, technology and secondary services.

• Sales prospects for manufactured products and services.

• Solid raw materials basis, including access to necessary imports.

Figure 3: Framework Conditions as the Prerequisite for the Development of Dynamic and Efficient Enterprises


This handbook aims to provide support in privatisation assignments in different countries

and strives to show the necessary prerequisites for its successful implementation.

Depending on a country's structure and level of development, the necessary conditions

are either already available or yet to be created. Some authors have attempted to define

different privatisation stages or phases which could be found both in developing and in

transforming countries. In each of these stages there is a need for specific support within

the framework of technical co-operation. The following figure reflects this connection;

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Pri

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tage

s an

d N

eed

for

Sup

port

Sta

ge 1

• Le

gal I

Eco

nom

ic fr

amew

ork

for p

rivat

isat

ion

is

only

beg

inni

ng to

dev

elop

•

No

cons

ensu

s ov

er p

rivat

isat

ion

stra

tegy

•

Littl

e pr

ivat

isat

ion

expe

rienc

e •

Ent

erpr

ises

to b

e pr

ivat

ised

are

mai

nly

thos

e th

at w

ere

orig

inal

ly e

stab

lishe

d in

the

priv

ate

sect

or (

smal

l ent

erpr

ises

in th

e pr

oces

sing

and

se

rvic

es s

ecto

r)

• S

ale

mai

nly

to n

atio

nals

or r

etum

to p

revi

ous

owne

rs

• W

ait-a

nd-s

ee a

ttitu

de o

f pot

entia

l inv

esto

rs

• R

elat

ivel

y w

ide

supp

ort a

mon

g th

e pu

blic

• D

evel

opm

ent a

nd im

plem

enta

tion

of a

pr

ivat

isat

ion

stra

tegy

as

wel

l as

an a

dequ

ate

lega

l and

inst

itutio

nal f

ram

ewor

k •

Kno

w-h

ow fo

r the

cre

atio

n of

a P

rivat

isat

ion

Age

ncy

as w

ell a

s th

e im

plem

enta

tion

of

part

icul

ar p

rivat

isat

ions

•

Impl

emen

tatio

n o

f ac

com

pany

ing

mac

roec

onom

ic m

easu

res

-Tr

ansp

aren

cy,

impl

emen

tatio

n o

f edu

catio

nal

cam

paig

ns a

mon

g th

e po

pula

tion

Exa

mpl

es: T

anza

nia,

Uzb

ekis

tan

Sta

ge 2

• Le

gal I

Eco

nom

ic fr

amew

ork

for

priv

atis

atio

n av

aila

ble

but i

ncon

sist

ent

• P

rivat

isat

ion

stra

tegy

rea

lised

•

Priv

atis

atio

n ex

perie

nce

avai

labl

e, b

ut d

elay

ed

• M

ediu

m a

nd la

rge

size

ent

erpr

ises

of a

ll se

ctor

s to

be

priv

atis

ed

• Fo

reig

n in

vest

ors

are

adm

itted

, ho

wev

er th

e on

ly o

nes

enga

ged

are

thos

e w

ho a

re a

lread

y fa

mili

ar w

ith th

e co

untry

•

Sup

port

amon

g th

e pu

blic

dec

reas

es w

ith th

e ap

pear

ance

of

nega

tive

cons

eque

nces

of

priv

atis

atio

n (u

nem

ploy

men

t, in

flatio

n, d

ecre

ase

in p

rodu

ctio

n)

Nee

d fo

r su

pp

ort

:

-S

treng

then

ing

of t

he le

gal a

nd

inst

itutio

nal f

ram

ewor

k • I

mpl

emen

tatio

n of

priv

etis

atio

n st

udie

s -P

rom

otio

n o

f inv

estm

ent i

nsid

e an

d ou

tsid

e th

e co

untry

-

Cre

atio

n o

f mes

o le

vel i

nstit

utio

ns

(ie.g

. in

vest

men

t an

d un

it tru

st fu

nds)

-Im

plem

enta

tion

of

acco

mpa

nyin

g m

acro

econ

omic

mea

sure

s -

Cus

hion

ing

of n

egat

ive

priv

atis

atio

n ef

fect

s

Exa

mpl

es: Z

ambi

a, C

zech

Rep

ublic

Sta

ge 3

• In

stitu

tiona

l fra

mew

ork

for p

rivat

isat

ion

is

cons

iste

nt

• Th

e pr

ivat

e se

ctor

dom

inat

es a

lread

y to

a la

rge

exte

nt

• E

nter

pris

es to

be

priv

atis

ed a

re p

ublic

util

ity

com

pani

es a

s w

ell a

s in

sec

tors

that

are

st

rate

gica

lly d

istin

guis

hed

(def

ence

indu

stry

, tra

nspo

rt, t

elec

omm

unic

atio

ns e

tc.)

• Fo

reig

n in

vest

ors

enga

ge th

emse

lves

mor

e ex

tens

ivel

y •

Sup

port

only

from

that

par

t of t

he p

opul

atio

n w

hich

ben

efits

from

the

impa

cts

of p

rlvat

isat

lon.

Nee

d fo

r su

ppor

t:

• Im

plem

enta

tion

of p

rivet

isat

ion

stud

ies,

co

ntin

ued

intro

duct

ion

of r

ehab

ilitat

ion

and

priv

atis

atio

n ex

perti

se

-Stre

ngth

enin

g o

f mes

o le

vel I

nstit

utio

ns

• Sup

ervi

sion

of p

rivat

ised

ent

ities

Exa

mpl

es:

Mal

aysi

a, F

ranc

e

g ~ 1\ ., ~

'. ~

;:

C"\

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IS g' -....:J


1.4 Typ,ical Process Flows of an Ideal Privatisation Programme

Privatisation is a complex process with a dynamic and evolutionary character. Individual

and isolated projects that are not incorporated into the framework of a process-oriented

privatisation model are meaningless. Short-term measures must be co-ordinated and

compatible with long-term aims and strategies. Privatisation programmes should therefore

not be reduced to short-term adjustment programmes or isolated enterprise privatisations,

but should be planned as long-term structural changes with inherent sequences of

measures.

The ideal privatisation process can be divided into five phases, as described below and

shown graphically in figure 5.

Although broad consensus on the necessity of privatisation exists as a rule, this is not the

case with regard to the concepts of privatisation strategies. In the first phase, a widely

accepted privatisation programme will ideally be developed. This conceptual phase should

involve all social groups, both the government and the opposition, trade unions, potential

national and international investors, and other associations.

Consensus should especially be aimed at the goals and basic elements of the programme.

The groups involved must be conscious of possible conflicts between particular goals of

privatisation (see also Chapter 2.2) and set priorities accordingly. In addition, clarity

should prevail regarding all possible benefits and costs. Because privatisation is as a rule

associated with negative effects, governments often have difficulty discussing it openly.

A public discussion can, of course, increase future support by tackling the issues of

negative accompanying effects. And, most important, the promotion of transparency is

not only relevant to the initial phase; it is highly important throughout the entire process.

The legal foundation for privatisation is created in the second phase. This includes, for

example, the examination of existing legislation for possible hindrances and the creation

of adequate order in ownership issues. In addition, an institution is created that will be

responsible for carrying out the privatisation of state enterprises. There is much support in

this context for advocating the creation of an independent privatisation agency (see

Chapter 4.2).

Finally in this phase, concrete national, sectoral and individual privatisation strategies are

worked out, i.e. a guiding line is laid down as to which sectors and enterprises should be


privatised over which time period, and with which priorities and methods. Different

classification systems supporting the choice of priorities for privatised enterprises exist

and are examined further in Chapter 4.2. The enterprises are selected on the basis of

criteria such as the following:

• Strategic importance and financial performance.

• The degree of competition.

• The size of the enterprise.

• The sector of the economy.

Privatisation programmes for the entire economy can begin at first with simple and "close

to the people" fields: privatisation of agricultural production as a rule enjoys high public

consensus and reaches rapid production increases without great investment volume. The

privatisation of housing, for example through vouchers, allows the population to enjoy

the advantages of privatisation immediately. At the same time, small enterprises in the

services and retail trade sectors can be privatised - in general without problems - to

produce a higher availability of goods and services in consumer-related fields. Such

privatisation is above all not connected with social hardship, and it produces public

support for the privatisation process and makes the practice of market economic actions

possible. In addition, time is also saved which can be used for preparing the

implementation of friction-laden privatisations of medium and large public as well as

quasi -governmental enterprises.

The conception of such strategies lies in the privatisation agency's or institution's field of

responsibility. Its recommended procedures will then be discussed and decided upon at

government level in the third phase, whereby important economic and social groups

will again be included in the decision-making process.

In the fourth phase, the chosen public enterprises are prepared for the privatisation,

which is then implemented. A detailed analysis of the actual situation of the enterprise and

its environment, including the valuation of the enterprise, follows. According to the

chosen privatisation strategy, the enterprise is transferred into an adequate legal form,

memoranda of sale are developed, negotiations with potential investors take place and

finally the enterprise is sold. These particular steps are described in more detail later in

this manual.

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. --Pri~atisation P

roce

ss O

rien

tatio

n I

Pha

se 1

:

Dev

elop

ing

con

sen

sus

De

velo

pm

en

t of a

wid

ely

a

cce

pte

d p

riva

tisa

tio

n

prog

ram

me,

ag

ree

me

nt

on

aim

s a

nd

ba

sic

ele

men

ts,

cla

rific

atio

n o

f b

en

efit

s a

nd

co

sts

of

pri

vatis

atio

n

Pha

se 2

:

Exa

min

atio

n o

f exi

stin

g

legi

slat

ion,

cre

atio

n o

f a

Pri

vatis

atio

n A

genc

y,

dete

rmin

atio

n o

f pri

va

tisa

tion

str

ateg

ies,

pre

se

lect

ion

of e

nter

pris

es

to b

e p

riva

tise

d

Pha

se 3

:

Dec

isio

n o

n

pri

vatis

atio

ns

Dis

cuss

ion

an

d

de

cisi

on

at g

ove

rn

me

nt l

eve

l (in

clu

si

on

of i

mp

ort

an

t e

con

om

ic a

nd

so

cia

l g

rou

ps)

Pha

se 4

:

Pre

para

tion

and

imp

lem

en

tatio

n o

f p

riva

tisa

tion

Det

aile

d a

na

lysi

s o

f th

e e

nte

rpri

ses

to b

e

pri

vatis

ed

, m

anag

em

en

t app

rais

al,

pre

pa

ratio

n o

f p

rosp

ect

use

s,

ne

go

tiatio

ns

with

in

vest

ors

etc

.

Pha

se 5

:

Co

ntr

ol a

nd

care

taki

ng

Co

ntr

ol o

f co

mp

lian

ce

with

pri

vatis

atio

n

con

tra

cts,

ca

reta

kin

g

mea

sure

s, e

nsu

ran

ce

of s

ust

ain

ab

ility

of

pri

vatis

atio

ns

etc.

Acc

om

pa

nyi

ng

eco

no

mic

and

so

cio

-po

lltlc

al m

easu

res

(lega

l and

inst

itutio

nal f

ram

ewor

k, c

ompe

titio

n po

licy,

so

cial

sec

urity

and

com

pens

atio

n, e

tc.)

as w

ell a

s b

uild

ing

and

str

en

gth

en

ing

of m

eso

leve

l in

stitu

tion

s.

tv

o Q

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Many contracts for the sale of public enterprises express specific arrangements on the

extent of the purchaser's investment or on the maintenance of an agreed quantity of

employment. In the fifth phase, the compliance with such clauses is supervised. In

addition, the sustainability of the privatisation should be enhanced through continued and

consistent measures to improve competitiveness.

The control and supervision of privatisation should not only take place at the end of the

privatisation process. Instead, there should be continuous, iterative feedback on the

experience as it is gained, in order to ensure the implementation of corresponding

adjustments and refinements.

The same applies to the accompanying economic, social and political measures

during the entire privatisation process. Important elements here include the creation of an

appropriate legal and institutional framework, the establishment of an adequate

competition policy and corresponding measures that will cushion privatisation's negative

effects. Large-scale privatisation programmes that do not include a working social

security system and appropriate labour market policies lead to unacceptable social

consequences.

In addition, before and during the entire privatisation process the creation and

strengthening of institutions in the business environment are to be promoted,

since privatised enterprises are often not in a position to develop adequately without the

existence of supporting institutions.


1.5 Selection of Enterprises for Privatisation

Which enterprises should be privatised when must be decided at the beginning of the

privatisation process. Clarity about the definition of a public enterprise must exist for this.

Here one is concerned with enterprises where the state or state organisations own at least

50% of the shares, or on which the state exerts considerable influence6. The different

forms which public enterprises take can be described on the basis of the following

characteristics:

• Nature and number of owners: national, regional or local authorities as sole owners, plural public owners (mixed public ownership enterprises), private enterprises;

• legal entity differentiation: corporate body public enterprises and enterprises constituted under public law.;

• sector (nature of the goods and services): traditional public domain - such as energy, water, transport - or typically private sector domain such as goods production, agriculture, tourism, services;

• national or international economic activity;

Which enterprises should now be privatised first? A variety of instruments for classifying public enterprises and their priority to be privatised exist.

The most important classification systems are briefly portrayed below:

• Classification according to strategic importance and competitiveness of public enterprises:

6 On the definition of a public enterprise, see Briining, D.-K.: Management Problems in Africa. Under Special Consideration of the Formation of Management Training Projects in Public Enterprises. Empirical Study in Six African States, Berlin 1986. Briining defines a public enterprise as follows (pA): "An enterprise is public when: the state or any other national, regional or local authority holds at least 50% of the capital; it is under state control and reports to the state; its objectives are of a public or multi-dimensional nature. The multi-dimensional aspect presupposes financial investments, the marketing of products and services, financial returns, a system of business accounts and a social return which the enterprise must account for."


Classification According to Strategic Importance and Competitiveness of the Enterprise

Strategically Strategically less Important position important position

Competitive Remains!n the public Privatisation

sector

Commerciali- Rehabilitation I sation privatisation I

Not competitive

liquidation

Figure 6: Classification of Enterprises to be privatised

23

The classification of state enterprises according to this system allows a quick assignment of the enterprises and is - especially in countries where a large number of enterprises are to be privatised - a good starting point for planning privatisation programmes. The assignment of enterprises can be done according to different criteria. For example, in Togo enterprises were assigned as strategic if they fulfilled important public tasks, played a role in the exploitation of natural resources, or significantly contributed to the state's income. In Kenya enterprises which contribute to national security or produce public goods were classified as "strategic". Gauging competitiveness should be oriented towards the market which is relevant to the enterprise. Depending on the sector and the specific situation, these could be regional, national or international markets. Enterprises which do not face any competition should be examined as to how far they could survive in a competitive environment.

The danger with this approach is that the idea of "strategic" can be too widely cast. The classification remains subjective and leaves open the possibility of preventing the privatisation of enterprises under the auspices of being strategic.


• Classification according to the size of the enterprise:

A grouping of the enterprises according to size (measured e.g. by number of employees or turnover) is a helpful support when planning the processes of the privatisation programme. Many countries first privatise the smaller, less problematic enterprises. This also achieves a wide participation. This practice was followed in Poland, where in addition to the early small privatisations the larger state enterprises were later to be sold to various shareholders in order to gain a wider participation.

Classification according to sectors:

State enterprises can also be grouped according to sectors and then be privati sed by sector. Less "strategically important" sectors are then privatised first. One advantage

of this method is that potential investors can purchase more than one enterprise in a particular sector at the same time. Large foreign investors such as multinational companies can thus be attracted. The sale of more than one enterprise to the same investor reduces the transaction costs of the privatisation (e.g. lower cost of negotiation). The potential reduction in competition in the sector, however, must be

weighed against this.

Which and when the decision support classification methods listed above should be used cannot be generalised. The selection of the enterprises to be privatised should be guided

by the specific economic structure as well as the ongoing political and socio-economic developments in the country.

1.6 Privatisation Methods

Fundamentally, one should distinguish between two types of privatisation: material

privatisation and privatisation of management. In the latter case, the enterprise remains

under state ownership, while with the material privatisation the property relations change,

i.e. the enterprise is transferred to private ownership. Frequently, if a complete material

privatisation is not possible but an increase in efficiency must be achieved, the

privatisation of management is the first step towards a complete privatisation.


Private sale of shares

Management Buy-in

Management Buy-out. Employee Buy-out

Asset sale (liquidation)

General, Points:

Privatisation Methods

owners

Voucher Privatisation

• Privatisation of the entire enterprise or of specific parts? • To what extent should foreign investment be allowed?

Figure 7: Privatisation Methods

Management Contracts

Leasing

25

I

The figure above provides a preview of the privatisation methods described in Chapters

1.6.1 and 1.6.2. Before deciding on an adequate form of privatisation, the following

questions must be addressed:


• Privatisation of the enterprise as a whole or only a specific part or parts?

Preserving the remaining state control and regulation functions is one reason for keeping specific parts of an enterprise under public ownership. Therefore privatisation of part of the enterprise is frequently practised in very large enterprises, e.g. Eastern European combines. In addition, in countries with a large number of enterprises to be privatised, higher sales proceeds through a well-timed postponement of an enterprise's sale are often expected. This practice has shown that privatisation of only a part of an enterprise can also be problematic. This was done - for example, with the partial sale of Petrocorp, New Zealand's largest oil and gas company - in order to maintain the state's influence. Here, the private sector, even as minority shareholders, was well positioned to "capture" the management and assume higher risks than would have been the case with a fully privati sed and appropriately regulated and supervised enterprise.

• Nationals or foreigners?

7

Due to the fear of a sell-out of the entire economy to foreigners or ethnic minorities (such as Asians in Zambia or Kenya, or the ethnic Chinese in Indonesia), many countries limit the participation of foreigners7 in privatisation. Some governments guard themselves against a strong foreign presence by selling only a portion of the shares to foreigners, or through retaining so-called "golden shares", which ensure the government the right of co-determination. Golden shares, however, may discourage investors who are not willing to risk the government's renewed involvement.

Generally, foreign investment is welcome because it not only provides necessary capital inflows, but foreign investors also provide access to production and management technology and new markets. Foreign investment often provides indispensable initiatives and impulses towards modernisation. It is not surprising that, above all, countries whose governments are relatively strong (e.g. Mexico, Chile) give priority to foreign investors more so than countries whose governments fear losing the next election if they show too much preference for foreign capital.

"non indigenous" individuals or groups


1.6.1 Material Privatisation

The following are detailed descriptions of the various methods of material privatisation:

• Sale of shares to the public

In this method shares are issued for the company which is to be privatised (which of course must have a suitable legal constitution, such as a joint-stock company) and they are sold openly to the pUblic. A number of possible arrangements exist for this activity (i.e. national or international share issues) as well as quantitative or qualitative requirements (for example, number of shares per shareholder or groups of share purchasers). As a rule, an emissary (e.g. investment bank) will lead or underwrite the issuance of shares so that the state's risk on the issue is managed. If state ownership is simply to be diluted, then a share capital increase can also be carried out.

The past has shown that privatisation in the form of a sale of shares to the public only works when the enterprise under consideration is a profit-making firm or can at least credibly promise a certain profit level so that the public is interested in holding shares. In order for that to be the case, there must be a large, well-developed capital market

which is able to absorb the issue with sufficient depth, in addition to providing the desired capital.

One factor in particular which makes a sale of shares to the public a favourable method of privatisation is the ability to avoid a concentration of shares by engineering a broad ownership structure. Through this, small investors are also able to participate in the privatisation process, a goal that is often referred to as popular capitalism. Finally, this method of sale can ensure a large degree of transparency in the privatisation process.

Problems lie in the relative complexity of the process and time absorbed, which also leads to high transaction costs (in other words, costs that are directly related to the privatisation, such as registration at the stock exchange and compliance with the exchange's reporting rules and regulations). Further difficulties arise due to poorly developed capital markets in developing and transforming countries. When financial

resources are limited, a displacement of other necessary private investments results -"classic" crowding-out effects, but here due to the withdrawal of government from the

productive sector.

When too great a dispersion takes place, the danger exists that the owners will lose effective control over the managers, which means that the ineffective state control of the business will not be corrected by the new shareholders' control. The individual


shareholder - even if he is well informed, allowed to vote and willing to participate - is

actually powerless. In extreme cases, the shareholders will not be adequately

informed of activities which take place in the firm, as was the case with the British

Trustee Savings Bank Group, which found it too costly to send shareholders a copy of the company's annual report. They wanted to replace it with a shortened form of

the report which would fulfil their minimum obligations to provide information.

• Private placement of shares

In this privatisation method, shares are transferred to a particular investor. The

selection of these investors can take place through public announcements (open or

restricted tenders), through an auction, or through direct negotiations with select

investors.

Private share sales are preferred to public share sales in small countries with

underdeveloped capital markets. Private share placement is particularly recommended

for weaker enterprises, or when special technical or management know-how is

required. In these cases, selection criteria must be developed for the search for and

dealings with potential buyers (reputation, financial strength, history and experience, etc.). The future owners can then be better judged and the future business plans can

be examined more flexibly.

The danger of concentration of property and income exists and consequently an increased control that individuals, firms or institutions can exert. This was evident in

the privatisation of 232 Chilean enterprises between 1974 and 1982, which resulted in

greater bank control over industrial organisations, and lead eventually to serious distortions in credit allocation. In addition, possibilities of controlling the public sector with respect to the selection of investors and the prices that they pay hardly exist and the danger of corruption is great. In order to ensure the highest possible level of transparency, clear guidelines and rules for the selection of investors are therefore

necessary.

A special case in private share sales is called management buy-in (MBI), in which

outside managers buy the shares and therefore become employers in the business.

This is particularly advantageous when the business not only needs capital but also

sound knowledge about particular (western) business and marketing methods, or

effective cost planning, or other management or industrial technology.

• Management and employee buy-out

In the framework of management and employee buy-outs (MBO and EBO), either the

management or the entire workforce acquires the enterprise to be privatised. This


method is often employed when the state enterprise is in a weak financial position, but is under the direction of qualified management who can rectify the situation. It can also be used when there is hope that the company will have a strong chance in the market after a successful rehabilitation. In former East Germany, over one fifth of all privatised businesses were transferred from state ownership through management or employee participation.

In addition to the arguments that jobs are preserved and that otherwise unsaleable firms are maintained, this method results in higher motivation and accountability levels in management and employees. In employee buy-outs, the otherwise common feeling of management mistrust can be eliminated. Finally, participation of the domestic population can be ensured (see also Chapter 2.4).

The danger that this solution will not lead to socially and politically desired changes for the elite exists in former socialist states as well as in developing countries. The former holders of power of the old bureaucratic system are often those who yield the economic power in the new system, a situation which rarely meets public acceptance. One cannot assume that the performance abilities of the enterprise bosses under socialism can meet the qualifications demanded of management in a competitive market system. A transfer of property rights to the former management would therefore hinder the dire need to generate human capital.

Many workforces cannot raise the financial means to purchase the enterprise. This is also true of managers whose pay was often not high enough to allow them to establish credit. They are therefore dependent upon foreign capital from credit institutions, the indirect owner of the public enterprise, or the state (leveraged buy-outs, leasebacks, etc.). In these cases, the value of the property and possibly the future income of the privatised enterprise serve as security or collateral. Frequently though, the expectations regarding the enterprise's development are much too optimistic.

• Sale of individual assets

The sale of individual assets can refer to any of the following: individual, dependent (in the case of a going concern), or independent assets. The sale of assets is as a rule only carried out in the case of a liquidation - in other words, when a material privatisation of a going concern is no longer possible because of financial and economic factors (e.g. poorest performance, loss of the enterprise's raison d'etre, unsaleability). In some cases, parts of the business are sold although the core of the business remains intact. The sales can take place through announcements, auctions or direct dealings with private investors.


A liquidation can be more expensive than restructuring the enterprise because all obligations fall due in one go, including statutory costs (i.e. unpaid sales taxes and duties), retrenchment costs, etc.

• Return to former owners

Restitution plays a distinct role in the reforming Eastern European countries, where many private individuals were dispossessed during the process of building the socialist centrally planned system. The return of assets to the former owners is difficult because it often comes to drawn-out, time-consuming legal disagreements in identifying and distinguishing rightful former owners.

The German experience shows that the privatisation process can be undesirably slowed down because of this. When the principle of "Return before Indemnification" was established in the German unification treaty, a flood of compensation requests ensued. The procedures to determine former ownership were very time-consuming and were criticised as being a hindrance to investment. As long as the ownership rights for property and production facilities are not clearly determined, they are not freely transferable. This means they cannot be invested in and the privatisation process comes to a standstill.

Therefore retribution can be seen as compensation for property damage suffered by former owners, but not as their right to re-acquire their former assets. In the meantime, this connection is at least partially considered in investment prioritisation laws. Other countries, however, have gone a step further, for example in Poland, where the indemnification rule is given general priority, and in Hungary, where indemnification/reimbursement has been completely ruled out.

• Voucher privatisation

Because straightforward sales are often only possible to a limited extent (particularly in Eastern Europe), different forms of ownership transfer were developed in these countries. A rapid transfer of property rights and maintenance of a certain degree of social justice were promised. A common factor in these methods is a voucher system which can be organised in a number of different ways, but in which every adult citizen receives vouchers free of charge or for a nominal fee, that he or she can later exchange for ownership titles in the state enterprises of his or her choice.

The advantages of this privatisation method are that it can be carried out quickly and with minimal costs. Because the entire population takes part in the privatisation, a higher level of political acceptance can be expected. This is true because, among other things, it is publicly effective and therefore more popular to give the state property to


the citizens as gifts, rather than to wait for the indirect advantages of privatisation, e.g. higher fiscal income in the long run.

Finally, the shortage of domestic funds will be evened out. Initial experience shows that mass privatisation can make a positive contribution to the development of capital markets. The number of vouchers committed to each enterprise shows how much value the citizens assign to the individual companies. This then serves as an indication for the price of the shares initially held by the state which can later be sold on capital markets with both foreign and domestic participation.

There are also negative aspects of this privatisation method, for example, the fact that badly needed financing for restructuring measures and rehabilitation does not flow to either the enterprise or the state. With this method, an extremely wide dispersion of ownership rights - at least in the early phases - makes control over the business by the shareowners almost impossible. Because the new small shareholders have little or no experience in the evaluation of performance, interpretation of records or order of business in general meetings, it is relatively easy for the former management to pursue its own interests. This can cause the expected gains in efficiency through privatisation to fail to appear. The management of numerous enterprises in the Czech Republic understood this and pleaded for the privatisation of as many enterprises as possible through this system. They expected that the small shareholders' ineffective control would allow them more room to pursue their own goals or agendas.

Even the placement of shares in investment funds, which then administer a large portion of the certificates, did not lead to a more efficient control structure because these funds seldom played an active role in the management of their portfolio enterprises, even in developed economies.

One can assume that only some of the economic agents want to retain assets in the form of shares. Therefore many citizens will sell their ownership titles right away. This leads to a less scattered ownership structure and therefore to somewhat more concentrated control. The relatively high supply of ownership titles for sale, however, results in lower prices for the shares. Citizens who want to sell their shares, in tum, receive a lower consideration for them. Because poorer classes of society in particular belong to this group, they will benefit less from the privatisation, while financially stronger and better informed citizens (as a rule the more privileged groups) acquire shares on the market and are more likely to identify those shares where rapid growth in the value can be expected. Extremely high speculative gains for the risk-takers can then lead to political unrest.

Because of these disadvantages, the voucher privatisation process should not be the core of a privatisation concept for a large enterprise. The sale of coupons is better


suited to other pieces of state property - for example, apartments, real estate, small businesses, and service enterprises - because the majority of citizens can better estimate their value, and because the danger of too widely scattered ownership is minimised.

1.6.2 Privatisation of Management

The ownership structure of public enterprises remains unchanged in the privatisation of

management. As indicated, this privatisation form is often a preceding step to material

privatisation since this form embodies the lowest number of politically combustible

issues, among other things. This privatisation method is often implemented in areas

where it is difficult to attract private investors. Another advantage lies in the relatively

rapid implementation of management privatisation, and thus in the possibility for quick

realisation of efficiency improvements.

• Management contracts

In this privatisation method, the state (as owner of the public enterprise) contracts outside private management for a particular period of time. The management receives a set remuneration for running the business, while the business risk remains with the state. Management contracts are particularly common in service sectors, e.g. hotels, airlines or social services, but are becoming more and more common in industrial sectors.

One expects increased efficiency and effectiveness in the entire enterprise through management contracts, and in particular an improvement in the procedural, structural and personal roles of the management. One condition for these positive effects is that the contracted management possesses the necessary competence and accountability for carrying out the necessary changes in the business. Problems, however, lie in the fact that the management may not carry any financial risk, depending on the structure of the contract. Losses which appear must be taken over by the state although it has no influence on the daily operations of the firm. Therefore it is recommended that management contracts contain incentives for increased efficiency, for example, through performance-related compensation.


• Leasing

In this privatisation method, the state as lease-provider signs a contract with a private company for commercial use of a public enterprise for a certain period of time. In return, the state receives the lease or "rental" fee. The business risk lies in the hands of the leasing company. Depending on the contract conditions, the leasing company

has varying obligations and rights when employing a certain section of the workforce. The leasing fees are often based on the profitability of the enterprise, so that management has an incentive to improve performance.

Many disadvantages of management contracts are eliminated in lease contracts. The leaseholder, for example, has more control over the business and also carries the financial risk. It must be noted though that the danger often exists that lease contracts act only as a temporary solution, because the political authorities often demand renewed and increased influence when the enterprise becomes profitable again. Therefore necessary investments are often not carried out in leased enterprises.

Which privatisation forms should be applied to which state enterprises? As was discussed

in the description of the various privatisation methods, every method has its own

advantages and disadvantages. Tips for the selection of a privatisation method based on

the characteristics of the enterprise, which sector it belongs to, and the desired goals, are

found in the appendix. Chapter 4.3 provides a decision support matrix which facilitates

the process of selecting an adequate method of privatisation.

1.7 Obstacles to Privatisation

A number of obstacles that can hinder the success of reforms exist in the privatisation

process. The following figure speaks for itself and requires no further explanation at this

point in time:8

8 The individual barriers are discussed in detail elsewhere in this handbook.


Major Obstacles to Privatisation I

Figure 8: Major Obstacles to Privatisation

A clear factor for success is the support of the reform programme by the population as a

whole. Within the population, however, there is often no consensus about the state's role

in the measures to be carried out. Particular problems arise when privatisation and reform

programmes are prescribed by outside organisations that do not take into account the fact

that local relationships and historical traditions and attitudes cannot be changed in the

short run. Privatisation programmes are doomed to fail if the governments and important

popular organisations are not convinced that privatisation and deregulation will lead to

positive effects for the entire economy.

Possible opponents to privatisation could be:

• Workers fear decreases in wages or the loss of employment.

• Line management fear the loss of their control over the enterprise.

• Government officials want to avoid the reduction of their areas of responsibility and therefore argue that private control of business does not serve the common good of the people. This phenomenon is not only visible in developing and reforming nations, but also in western industrialised nations, where politicians and government


•

•

•

employees use tricks to delay the sale of state property for fear that they will lose their positions of influence.

The political opposition can take advantage of privatisation processes in order to improve its own position by criticising the actions of the state. Accusations can be made against selling enterprises for too Iowa price, selling them to the privileged or to

foreigners, or a lack of concern for the interests of the working population.

The military is often directly connected with the management and control of public enterprises. In some countries, military regimes will establish their own enterprises which cover their needs for goods and services, and distribute the jobs among their supporters. The goals of privatisation and reform are then put at risk.

Then, of course, there are always the individual voices against privatisation which are of the opinion that privatisation is a way of helping the rich and privileged and further advancing skewed income distribution within the population.

The implications of these obstacles to privatisation should be considered in each phase of the reform process. Concerted action should then be taken with respect to each obstacle in order to come up with a reform package which will be met with consensus from the

society.

Conditions for the success of reform measures are therefore:

• Clear, unequivocal and public acceptance of privatisation by the members of

government.

• Privatisation should not simply be seen as a transfer of ownership rights, but rather as a comprehensive societal and economic reform.

• Consensus about the future roles of public and private sectors.

• Transparency of the privatisation process and a clear legal framework that is accessible to everyone.

• Fostering the active participation of all population classes in the privatisation process.

• Co-operation between the private and public sector in the construction of a market infrastructure for private enterprises, as well as in the design of a durable system of

social security.


1.8 The Holistic Approach to Privatisation

The preceding discussions have shown that privatisation is a complex and dynamic

process. One condition for success in privatisation programmes is consideration of the

interdependent structures of the reform process. The GTZ has therefore developed a so

called "holistic approach" to privatisation.

The hallmark of the concept is the use of comprehensive and integrated systematic

consultation to take into account the complexity of the privatisation process in which

different participants (on the government, semi-government and private levels) are

involved. The systematic consultation aims to connect the privatisation-relevant

participants in politics and on the macroeconomic level with those on the microeconomic

and mesoeconomic level. A networking of these levels not only leads to synergistic

effects, but also helps to obtain the necessary privatisation consensus and contributes to

the sustainability of privatisation.

On the macroeconomic level, measures to establish a market -oriented economic order are

called for. This is because the expected positive effects of private ownership can only be

realised in an adequate and market-conforming environment. Stabilisation measures are

therefore necessary because overall economic instability can arise during the process of

reform.

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Privatisation and reform processes are more than short-term adaptation programmes of

neo-liberal development strategies under the motto "get the prices right". It has much

more to do with long-term, overall economic and societal change. The restructuring and

modernisation of the entire economy must therefore be supported by respective economic

and socio-political measures. Herein lies an important basis for technical co-operation: an

important element of the GTZ concept consists of aiming not only to improve the

conditions on the supply side of the economy, but also to strive equally to improve the

population's economic opportunities through a greater and fairer participation in the

economic process. The participation of diverse groups in the market process should be

improved through better access to educational and vocational institutions, information and

credit opportunities, and through promotion of small businesses and regional

development.

The GTZ concept deals less with the equation "free market plus redistribution" and more

with promotion of private business and poverty reduction through relatively wide

resource access and participation in market processes. Promotion of private activities

under this premise achieves a contribution to economic pluralism and forms an economic

counterpart for fostering the political democratic process in developing and transforming

countries.

An important component of the GTZ concept lies in the emphasis on the meso

economic level. Successful privatisation can only be generated by the effects of macro

and meso level policies on the enterprises. The institutions and organisations that cannot

be exclusively categorised as macro (i.e. the government) or micro (i.e. enterprises) form

the meso level and they perform intermediate, catalytic tasks. Examples of these

organisations include privatisation institutions, unions, chambers of commerce, financial

institutions, and export and investment promotion organisations. These institutions serve

as transmission belts between the macro and micro levels because they have vertical

influence in both directions and can help bring about social consensus through their

horizontal networking. The creation and strengthening of institutions on the meso level

can therefore contribute greatly to reaching the goals of the reform programmes.

Functional institutions on the meso level can as a rule only be maintained through a far

reaching restructuring of the state apparatus, in which old institutions must be reformed

and new institutions must be founded. Private, participating, institutional structures can

only grow, however, over an extended period of time.


In the area of individual. organisations, that is, on the micro level, questions about

privatisation in a narrower sense take priority. An evaluation of the enterprise on the basis

of a comprehensive framework and company analysis is carried out through a

privatisation study. The individual privatisation options will be surveyed for their

advantages and disadvantages from the results obtained. Further measures carried out

include the search for and selection of potential investors, carrying out sales negotiations

and implementing prerehabilitations.

The GTZ concept is constructed so that it can also be applied by gradual and partial

privatisation, for example, through management or leasing contracts. Many state

enterprises produce important public goods or should for other reasons be fully privatised

at a later time. In Eastern Europe in particular, closing all competitively weak and

unsaleable enterprises is not an option nor is it sensible because of the negative social

consequences. Therefore restructuring and rehabilitating public enterprises in phases of

privatisation programmes form an important topic. Because this handbook is primarily

concerned with issues and questions in the area of privatisation, the topics of restructuring

and rehabilitation will be the subject of the next handbook.


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Kowalski, Jochen: Privatisierungsprozesse in osteuropiiischen Liindern - Erfahrungen der ersten zwei Jahre, in: ZOgU, Bd. 14, H. 3, 1991.

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Nellis, John, Kikeri, Sunita: Public Enterprise Refonn: Privatization and the World Bank, in: World Development, Vol. 17, No.5, 1989.

OdIe, Maurice: Towards a Stages Theory Approach to Privatization, in: Public Administration and Development, Vol. 13, 1993.

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Chapter 2: Measures on a Macroeconomic Level 43

2. Measures on a Macroeconomic Level

2.1 Macroeconomic Determinants

Previous experience has shown that the success of privatisation is closely linked with the

implementation of suitable macroeconomic measures. The classic example when this does

not take place is the privatisation of state-run monopolies, that - without corresponding

market deregulation and anti-trust measures - do not result in the desired efficiency gains.

A more specific example is the first privatisation phase in Chile, which was embarked on

very quickly and without supporting economic policy measures. Since accompanying

economic policy measures such as stabilisation, deregulation and trade liberalisation were

instituted only after privatisation, many newly privati sed companies did not survive in

their newly competitive environment. Specific accompanying economic measures to ease

structural change and create incentive systems could possibly have prevented this.

Accompanying macroeconomic measures necessary to assist in privatisation consist of the

following:

• Policy Measures

Private industrial activities can only be successful in a market-driven economy. This is why, in the framework of privatisation programmes, market-conforming legislation and an adequate legal system must be guaranteed. In the former centrally administered economies of Eastern Europe, this refers to a complete transformation of the entire economic system; and in developing countries it has to do with a strengthening and consolidation of the market economic structure.

• Stabilisation Measures

Privatisation and market economic reforms are generally coupled with considerable adjustment crises, for example, high inflation rates, declines in production, and a drop in national income. These kinds of instabilities endanger the success of privatisation

and hinder the development of national and regional economies. Urgent stabilisation tasks typically lie in controllirig government spending, curbing inflation and stabilising the currency; measures may lie in restricting money supply growth,

operating government on a cash budget and other fiscally restrictive measures.

44 Chapter 2: Measures on a Macroeconomic Level

• Regional and Sectoral Structural Reforms

An inefficient industry structure dominates in most developing and transforming countries. Former Eastern Bloc countries, for example, host many heavily vertically integrated enterprises. Extensive structural change is necessary in order to become competitive in regional, national and international markets, and this must be adequately supported by regional and sectoral policies.

• Socio-Political Measures

For a considerable part of the population, privatisation programmes are associated with negative effects, at least temporarily. Socio-political accompanying measures are necessary, above all, in order to tackle the problems of rising unemployment. A working system of social security should be developed in the medium to long term.

• Informing and Educating the Public

Fear of negative employment effects and lack of information or false information about privatisation programmes cause the population to widely oppose the idea. The success of reforms depend heavily on the support and active participation of the population. Public information and information campaigns contribute to successful privatisation.

For the success of privatisation, clear government articulation supporting the reforms and their scheduled implementation are of particular importance.

This reduces uncertainty about political developments and contributes to an investmentfriendly climate. Many reform and privatisation processes are characterised, however, by delayed and inconsistent measures. For instance, in January 1994 in Romania, the 1993 privatisation programme, which was developed in 1992, had still not been adopted by the parliament.

2.2 Market Oriented Economics as Prerequisite for Successful

Privatisation

An economic system is understood as the entirety of all state and/or societal rules which

comprise and surround economic activity. Economic systems have been moulded out of

different constitutive elements. These include types of rights of disposal, and the national

economic planning and co-ordination functions. According to the arrangement of these


and further elements, the economic systems leave themselves placed between both

extremes of free market enterprise and planned economy.

Economic systems have an essential influence on the developmental patterns of a national

economy! and form the basis for all economic policy measures. Many instruments for

improving economic growth fail when the basic structures in which the instrument

promises success have not been laid down. That is why a basic decision about the

framework in which the economic activities should unfold is necessary. The decision for

privatisation and increased private economic activities demands a competitive, market

oriented system: just as private ownership is a requirement for competitive systems, so is

the competitive system a requirement to ensure that private ownership does not lead to

economic and social injustice.

Essential basic principles of market economies - besides private property and competition

- are also freedom of contract and a working price system. The model of the desired

economic system should above all contain elements of the social market economy, an

order that combines the efficiency of private ownership with social balance. The

accompanying privatisation measures that are necessary for creating or strengthening a

market system with these elements discussed under the following headings:

• Creating legal and institutional frameworks

• Safeguarding and supporting competitiveness

• Establishing a working price system

• Reforming the financial markets

• Conforming opening to foreign trade

• Developing a consistent taxation system

• Instituting labour market and social order

The social balance should result through the construction of an adequate social security

system and the widespread development of wealth in the medium to long term.

Furthermore, a distribution of income is provided through the formation of socially

responsible taxation and redistribution policy. The development of feasible socio-political

measures should guarantee that such state intervention is congruent with market principles

so that the functions and competitiveness of the system are not endangered. Economic

1 See also Chapter 1.1.


policy measures should be carried out so that competition between firms is maintained.

Subsidising single state-owned enterprises creates competitive disadvantages for private

firms.

While the transforming countries must bring a completely new order to their economic

system, most developing countries can build upon at least partly existing market

economic systems. The checklist found in the appendix supports the examination of the

system-political status quo and the derivation of relevant measures. At the same time, it

must be clear that the social market economic system is not a complete, transferable

model. In fact, the constituted principles and rules must be thoroughly implemented in

order to guarantee the system's operation - and they must respect the particular country's

developmental situation.

The importance of making the proper basic decisions in this area should not be viewed too

lightly, for eXa.JIlple by simply expecting the enactment of a few legislative items to

unleash prosperous economic development. The right system-political basis is a necessary

but insufficient condition for economic success. Many other factors are also needed, for

example, free enterprise, capital, motivation, education, and a working administration.

The system-political fundamentals must be successively broadened with ongoing

economic development.

2.2.1 Legal and Institutional Framework

Responsible and independent private businesses can only compete in the market when the

corresponding legal basis is available and operating. In many developing countries, the

corresponding legislation is available, but its implementation is not guaranteed. Large

competitive distortions result, above all when businesses work around or against tax and

customs regulations.

Legal framework conditions are to be regarded as extremely critical success factors for

privatisation because, without them, an abundance of uncertainties, delays, possibilities

for misuse, and dysfunctional behaviour can develop. Figure 10 provides an overview of

the necessary legal foundations.

One of the essential legal prerequisites for successful privatisation implementation is a

working ownership system. The basis for transferring public property into private hands

must first be developed in most transforming countries. This is illustrated by Uzbekistan,


where enterprises are to be reconstituted into appropriate legal entities in order to allow

private ownership - since January 1994. However, the sale of these productive assets and

their real estate to natural and legal entities is made difficult: for example, a surveying and

real estate registration system does not yet exist. A stock market or stock exchange

likewise does not exist. In order to provide some investment protection in this otherwise

risky environment, the Uzbek President created an investment insurance agency

("UzbekInvest") at the Ministry of Finance.

Figure 10:

Important Legal Foundations of a Market Economy

• Private ownership laws • Credit, insurance laws • Competition and cartel laws • Company laws • Corporate laws • Stock exchange laws • Banking laws • Insolvency laws (bankruptcy composition) • Taxes and duties laws • Foreign currency laws • Consumer protection laws, supervision • Laws for general employment conditions • Real estate laws • Labour and social laws. co-management • Freedom of ownership and business

guaranteed by the State • Ecological safety and liability rules • Economic criminal laws • Economic constitution laws • Trade laws • Civil laws

Important Legal Foundations of a Market Economy

The history and source of public assets must be determined (legal inheritance by the state

or municipalities, appropriation, nationalisation, etc.). The transfer of property as a rule

cannot occur without determining the previous owners. This is especially true for

appropriation of formerly private property. In former East Germany alone, over a million

applications for retribution have been made. Eastern European reforming countries face


exacerbated problems in this area due to confusion surrounding the term of public

property and unclear legal titles.

The experience in the transformation of former East Germany has shown that, when

ownership issues remain untreated, investment is reduced or stopped. In order to keep

from deterring potential investors and burdening new investme!1ts with legal risk, a

solution must be striven for, which can be implemented quickly. This could be reached,

for example, through the following: after a set time period has elapsed, the property rights

are automatically determined and the results guaranteed as legally valid. Debate may arise

with regard to state compensation for former property owners in subsequent lawsuits, but

the availability of property for new owners may no longer be questioned.

The creation of an investment-friendly environment, which is determined by the formation

of investment regulations, is a further critical success factor. A clear, legitimate

framework elucidates the rules of the game" of privatisation and creates a stable

environment for private investors. Investment regulations should be as simple and explicit

as possible, so that in a relatively short time investors can gain a comfortable overview of

the individual regulations and supporting measures. Foreign investment should be

supported - perhaps by allowing the repatriation of profits - so that necessary capital and

know-how can flow into a country. All laws and norms should be in agreement with each

other, so that the founding or entry of a firm is simplified; The test procedures, in an ideal

case, are extensively standardised. Discretionary and confidential procedures should be

avoided.

A legal framework that supports competition (competition laws) and thus corresponding

cartel laws and monopoly supervision is of particular importance. In the case of natural

monopolies, corresponding regulations must be created that guarantee appropriate

supervision.2

In the area of legal requirements for the security of a market-oriented economic system,

one must include the creation of a legal basis for the development of its essential market

oriented institutions. Of special importance is a central bank with monetary policy

instruments, as well as a functioning financial and social administration. In a later phase,

the institutions of justice, competitive supervision and other supervisory authorities are to

be established.

2 See Chapter 2.2.2.


In the development of an adequate legal and institutional framework, it should be

observed that the prescribed requirements of the framework are, on the one hand,

imperative for the success of the privatisation processes, but on the other hand require a

long time for practising legal and market awareness, as well as for the acceptance of

democratic procedures for conflict resolution. Institutional renovation and the creation of a

new legal system require introducing new ways of thinking as well as new structures.

These relationships must be taken into account in many Eastern and Central European

countries. Decades of socialist power have left lasting traces in their sense of justice, and

the administrative and judicial structures have remained. According to earlier views, law

as the means of developing a totalitarian regime was tied to the desires of the official

party. Subjective individuals' rights which rely on consistent interpretation are only

rudimentary developed. Over and above this is the lack of educated judicial personnel for

the planned tasks in law practice, law making, legal terminology and enforcement.

In the meantime, the lack of reform strategies and measures is not the problem, but rather

their overabundance is. Widespread and frequent issuance of laws, even constitutional

amendments, is the rule in many countries. Differences in the legislation proposed often

result in contradictory laws. Many countries adopt parts of foreign-advised legislation

from various legal systems that do not fit together. (The problem of "Law Dropping").

Case Study:

Support of Legislative Reform in Transforming Countries

The GIZ is working with the special problems of Eastern European reforming countries

in the context ofvariof!S projects:

• In Georgia, the project "Technical Assistance in Economic Reform Legislation" concentrates on co-ordinating the development of adequate legislation and international donor activities. Laws in the area of economic rights are being drafted, or, to be more precise, Georgian drafts are being materially reworked. Target groups are fellow colleagues of the Ministry of Justice, accompanying law commissions, judges and members of parliamentary legislative committees. One goal is that new Georgian economic laws be made in accordance with market economic standards in

their structure and content. Projects of this type are important, above all, in the first phase of change. Rapid legislative development must be accompanied by a minimum

standard in form, content and congruency.


• In Albania, in an integrated project of economic and legal consulting, the legal reform steps are being co-ordinated with the contextual handicaps, timely sequence of

measures towards privatisation and the restructuring of state-run businesses. The project is being carried out by the ministry for economics and finance. The target groups, in addition to the Albanian ministries, include the firms and their associations (to the extent that they exist). The goals are to discuss the different legal arrangements in connection with economic policy measures of transformation, and to support the understanding of new kinds of laws by private and public sector representatives.

• Uzbekistan is home of the "University for World Economics and Diplomacy," where future executives of the country are being educated by renowned professors. At this institution, the systematic study and evaluation of the development offormer laws which are still valid, as well as newly enacted laws, orders and decrees - and the investigation of contradictions resulting from them - are supported. Within this project, a recently created research centre for "Legal Bases of the World Market" occupies itself with the analysis offoreign studies and organises groups of experts. From the result of the investigations and discussions, plans for new laws are being initiated. The discussions that take place support the creation of a new judicial culture and a new awareness of laws and rights.

2.2.2 Securing and Promoting Competition

Support of competition can be regarded as the crux of privatisation. If the potential

efficiency gains of privatisation are to be realised, it must be guaranteed that each market

is open to competition. Privatisation of state-run monopolies without corresponding

regulatory and supervisory measures does not lead to the desired success, but rather to

private monopolies that are afflicted with the same problems as state-run monopolies.

Chapter 2: Measures on a Macroeconomic Level

Characteristics of Competitive Markets

~ Existing enterprises are "vulnerable" to the entry of others since the threat of new enterprises entering the market with the same products and services is real. It follows that through the prospect of a new competitor there is pressure for competition (theory of contestable markets).

~ Entry to the market is not connected with so-called "sunk costs" (costs that will have to be incurred and are irreversible) and therefore there are no barriers to market entry.

~ All enterprises have the same access to factors of production and input factors.

Figure 11: Characteristics of Competitive Markets

51

The figure above shows the most important characteristics of competitive markets, which

serve as models for competition policy. Through competition policy measures,

competitive markets should be created (competitive support) and, with that, the greatest

amount of competition should be guaranteed. In addition, fair and clear rules should be

developed which facilitate trouble-free functioning of the private sector and the

competitiveness of the markets (protection of competition and supervision against

misuse).

Key elements of an efficient competition policy include:

• Promotion of Competition

In many reforming and developing countries, entrenched market structures exist which lead to a decrease in competition. Especially in the former centrally planned economies, the easier planning for large production units, and the benefits sought from economies of scale led to the distortion of the firms' sizes and to state-run monopolies. In addition, close interconnections frequently exist between the individual firms. The elimination of monopolies and the breaking-up of larger firms are two urgent tasks of competition policy in order to set the self-steering mechanism of the markets in motion.


The direction and extent of the deconcentration should be guided by economic arguments. The smallest, efficient firm size should, together with the market size and structure, determine the highest reasonable number of cost-effective firms.

Monopolies should then immediately be divided into as many single businesses as needed so that these firms can efficiently serve the market in question.

Finding logical lines along which to divide personnel and financial resources may be relatively easy compared to finding logical lines along which to divide other assets. Logical lines may exist along functional areas, whereby it must be determined whether further division within the functional areas makes sense. The problem which usually looms much larger than determining where and how to divide is that of resistance from political and privileged comers. These decision makers do not want to lose their influence and privileges.

The separation process also offers the ideal opportunity to alter the legal status of state enterprises into a private sector legal entity. In most cases this is a pure formality: an addition to the articles of association and an entry in the Companies Registry. It can of course happen that the other extreme occurs. The company is wound up and the assets and liabilities are assigned to the new legal entity.

In many developing countries, monopolies and inadequate competition are precipitated by the narrowness of the market. Market-dominant positions cannot be shattered because only a few firms can produce with optimal cost conditions in most sectors. Here, lacking domestic competition can be enlarged through foreign competition. This is achieved when foreign trade is liberalised step by step, and particularly when high import tariffs are dismantled.

Further measures of competitive promotion lie in lowering the current market entrance barriers, for instance, through the promotion of technical advancement to aid small firms, or through the allocation of public contracts to new competitors.

• Protection of Competition

With the help of laws, competition restricting reactionary practices should be curtailed. Areas to address include effective cartel and merger control, as well as the

ban on collusive, obstructive and suppressive practices (for example, dishonest

competition or dumping).

• Supervision

For non-market structures that already exist - for instance, in the case of natural monopolies (utility companies) - the competition policy must try to neutralise the possible negative effects associated with the structure. In particular, it should be


illegal for ftrms to abuse their monopolistic position. Rather, ftrms should be run in the public interest with respect to both the quality of the service provided, and the price for those services.

The control of misuse must not only proceed with respect to the abuse of private

market power, but also against government protection of state-run ftrms. Therefore the

independence of an appropriate supervisory authority is of great importance in

countries with a relatively strong state-run sector and sluggish privatisation. Because

of these interdependencies, numerous experts support a competitive policy according

to the spirit of the German law against competition restriction (GWB) or the EU

contract.

2.2.3 Establishing a Working Price System

The price mechanism regulates the balance of supply and demand in the market economy.

The larger the demand for a product and the scarcer the supply is, the more willing the

consumers are to pay higher prices for a product (price as scarcity indicator). This price

signal is an incentive for producers to increase production of the good because they can

realise more proftt with higher prices. If more and more ftrms begin to produce and offer

the product, an oversupply will develop. In order to be able to further sell the good, the

producers must reduce their price. After a period, an eqUilibrium price emerges such that

the demand corresponds with the supply. The decentralised co-ordinating mechanism of

prices provides for efftcient resource allocation.

In many developing and reforming countries, most goods are given ftxed prices that do

not mirror their actual scarcity. Such distortions in the price structure lead to an inefftcient

allocation of resources as well as to liability and risk problems in entrepreneurial trade. In

order that the prices can take on signiftcant guiding and signalling functions for the market

systems, the state-controlled prices must be liberated.

Price decontrol leads to a change in relative prices and, with this, to the rearrangement of

many production and consumption decisions. These changes do not take place, however,

without friction losses: during the adaptation phase, the market price will over- or

undershoot the scarcity price, and non-equilibrium prices consequently send out wrong

signals. The new market signals simultaneously appear in all markets and develop

erratically.


The ftrms require a certain amount of time in order to adapt to the changing market

signals. Many ftrms can only meet these demands by decreasing production - due to the

fall in demand as a consequence of crisis conditions. The consequence of price shocks in

all markets will produce rapidly growing unemployment. If the affected goods were

previously subsidised, a sharp increase in consumer goods prices results. Because

foodstuffs and other goods needed daily fit into the category of such subsidised products,

the population with relatively low income suffers the most under the price liberation. Price

reforms are not readily accepted in large sections of the population. In Egypt, mass

demonstrations resulted in the 1970s when the price for grain and bread increased after

liberaIisation measures.

Prior to the liberalisation of prices, such interrelations should be taken into account and

measures should be developed in order to cushion the negative effects, in particular for

. the poorer population groups. Examples for this are a gradual price liberaIisation or direct

transfers to the people affected .

2.2.4 Financial Market Reform

An efftcient monetary and credit system is a basic requirement and a central force for the

dynamic development of an economy. The success of privatisation and the promotion of a

private economy are closely tied to the workability of the fmancial system.

When building up a functioning domestic capital market and later integrating it into the

international financial market, it is valid on the one hand to ensure the mobilisation of

foreign and domestic capital, and on the other hand to link this capital to efftcient uses.

In many developing and transforming countries, however, the financial markets are

underdeveloped. The financial infrastructure is rudimentary and, besides the organised

fmancial markets, there are informal credit markets that are controlled by non-institutional

lenders. Only a few countries have functional markets for shares (stock markets). Not all

social classes are included in the monetary and capital trade. The already underdeveloped

capital markets are used above all for the financing of the state's budget deftcit, and

necessary private investments are crowded out of the market.

An example in Zambia lends itself well to describing the difftculties associated with the

privatisation process due to a weak ftnancial sector: the Bank of Zambia plays a central

role in the ftnancial markets because it establishes the minimum deposit requirements of


the few commercial banks. For financing of the state budget, treasury bonds were issued

that were, at the time, an extremely attractive investment. Firms were not able to finance

the high cost of money. The commercial banks offered no long-term financing. A stock

exchange did not exist, but was to be set up in order to make the participation in

privatisation in Zambia possible. The value of the Kwacha is fluctuating considerably,

which makes planning more difficult. A tendentious loss of value with respect to other

currencies can be observed. This leads to existence-threatening situations for Zambian

businesses that have to service foreign-exchange-denominated debt or purchase

manufacturing inputs from abroad.

An essential reason for the weak financial infrastructure in developing and transforming

countries lies in the widespread strict regimentation of the financial markets. Both foreign

exchange control and the high minimum reserve requirements allow little room for private

businesses and commercial banks to manoeuvre. Many countries pursue a state-organised

determination of interest rates as well in order to create access to less expensive credit.

This not only has a negative effect on the development of savings (because such low

interest rates do not attract savings), but it also makes credit rationing necessary, which

again favours an inefficient allocation of financial and real resources.

An increase in real interest rates through liberalisation of the financial markets not only

increases domestic savings, but additional foreign capital can also be mobilised. South

Korea, Taiwan and Indonesia are examples from the recent past that show how realistic

interest rates and exchange rate policies improve the function of the domestic financial

markets, and with this contribute to the economic growth of their respective countries.

Further instruments for improving capital structures lie in Debt Equity Swaps or in the

development of investment funds, for example.

In the Eastern European reforming countries, the introduction of a functional credit

system must often start from scratch. These countries are often characterised by a one-tier

banking system, therefore also characterised by the lack of commercial banks. The main

role of the banking system in the former centrally planned countries was occupied by a

state-run bank, whose main task was the financial steering of the economy. Every

business maintained its account at the state-run bank which financed the enterprise and

sometimes participated in the development of production plans as well. Moreover, the

state-run bank also had original issuing bank functions. In addition to the state-run bank,

a few savings banks and special banks, for example, foreign trade banks, existed.


The first step towards a two-tier banking system should be the abolition of the immediate

directive rights of the government with regard to the state-run bank, as well as the

separation of central banking tasks from other tasks (e.g. according to the model of the

German Bundesbank). Then the commercial claims and commitments of the state-run

bank should be passed into the hands of a newly established private bank. In a later step,

this is split into individual commercial banks, where, ideally, western banks are already

prepared to co-operate.

2.2.5 Adapted Economic Opening

Many developing and reforming countries are protected from the world market by a state

trade monopoly or corresponding regulations and trade barriers. In order for them to be

able to profit from the international division of labour, a liberalisation of foreign trade

together with the convertibility of the currency is necessary. A certain degree of pressure

to conform from the outside is desirable because enterprises are then forced into becoming

more efficient in order to be internationally competitive.

The danger does exist, however, in the case of simultaneous liberalisation of internal and

external markets that the businesses which have operated for decades in a protected

market will not be able to adapt to the international competitive pressure in a short period

of time. Even the businesses that draw upon the potential advantages of competition can

be doomed to fail. The rapid opening of foreign trade in former East Germany through the

currency union with West Germany, for example, led to an almost complete devaluation

of the capital stock of its industries.

In order to prevent foreign competition from progressing too quickly and without enough

preparation, a gradualliberalisation of foreign trade is frequently suggested. A similar

point of view is represented by the infant industry argument, which supports customs or

tariffs for a defined and limited time in order to protect young branches of industry. It is

assumed that these industries will be able to reach international competitiveness in a'given

period of time if they are provided with temporary protection. Ideally, the tariffs should

be laid out so that manageable challenges to the local economy still exist from the foreign

competition.

In principle, this sort of argument is also accepted from supporters of liberal foreign trade

policy. One must realise, though, that a healthy dose of increased competitive pressure is

difficult to plan and to carry out. In addition, implementation problems can arise with

respect to determining which industries are worthy of protection. Finally, when the


protectionist measures are retracted after a given period of time, the move often meets

with resistance from the industry involved.

The way around the problems associated with protectionist tariffs lies in the liberalisation

of the currency exchange} Exchange rates reflect the relative competitive position of

economies. In the case of a flexible exchange rate, a realistic equilibrium rate will come

into being in a short period of time. The lower the exchange rate is, the more businesses

will remain in business. This is the result of their products becoming relatively

inexpensive in comparison to foreign products, both domestically and in export markets.

A general protection of the market would then become unnecessary.

Individual countries take advantage of these causalities and pursue an intentional

devaluation of their currency in order to stimulate exports and generate supplemental

income. Too strong a devaluation, however, is associated with problems because the

increased exports are strictly the result of temporary price advantages and not actual

competitive advantages. The most necessary structural change ceases to take place. The

prices of imports increase dramatically because of the extreme devaluation, and some of

the imports are therefore stopped. Local producers of goods which are usually imported

can take advantage of this situation and - at least temporarily - demand disproportionally

high prices which increase the danger of inflation. Additional inflationary dangers result

because of the increased local prices of imported products.

In order to avoid monopolistic situations - especially in economies with relatively

restricted markets - a regional or world-wide opening of the markets is recommended so

that lacking internal competition can be compensated for by outside competition. Because

of the large discrepancies between the developing and/or reforming countries and the

western industrialised countries, a regionalisation in the sense of increased economic co

operation within the individual regions of Eastern Europe, Africa or Latin America can be

useful as a transitional phase. These kinds of trade relationships can contribute to an

economic revival of the regions, but should not be maintained as a long-term substitution

for world trade.

The state can push the development of foreign trade forward through targeted measures to

promote exports. It can also support the expansion of competitive establishments which

are in a position to produce internationally marketable products and services. The Asian

"Tigers" were successful in this area: some Asian economies were even successful in

3 A further solution is a temporary import tax. See Chapter 2.3


positioning themselves in international markets for high-tech products. An excellent

example of this is Indonesia's successful aircraft industry, which has in the meantime

become an important supplier for Boeing.

Finally, in the discussion about integration into the world economy, one ought not to

forget that the most effective support for foreign trade, and with that the support of

economic growth, exists in the opening of the markets of the industrialised nations to

products from developing and transforming countries. These countries rightly support

improved trade relations with the industrialised countries under the motto "not aid, but

trade" or "change through trade". The World Bank has calculated that trade barriers in the

industrialised nations cost the developing countries over $85 billion in lost income in

1985. This figure is much larger than total development aid.

2.2.6 Development of a Consistent Tax System

Taxes are the most important source of income for the state in stable, market-conforming

economies. Effective administration in a stable tax environment generates income that can

be reinvested in the economic circuit. Through a tax system suitable for development, not

only can the financial resources be made available for state investment activities, but

unequal income and property distribution can also be corrected and econoinic growth and

private business activities supported. The quality of the state as guardian and driver of the

social market economy is measured by its ability to capture the tax potential.

The taxation systems in many developing and transforming countries are, as a rule, not

compatible with economic orders in market economies. Not only do they not generate

sufficient income for the state, but they also suffer from the following weaknesses:

Lack of transparency: Because of the multiple taxes on businesses and because of the way taxes are designed, the computation of net taxes owed is difficult to comprehend and is often connected with tremendous problems.

Insufficient predictability of the level of taxes exists because they are often determined after the fact, through dealings between the fmancial administration and the businesses.

Lack of security and stability: Rates of taxation and tax laws change so frequently that it is difficult for the businesses to estimate the tax consequences of an economic transaction.


High levels of discrimination: Because taxes are used to a large extent to

penalise particular activities and sectors of the economy and to subsidise others, there are tremendous differences in the tax burdens between various individuals and

businesses. This discrimination leads to poor development and underdevelopment in individual sectors.

A weak tax administration is not in a position to collect the taxes as called for by the tax laws. Particular problems ensue and result in the developing and transforming

countries having poor tax morale and discipline.

These problems lead to a1locational distortions and income instability. The danger exists

that even a reduced income level cannot be maintained during the transfer to a market

economy and that the stabilisation efforts will be jeopardised.

Only a comprehensive and rapid reform of the taxation system and its administrative

authority can provide the necessary framework for the growing private sector and

simultaneously collect the necessary income. The collection of taxes should not depend on

the economic business cycle.

Many transforming countries have decided to copy the Western European taxation system

as part of their reform process. The main elements of the reforms which will be carried

out in these cases include:

• Implementation of a value-added tax, supplemented by targeted consumption taxes.

Implementation of a comprehensive income tax.

• Restructuring of the profit tax into a corporate tax.

The usefulness of introducing a Western-European-style taxation system is doubted by

many economists: first of all, because there are said to be many distortions in the Western

European tax systems, and secondly because these systems do not necessarily meet the

needs of the reforming countries. In this context, the introduction of a consumption tax

rather than a conventional income tax is often discussed. Possible advantages for

reforming countries in this case lie in the non-taxing of savings and in the easy

implementation of the consumption tax.4 Moreover, the reforming countries could use the

reform measures which will be implemented anyway to introduce taxation alternatives that

are not afflicted by the insufficiencies of the Western European systems. These types of

4 Refer in the literature reference to the contributions by McLure.


improvements have as yet not been realised in Western Europe because the reorganisation

of the system would mean high adaptation costs.

Above all for Central European reforming countries which are striving for membership in

the EU, the adoption of at least the basics of the Western European taxation system is

recommended. In addition, the introduction of an untried taxation system would

negatively affect the entire refonn process and could lead to delays. For these reasons, the

arguments for the general adoption of an already tried - though perhaps flawed - Western

European taxation system, with the possibility of later adaptations, outweigh the

arguments for the establishment of a brand new one.

Case Study

Support of the Tax Administration

In addition to a consistent tax system, a modem administrative structure must also be put

in place. Under the "Taxation System and Tax Administration" project sponsored by the

G1Z in Croatia, the Russian Federation, Kazakhstan, Uzbekistan, Kirgistan and Georgia,

the ministries for economics and finance and/or the state tax inspection authorities are

being supported in the formulation and conversion of possible budgetary, taxation and

procedural arrangements, as well as in the building-up of administrative units. Because a

different sort of understanding of economic activities, their values and their course of

action generally still prevails in the transforming countries, the existing tax systems show

considerable incompatibilities with the competitive economic order. The project's goals

are:

• Improvement of market conditions, as well as support of the privatisation process and assurance of monetary stability

• Ensuring adequate financing of the state budget

• Development of a consistent taxation system

• Increased ability of the state tax inspectors to continually and successfully carry out

their tasks.

For this to take place, simple concepts and clear formulation of the tasks and means of

carrying out procedures must be formulated for the administration. Further aspects of the


project, which take into account the necessity of regional co-operation, include the

recently introduced intertwining or networking of the projects with each other, and a

planned regional advisory centre which will act as a forum for common orientation and

exchange of experience between the countries.

2.2.7 Labour Market and Socio-Political Order

It is also necessary to reform the labour market and the social order in order to reform entire economic systems. The necessary measures in this respect can be divided into two areas: firstly, an adequate labour market order with an efficient public labour market administration must be built up, and secondly a system of social security.S

The labour market order which must be achieved should be compatible with the desired competitive economic order. Despite necessary regulations - for example, worker protection laws - as flexible a labour market as possible should be striven for.

With this background, an efficient public labour market administration should realise the following tasks:

• Future prognoses for labour market development (especially unemployment) and the employment and education needs of the entire economy.

• Orientation assistance in job searching and learning a trade.

• Assistance in job search/placement.

• Qualifying those looking for jobs.

• Securing the transparency of the labour market.

Job and employment development.

In view of the job and employment development acceptable in labour contracts, the parties concerned should be given as scope as possible, and, for example, part-time or limited contracts should be allowed. Special attention should be paid to wage flexibility. In this respect, a close link between wages and productivity development should be striven for. This will help in achieving an appropriate relation to economic efficiency.

An important aspect of accompanying social measures is the building and strengthening of

the necessary institutions in the areas of social security and the construction of social

5 The necessary legal policy measures will be only touched upon in this handbook. The procedural social measures and measures for fighting the high unemployment which is typical of reforming and transforming countries will be discussed in Chapter 2.5.


networks for retrenched workers. In modem social market economies, social insurance systems deal in particular with retirement, death, work-related accidents, unemployment and health insurance. In connection with privatisation and reform programmes, unemployment insurance is of particular importance. The privatisation of the economy in former East Germany, for example, could only take place as quickly as it did because West Germany provided a well-equipped, relatively close social network. Such a network is not available at this time in many developing and transforming countries because it cannot be financed by the government. Therefore, in addition to the regular task of building up social security systems, further procedural measures are necessary and are treated in Chapter 2.5.

Case Study:

Support of the Labour Administration in Kirgistan

In the context of the "Labour market and social security" project, the state labour administration in Kirgistan is being supported in the formation and implementation of an active labour market policy. Those carrying out the project include the Ministry for Labour and Social Security, and the main administration of the employment services. The consultation is targeted at specialists and management of the government administration and has the goal of limiting unemployment and underemployment.

The public unemployment in Kirgistan was still very low at the end of 1993 (approximately 1 %), but will rise rapidly through the increasing economic restructuring in the course of the transformation process. This restructuring includes not only the alignment of new markets and products, but also removing the governmental element from economic activities in the framework of privatisation.

In this situation, the labour market consulting project concentrates on giving the government the ability to prepare and implement effective instruments for decreasing unemployment (labour market analyses and prognoses, mediation,further education and re-education, promoting work and employment, etc.). It is also important here to demonstrate ways of decreasing unemployment in privatised companies and those yet to be privatised. Such means can include the founding of retrenched labour-collecting enterprises for fostering work and employment or fostering self-employment and development of workers who have been released from newly privatised businesses. These options are to be connected with training or retraining measures for the qualification of workers, as well as economic development and structural policy measures.

In the framework of the project, not only will the agreement between the labour administration and the social, economic and financial administration, as well as the


political leadership (president, prime minister) be strengthened, but also between the

government labour administration and the non-government actors (labour parties, unions,

etc.)

Case Study:

Social Security in Transforming Countries

The transforming countries have a well-developed social security system at their disposal

that has, however, not kept abreast of the times as well as it did in the previous relatively

stable economy with government job guarantees. In those days, social policy measures

were aimed at providing the basic needs of the population.

The most important instruments for this were, on the one hand, subsidies for services

(e.g. transport) and basic nutrition needs, and, on the other hand, government transfer

payments for particular groups in the population such as large families, students and the

retired. In addition, the large state enterprises provided social services such as

kindergartens, as well as company-owned apartments and company-owned resort centres.

Through these non-transferable company services, the mobility of the labour force was

severely limited.

The administration and the access to these services lay with the trade unions, which

represent important pillars of the nomenclature. The fees for the company social services

and for the government retirement insurance were generally deducted directly from the salary. The total salary withholdings were between 35% and 40%, of which 25% to 27%

went to the state retirement funds. The rest went to the so-called social security fund, which was administered by the trade unions and served to finance the social services of

the company, as well as company health and accident insurance.

From the view of the individual workers, the withholding had the characteristics of a tax

paid to the company, while the services were understood to be provided by the state. The

fact that the unions stuck to their legitimate role as organisers of social services hindered

the surfacing of an independent structure beyond the company level. This sector would

otherwise have to be made up of self-help groups, welfare committees, churches and

community institutions that can focus the on-hand self-help potential flexibly and free of

influence from particular interests.

With the acceleration of labour market reform and the related increased unemployment,

high rate of inflation and increased poverty in the population, the danger exists that

government assistance programmes lead to large budget deficits. The government social

policy must therefore refrain from advocative, virtually automatic burdening of the public


budget. Through a restructuring of the social security institutions, it must concede more autonomy and strengthening of the financial capacities of these institutions through the construction of an insurance system with a close relationship between fees and services. At the same time, a goal-oriented government social assistance programme should be constructed, which ensures survival assistance to the poorest of the poor during the transformation process.

2.3 Stabilisation Measures

With respect to the necessary restructuring of production associated with reform and

privatisation programmes, the old system often falls apart faster than the new one can

come into being. Adaptation crises then result, which cause decreased production and

often the loss of jobs. High inflation rates cause even more difficulties because they result

in climbing prices when the goods market is liberalised.

Far-reaching stability of the currency value is an important condition for the development

of an economy. When the local currency is not stable, it is not used as a store of value or

a means of payment or investment. This causes the prices to lose their allocative function.

The most pressing task of stabilisation policy is to curb inflation. The key lies in

correcting inflationary expectations, which actually lead to a more rapid circulation of

money, and, with that, even more inflation. In order to prevent stabilisation from falling

apart under speculative attacks, the credibility of the reform measures introduced must be

assured.

An important element of a stabilisation policy is the move towards a restrictive

monetary policy which can counteract inflationary tendencies. This should be achieved

through increased refinancing propositions from the central bank, which grant credit to

commercial banks more expensively and thereby decrease the growth of the monetary

base.

The results of such a policy are definitely influenced, however, by the course of chain

effects starting at the central bank, moving to the commercial banks, and finally to the

individuals in the economy. In,Poland, for example, the commercial banks did in fact

pass the high interest rates on to their customers but did not orient their distribution of

credit based on economically efficient criteria. This in tum meant that the desired effects

were not achieved. The reason for these policies by the commercial banks was that their

portfolios were sectorally concentrated, which meant that they were particularly dependent


on the economic success of individual state businesses. In order to survive, the banks

gave preferred credit to these often unprofitable businesses. Private more successful

businesses did not even come into play, while large state businesses continued to avoid

pressure to lower their costs because they could rely on automatic credit.

Further problems in the implementation of a restrictive monetary policy lie in the

determination of interest rates. For many developing and reforming countries, a base of

experience does not exist for interest rate determination in a non-inflationary arena. Nor

are they familiar with the means of influencing public expectations and the influence of

these expectations on the demand for money. This leads to the danger of setting the rate

too high or low. While too Iowan interest rate fails to halt inflation, too high an interest

rate leads to an even more deeper recession.

One possible solution to these difficulties is the use of the exchange rate, instead of the

interest rate or monetary aggregate, as an interim goal of monetary policy. The influence

of world market prices can lead to a stabilisation of the domestic prices particularly in

economies that are relatively open.

Any form of restrictive monetary policy is ineffective, however, if the state continues to

receive further credit from the banking system without limitations. As in the past, the

budget deficit in many countries is still financed through the printing of currency. In order

to avoid such a destabilisation, a clear division of the state budget. and monetary policy

should be pursued. Above all, fiscal policy measures can be carried out as a further

substantial el~ment of stabilisation policy. Consolidation of the state budget and/or a new

structuring of the receipts and expenditure stands in the foreground.

If public spending does not rapidly decrease, the danger exists that private sector

development will be limited. Former expenditure programmes must be newly structured

because they often contradict a market-oriented economic structure. The large subsidies to

inefficient state enterprises in particular must be reduced. Proceeds of sales from

privatisation - if they exist at all - should not be used for increasing expenditures. A strict

cash budget discipline is politically difficult to adhere to, however, because new

expenditure demands result from the transition process.

On the income side, a restructuring is needed in the taxation system, as previously

discussed. This restructuring should put the national budget on a solid income base,


independent of cyclical factors, through which appropriate incentive structures for the

private sector can be created.6

The likelihood and danger of tax losses are large during the transition to a market

economy and the implementation of an adequate taxation system. Measures to generate

additional income are therefore necessary. These measures should not slow down or

hinder the reform process in any way - for example, as would happen if the government

expenditures were financed through the printing of currency.

A possible solution to these interrelations lies in the introduction of a temporary import

tax. Many reform programmes contain the dismantling of trade restrictions. There are of

course many economic arguments for the opening of the export economy, for example,

the fostering of competition. The necessary integration into the world economy and, with

that, the adaptation of the enterprise require time and fmancial means, however, that are

often not available. A temporary import tax results in short-term protection of the

domestic industry and allows for a gradual adaptation in production. The time limit for an

import tax should be laid out in advance, however, in order to ensure that the businesses

actually carry out the necessary adaptation to the world economy after a certain period of

grace.

2.4 Regional and Sectoral Structural Reforms

Most of the developing countries and Eastern European reforming countries are

characterised by distorted and inefficient industrial structures and outdated or depreciated

capital stocks. Comprehensive structural changes are necessary in order for them to

survive in future in domestic and foreign markets. The overall production apparatus is

therefore under double pressure to adapt: on the one hand, a reorientation must take plaCe

in the sectors in which the country either already is or has a chance of becoming

competitive in the domestic and export markets (structural adaptation). On the other hand,

the businesses must increase their productivity (niveau adjustment).

The quicker the structural changes take place, the quicker the desired economic growth

can be achieved. State-sponsored regional and sectoral structural policy measures can

support and ease the adaptation processes. Those who simply rely on the self-healing

powers of the market risk a wide reaching de-industrialisation, and, with that, perhaps

6 See Chapter 2.3.


even an economically and politically unbearable situation in the existing conditions of

many transforming and developing countries.

There are situations in the Eastern European transforming countries in which it is sensible

to maintain industrial sectors which can be potentially competitive and would not survive

without limited, goal-oriented state support. Goal-oriented state subsidies in exceptional

difficult economic situations are therefore not necessarily to be refused. Ideally,

government support is so constructed that a certain degree of challenge for the

establishment of international competitiveness exists for the domestic economy. Regional

and sectoral structural policies should pursue the goal of fostering the willingness of the

private sector for risk taking, innovation and capital acquisitions. This can be achieved in

particular through the encouragement of education, technology and innovation, as well as

through the promotion of the mobility of production factors.

The decision for individual support measures should therefore be oriented towards

profitability and productivity. Co-operation between various ministries and decision

makers from the political and economic sectors should be striven for. Through this,

isolated sectoral development as well as concurrent counteracting measures can be

avoided, and the necessary flexibility of reactions to certain problems can be assured.

Strictly governmental steering and shaping of the structural changes are doomed to fail.

The observed collapses of industrial sectors in countries with high domestic demand and a

centrally directed industrial policy clearly show the limits of the approach of a central,

state-steered industry. The results of such policies in the past were often low international

competitiveness, increasing differences between quantitative and qualitative supply and

demand, exaggerated depth of production and inadequate adjustment to the international

division of labour. These methods produced more management styles that are

characterised by a subsidy mentality and the desire for state protection. One-sided support

in many countries caused firms to install excessive capital-intensive technologies, not the

technologies that fit local resources and conditions.


Regional and Sectoral Measures for the Promotion of Economic Development

Economic and investment promotion

Disposal of environmental waste

Investment in infrastructure

Support of start-ups

Investment in human capital

Promotion of necessary structural changes

Technology policy and research

promotion

Incorporation of informal sectors

Promotion of small and

medium-sized

Figure 12: Regional and Sectoral Measures for the Promotion of Economic

Development

The figure above provides an overview of the starting points for regional and sectoral

support measures. These steps are presented briefly below:

• Infrastructure Investment

The generally inadequate infrastructural in reforming and developing countries presents considerable barriers to private economic activity. Insufficient structures in transportation and telecommunications make the necessary restructuring and decentralisation of many Eastern European countries more difficult. For this reason, the state should carry out infrastructual investment at the beginning of the reform process if possible. Very often though, the hypothesis is put forward that a large part of these investments should be offered and financed by the private sector. One can assume, however, that the interest shown by potential investors in this area will be relatively small as long as the countries in question are still not on the path of growth and the investments cannot ensure success.


• Economic and Investment Support

The support of domestic and foreign investments is usually done via investment grants for construction, expansion and rationalisation investments through interest subsidies, special deductions or tax relief. A schedule for reaching the goals and possible consequences of various measures should be analysed before the implementation of the individual measures takes place. Special deductions, for example, do not make sense as long as the promoted business is not realising any profits and can therefore not profit from deductions from taxable income.

• Setting aside old Debts

Many state enterprises in reforming and developing countries have high levels of debt or other burdens (e.g. environmental liabilities) that make privatisation of these businesses difficult or even impossible. By taking over at least a part of these burdens, the state can provide a major contribution towards accelerating the privatisation, and, with that, structural change. Such a settling of accounts not only attracts potential investors, but also accelerates the valuation of the given enterprise. Again the Zambian copper mines provide an example, where past borrowings on behalf of the government must be netted out of the liabilities which new investors will be willing to assume.

• Investment in Human Capital

Education and health services make up an important element for strong and continuing economic growth and are therefore important investment areas. Human capital investments are necessary in developing and reforming countries. This argument with reference to Eastern European reforming countries may be astonishing to some since education and health issues were actually political priority areas in the former planned economies. But one must note that education policies were often actually just driven by the market. Current deficits in these areas can be made up for through targeted education and further training programmes, as well as through the introduction of performance-based remuneration.

• Technology Policy and State-supported Research

In the context of a suitable technology policy, the technological know-how in developing and transforming countries should be brought to an appropriate level. The Asian Tigers, for example, accomplished this through increased use of patents and through the imitation and application of tested technologies. Some other possible measures include education and further education programmes, grants for research projects, facilitated co-operation with public institutions (e.g. technology transfer

70 CluJpter 2: Measures on a Macroeconomic Level

facilities), making information from data bases available and protecting property rights. By splitting up the risks and costs through preferential treatment, the government can ensure that the public resources are channelled into applications that are beneficial to the private sector.

• Support of Small and Medium-sized Enterprises (SMEs)

The importance of SMEs for positive economic development is uncontested: small and medium-sized private enterprises not only generate employment, but also provide practical education, foster innovation and entrepreneurial initiative, and contribute to the development of healthy free enterprise. By embedding themselves deeply into the regional economic and social arenas, SMEs can also provide positive growth incentives for other sectors. Measures towards supporting small and medium-sized businesses, in addition to credit assistance measures, include partnerships between self-administered organisations and self-help establishments in the economy.

• Consideration of the Informal Sector

An informal sector has resulted in many countries from the one-sided support of large industrial businesses, and, with that, the discrimination against smaller and mediumsized businesses. Outside the formal economic structure, the informal sector in these countries takes in small businesses and fulfils the central economic and social tasks, for example, by providing for the lower economic levels of society. In order to make the potential of this sector useful for overall economic development, the performanceand development-oriented segments of the informal sector should be integrated into the structural policy support measures. This is particularly important when presented before the background that privatisations often allow the informal sector part of the overall economy to take root. Through the access to financial and advisory services, as well as targeted education and further training programmes, the activities in the informal sector should be prepared for integration into the formal sector.

Case Study:

Measures towards Active Public Participation

One focus of the G1Z concept lies in actively fostering wide public participation in the

privatisation process. This helps not only to develop an increasingly pluralistic structure

of the economic and societal systems, but also to minimise political opposition to

privatisation and strengthen the citizens' ability to identify themselves with the reform

process.


Measures for Active Public Participation in the Privatisation Process

Incentive schemes for small Investors

(accessible credit, distribution etc.)

Employee discounts

Prevention of share concentration

Small enterprise promotion and

start-up schemes

Payment I distribution of sales profits

Professional education and reintegration

ro rammes

Voucher systems

Small prlvatlsatlons

Figure 13: Measuresfor Active Public Participation in the Privatisation Process

71

The figure above shows the most important instruments and possibilities for increased

involvement of the various social classes in the privatisation process.

Active public participation can be achieved through special measures to promote small

investors. An example of this is the assistance to small investors to ease the process of

obtaining credit. Other important aspects are employee discounts because special

considerations for the sale of shares to the employees can dispel doubts that workers may

have about the privatisation of the company. In France, for example, 10% of shares were

reserved for employees in some privatisations, and these shares were sold to the

employees at a 5% discount. In addition, a loyalty-bonus system was initiated, which

included further privileges once the shares were held for more than two years. The

problem, though, is that many workers do not have the necessary capital at their disposal

to purchase the shares. Therefore the establishment of an institution must be planned

which allows necessary loans or the possibility of using pension funds to finance share

purchases. A further possibility for winning over small investors is the distribution of

services to investors in the privatised company - for example, giving gas or petrol

coupons for buyers of shares from gasoline companies.


In order to obtain a reasonably broad share structure, or, in other words, to avoid a

concentration of shares with a few shareholders, it is sometimes in order to limit the

number of shares allowed per person when making public announcements about the sale

of shares. During privatisations in Chile in 1986, only one half of the shares were sold to

those with a 10% share, and at least 15% of shares were to be held by 100 or more

independent investors. Similar rules exist when particular groups or foreigners are to be

prevented from obtaining too strong a position in the firm. It should be noted, however,

that non-strategic firms should not make such limitations too rigid because more flexibility

leads to a more rapid privatisation.

One aspect of the G1Z support for public participation in private economic activities lies

in the area of fostering small businesses and supporting their foundations for existence, as

well as encouraging professional further education and reintegration programmes. 7

Small investors can come into play particularly easily in the context of the so-called small

privatisations - that is, the privatisation of small businesses, shops and service

organisations. Because these areas deal with small units, it is financially possible for local

citizens to acquire or take a lease on a business through their own savings or with the help

of credit. In this respect, the small privatisations generally involve few technical,

institutional or political difficulties. In the mass privatisations carried out in Eastern

Europe in particular, shares of companies were given away or sold cheaply to the citizens

through the voucher system (see Chapter 1.6.1).

Finally, the citizens can be involved in the sale of an enterprise by being included in the

distribution of proceeds from the sale. The advantage of this method lies in the fact that

the participation of the citizens does not depend on their willingness to hold shares, and

that the risk of too wide a distribution of shares (as in the voucher system, for example) is

lessened. Moreover, every citizen would have a self-interest in afast and as efficient as

possible privatisation, which would be expressed, for example, by less resistance to

foreign participation. Finally, effective control over the use of proceeds from the sale of

the enterprise would be ensured. The expenditure of proceeds for subsidising other

businesses would become less popular. The possibility of distributing the proceeds of

course requires that positive net proceeds are in fact obtained. Because many state-owned

businesses in developing and transforming countries carry liabilities and responsibilities

accrued over the years (e.g. debts, environmental liabilities, damages to dispossessed

7 Refer also to the project examples in Chapters 2.4 and 2.5.


former owners, and high dismissal costs), one can expect a negative market value even

from enterprises which would, in principle, be able to survive as long as they continue

functioning.

Case Study:

Programmes to support Livelihood as Assistance to Structural Change

In the area of promotion of small trade and industry, the G1Z implements the so-called

CEFE approach (Competency-based Economies through Formation of Entrepreneurs) as

a way of supporting the basis of livelihood for these sectors.

CEFE is an educational method which strengthens the entrepreneurial competency of

budding entrepreneurs. It is based on elements of participative learning, simulation games

and exchange of experience. Through this, not only are the basics of business education

taught; rather they are also supplemented by the learning of market-oriented behaviour,

strategic planning approaches and the idea of accountability for risk taking. At the end of

the four-week course, a credible project idea is presented.

Potential target groups for the course include those completing a university education, as

well as unemployed youngsters, women, demobilised soldiers, returning refugees, etc.

Requirements for the successful participation, and, with that, strict selection criteria,

include entrepreneurial motivation and self-initiative.

Integrated CEFE programmes encompass a wide spectrum of activities:

• qualification of appropriate (preferably non-state-run) institutions for implementation;

• training of trainers;

• implementation of entrepreneurial courses;

• follow-up support measures, advice workshops;

• connection to the financial sector or direct inclusion of complementary financial

services (credit lines, credit guarantees).

The CEFE approach was developed and implemented as a pilot project in Nepal. Since

1986, over 750 businesses have been founded from CEFE projects, and, with them,

approximately 4,500 new jobs have been created. In El Salvador in 1993, an integrated


development programme was begun with CEFE components for the reintegration of

demobilised soldiers. In Southern Chile, entrepreneurial courses ("Crea Empresa") are

currently being carried out in the framework of a state reconversion programme for

unemployed miners and programmes for former political prisoners. The flexible and far

reaching application possibilities of CEFE programmes can be seen through these

examples.

A new challenge to development co-operation is fostering employment in former socialist

countries. Entrepreneurial programmes were recently tested in Vietnam and Mongolia;

long-term plans are set to begin in 1994 in Laos, Ukraine, Uzbekistan and Kazakhstan,

with the goal of supporting the reform policies of these countries from the bottom up.

Through this, integration of more social classes into the market economic process should

be made easier.

2.5 Labour Market and Social Policies

Privatisations lead to increased overall economic welfare, and, with it, the creation of jobs

in the long run; but in the short run, they can still lead to interruptions in production, loss

of income and increased unemployment. This is particularly true in the case of public

enterprises with poor performance which require a comprehensive restructuring or which

must be completely liquidated. In order to avoid negative effects on employment, a certain

number of jobs can be ensured through price discounts in the sales negotiations during

privatisations. Often, though, firing some workers can simply not be avoided. In extreme

cases, the situation leads to laying off the entire workforce.

For this reason, labour and social policy measures are particularly necessary in the former

centrally planned economies, where full employment was guaranteed by the government

and unemployment was unheard of. The reinforcement of unemployment leads to

distribution struggles for scarce jobs which cause numerous people with poor labour

market chances to fall into poverty. Moreover, negative employment effects lead to social

discontent and endanger the acceptance, and, with it, the success of privatisation and

reform programmes.

An important aspect of the GTZ concept is the integration of labour market and social

policy factors into the privatisation process. The starting point is the analysis. of the

current situation in the given country. The unemployment that results in the reform and

privatisation process is mainly of a structural nature although a cyclical economic


component figures in many countries because of the overall economic instability resulting

from the adaptation crisis. Large discrepancies then result between worker supply and

demand. The qualifications and experience available from those looking for jobs do not

meet the new labour market needs. Special problems exist in regions that are impacted

almost exclusively by one market sector, for example in the Zambian Copperbelt, in

which most of the economic activity - ranging from agriculture and food production to

machinery and banking industries - are connected with the copper mining industry. An

attractive labour market and social policy has to, above all, have an effect on easing the

structural change, whereby, on the basis ofthe available capabilities, appropriate actions

will be taken. Special emphases lie in targeted education measures, fostering occupational

and geographical mobility and fostering small businesses and the start of new businesses.

The more these measures are linked with economic development and structural policy

measures, the more successful they will be.

The often observed concentration of unemployment and, in particular, the long-term

unemployment of so-called problem groups such as the elderly, underqualified, unhealthy

and even women, requires special target-group-oriented labour market programmes.

Socio-political Accompanying Measures

Short-term measures

• Direct support of affected workers (social schemes, redundancy packages, early retirement schemes etc.)

• Unemployment benefits and support

• Employment agencies and information services

• Job-creation measures

Medium-term measures

• Promotion of alternative employment companies

• Continuing education and further training

• Retraining programmes

• Promotion of private initiatives (small business promotion, support of start-ups etc.)

• Incentive schemes to attract new enterprises

Long-term measures

• Creation of a social security system

• Measures for regional development

Aim: Cushioning against negative employment effects through new employment creation

Figure 14: Socio-PoliticalAccompanying Measures


The figure above provides an overview of the labour market and socio-political measures

that can be implemented during privatisation and reform processes.

Measures towards compensation for negative employment effects can lie in the direct

support of the affected employees in the form of social plans, severance pay and

incentives for early retirement. The make-up of incentive systems for employee reductions

must be given careful thought so that an incentive structure is not developed which results

in excessive motivation of the employees to leave the firm. Moreover, such measures are

very costly.

This is also applies to the payment of unemployment benefits to the employees who

have been dismissed. These payments could make sense as support during the

changeover from the old job to a new one, but at the same time further training and

education measures should be carried out in addition to this monetary assistance.

A particularly innovative solution is the suggestion of a payment as dowry at the

start of a new job. According to this proposal, the dismissed worker should be

ensured a generous payment which is not paid directly, but rather withhe~d in a special

account. When the worker finds another job, this settlement payment will then be taken as

dowry for the worker. In this fashion, no capital would flow from the economy and, at

the same time, the chances of the unemployed worker of fmding a new job are improved.

In order to prevent understandable doubts by the worker about an investment of his

settlement, the government could take on a loss risk security.

Measures aimed at job acquisitions include providing public contracts or

subsidised work programmes. This form of prograrnme temporarily reduces

unemployment and can contribute considerably in the long run to the overall economic

development of the country (e.g. road construction, telecommunications and social

infrastructure). They can be, however, rather costly.

Employing dismissed workers by employment organisations is somewhat similar to

the measures aimed at job acquisitions. The distinguishing feature of unemployment

organisations, however, lies in linking employment to theoretical and practical

qualifications. One particularly large application of this measure took place in the

transformation of former East Germany: in 1991-92, over 350 employment organisations

were founded, which were active in various fields. They environmentally cleansed some

of their former companies, took care of infrastructure-related tasks, took over education

functions or attempted to develop and implement new product ideas. Moreover, the


employment organisations were shown how to deal with the development of business

departments and the founding of businesses organised under the privatised economy. A

major advantage of the transfer of employment organisations into private businesses lies

in the ability to take advantage of functioning organisations. These possible effects are,

however, linked with high costs. This type of measure is only possible through

internationally financed programmes in many developing and transforming countries.

Further counterarguments are - in particular in the case of employment organisations

without a particular limited time period of existence - the danger of preserving

unproductive structures, as well as fostering unhealthy expectations.

When an employee is dismissed, job mediation and information services can

support his search for a new job. This type of service is particularly sensible in the case of

frictional unemployment. The transfer of occupations is, however, difficult in the case of

structural unemployment. In this case, many more economic support programmes (e.g.

small business support or business start-up programmes) as well as education and

training programmes must be carried out. Training programmes can either be based

on general education fields or on career-related topics. The state institutions that are

contracted for these educational programmes are often not in a position, however, to

develop training programmes that can adapt to the rapidly changing needs of the market.

Private businesses, on the other hand, are often very reluctant to carry out their own

educational programmes due to the high costs associated with such programmes. They

also fear that the better qualified employees will leave the company following the training.

Public incentives, for example, the implementation of tax relief programmes for

educational programmes, could help solve such problems.

Which of the measures should be carried out in the individual cases depends upon the

respective institutions. Often a combination of measures into a package approach, for

example, a coupling of direct financial support for the unemployed with educational and

training programmes, is recommended. When carrying out labour market and social

policy measures, one should ensure that these measures do not have the effect of

preserving the current structures. The hardships for the most disadvantaged must be

eased, but those who refuse to adapt to new circumstances should not be further

encouraged. Labour market and socio-political measures in developing and transforming

countries are successful, above all, in connection with regional and sectoral structural


policies, for example, support programmes for small businesses and newly started

businesses or incentive systems for the relocation of businesses.8

Case Study:

Integration and Occupational Support Programme in EI Salvador

After the signing of the peace agreement between the government of EI Salvador and the

guerrilla movement FMLN on 16th January 1992, the economic and social reconstruction

of this Central American country became the next challenge. The process of finding

political consensus and democratisation was clearly dependent on the idea that it could

succeed by easing the social and economic integration of the 33,000 former soldiers and

guerrilla fighters, as well as refugees from the former fighting zones. The economic

development of the nation definitely has shown positive growth trends in the past couple

of years. However, problems of poverty, underemployment and unemployment are still

prevalent. For the target group of the demobilisation activities, the situation is even more

difficult because of their lack of education and work experience, and their socialisation

experience.

Since 1993, the GTZ has assisted with a comprehensive national programme for

employment and economic support in EI Salvador. The partners in the co-operative effort

are the Secretaria de Reconstruccion Naciona~ the Fundacion 16 de Enero of the FMLN

and the Fundacion Nacional de Empresas Privadas. The integrated self-help-oriented

approach includes measures oriented towards the target group, regional economic support

and strengthening the institutional environment. Technical and entrepreneurial education

and training measures in small businesses and in support of new companies, social and

employment programmes (''foodfor work"), consulting activities and export promotion

for the small and medium-sized industrial sector are all aspects of this programme.

Important conditions for the implementation of these plans include the participation, co

operation and networking with various non-government organisations and especially

decentralised implementation groups through targeted organisational consulting.

The programme has a planned duration of six years. The German contribution is DM 9.9

million and consists, for the most part, of sending four long-term consultants and various

8 Refer. to Chapter 2.4.

Chapter·2: Measures on a Macroeconomic Level 79

short-term experts fbr special tasks, as well as carrying out education and training

programmes andfinancing an action fund.

Case Study:

Vocational Training for the Integration of the Unemployed

For the integration of the unemployed into economic activity, whether they be school

leavers, victims of civil wars, refugees or unemployed adults, the most appropriate

measure is often considered to be learning a trade. These educational measures not only

lead to the creation of more jobs, but can also ease the integration into economic life,

especially when the training is oriented to available jobs or when it prepares one for self

employment. In order to achieve this, the training should be combined with a package of

other measures such as credit assistance, infrastructure support or consultative assistance

with starting up new businesses.

The INATEC project in Nicaragua supports a self-help programme in which especially

needy families are able to build their own houses and, at the same time, are trained for

possible future employment in the construction field. With German support, an office was

set up in the central INATEC training institute to co-ordinate and support the self-help

home-building activities. At this time, 350 houses are being built by self-help families at

six construction sites, mostly outside the capital city of Managua. Participants in the

programme include families that are actually in an emergency situation (e.g. because their

towns were destroyed by hurricanes or earthquakes, volcanic eruptions or wars) and who

are, despite their disadvantaged situations, interested and able to actively participate in

construction activities.

The national or local government provides the land and international organisations provide

most of the construction materials. Assistance programmes such as "food for work"

provide food for the participating family members during the construction time. The

INATEC construction office supports the project through planning, coordinating and

overseeing the construction sites, as well as through training the participating family

members in the field of the elementary technologies of home building. The transfer of

skills is relatively easy and even something that the unpractised family members can easily

learn.


Some young people are planning to join together and form their own home-building

companies based on the techniques that they have learned. Others will be employed as

skilled workers in construction companies. Supplementary training courses are also

planned that would allow the participants to carry out more demanding construction

activities. In addition to the employment effects, the programme serves to satisfy the basic

needfor shelter.

The first home settlements were finished at the end of 1993. The reaction of those families

involved, of the politically accountable and of the financing institutions was very positive.

It is now planned to expand the programme to construct up to 2,000 houses in the

forthcoming years.

2.6 Information and Public Education

Experience up to now in reform and privatisation processes has shown that the desired

success is decisively dependent on popular support. It is only when the citizens are

convinced of the usefulness of a reform programme that they are willing to accept the

negative effects accompanying the transformation process. A wide consensus in the

population is necessary in multinational states in particular in order to avoid political

destabilisation.

Many social classes in the various countries are not well enough informed about the

programme to be carried out or have negative opinions of privatised, competitive

economies. Frequently, a distribution of income which is based on achievement or

performance is not accepted. In China, for example, the so-called thousand-yen families

(the farmers, taxi drivers, and shopkeepers) were faced with social contempt. The citizens

in Russia are also programmed to some extent to think badly of the economically

successful, not least, because they were often active in sectors which were formerly

considered marginal sectors by the government.

In this context, a great need for enlightenment of the public about goals and functions of

market economy practices exists. The advantages of competitive practices must therefore

be stressed very clearly; this includes, for example, the fair and equal distribution of

opportunity for all social classes. In addition, clarity about the possible disadvantages of

reform process must be established. In particular, the possibility of surfacing adaptation

crises should not be denied. The people must be made aware that short-term negative


employment effects may occur but that, in the long tenn, these will be made up for by the

creation of new jobs and hence increased income.

In order to ensure long-tenn support from the population and to avoid corruption, the

entire privatisation process should be as transparent as possible, and the public should be

infonned regularly about the actual state of refonn.

Information campaigns can also be helpful in the search for potential investors. The

willingness of the public to participate in the enterprise can be raised in particular in weak,

indigenous economies through infonnation campaigns, for example, with the title "What

is a share?" Targeted measures abroad can be beneficial in the mobilisation of foreign

capital.

The figure on the following page provides an overview of the contents and flow of

infonnational and instructional campaigns. Concrete examples of measures which have

already been carried out can be found in the appendix of the handbook.

82

Figure 15:


The Most Important Steps of Public Infomation and Educational Campaigns

Determining the target group

e.g.: • Local population • Local investors • Foreign investors

- -Laying down the aims of the

information I educational campaign

e.g.: • Support of the reform programmes • Preparation for investment

...... -Concept of content

e.g.:· Market economy and privatisation in general • Description of the functions of the stock

exchange • Information concerning the enterprise to be

privatised

........ • Employment issues -Choice of communication media

e.g.:· Newspapers, specialised magazines • Circulars • Visual media • Organisation of events • Direct, personal contact etc.

The Most Important Steps of Public Information and Educational

Campaigns


Case Study:

Information Campaign in the Privatisation of NCB Bank

The privatisation of NCB Bank in Jamaica in 1986 took place in the form of a public sale

of shares. The reasons for choosing this method were twofold: the goal of developing the

capital market and the attempt to ensure public support for the entire privatisation

programme. A group consisting of privatisation and marketing experts, a local advertising

agency and government representatives organised a widespread marketing campaign four

months before the sale of the enterprise. Modes of communication which were employed

for the campaign included TV, radio, press conferences, video productions and

confidential information sessions for important interest groups. In particular, in

conversations with representatives of important trade unions, it was stressed that the

shares would be widely distributed and that small investors and bank employees would be

given special consideration. Brochures with information about NCB were placed in post

offices, supermarkets and stock brokerage firms. On top of that, a leaflet with the title

"Questions and Answers about the Share Offering", including answers to 20 of the most

important questions about shares (beginning with "What is a share ?"), was distributed to

200,000 Jamaicans and was also printed in a daily newspaper. As the day of the

distribution of shares drew nearer, the advertisements became more and more intense

("Get ready, the Shares are coming"). The result of the sale of shares exceeded all

expectations: more than 30,000 Jamaican citizens and institutions took part in the sale of

shares, and the issue was 170% over-subscribed. (Source: Roger Leeds: Privatisation

through Public Offerings: Lessonsfrom Two Jamaican Cases).

2.7 Timing of Individual Reform Measures

In the case of full transformation of an economic system, as well as in changes in

individual sectors, there are principally two schools of thought about the succession and

pace of the individual reform steps: the partial and the radical methods.

The radical method - also referred to as shock therapy or the big-bang approach - supports

simultaneous implementation of individual measures in order to guarantee a rapid

functioning of the market system. A rapid and comprehensive change in the overall

economic incentives is desirable on the one hand in order to send strong signals for the

reallocation of resources and to avoid the problem of an institutional vacuum. On the other


hand, it is exactly this type of shock therapy which is connected with increased adaptation

crises. In the worst case, the domestic economy can completely fall apart, which results in

the annihilation of some businesses which would have been able to survive if they had

been given more time to adapt.

The gradual approach (also known as the piecemeal concept or the partial method)

therefore advocates a step-by-step procedure for reform. The biggest advantage here lies

in reduced social adaptation costs through better control possibilities over the individual

measures. Moreover, it is possible to take the special conditions and relationships of the

given country into account when arranging the individual elements of the desired system

whereas the shock therapy approach orients itself directly towards the market economy

because of time constraints.

The state plays an important role in the active control and steering of the structural

adaptation process. A major problem in the gradual ~pproach can surface here because

such a task requires rational state control which is not to be found in many reforming and

developing countries. In many cases, the administrative requirements for active control

and direction from the government are not available, and the governments lack the

competence, authority and stamina needed to survive reform steps. This is particularly

true when the reform causes negative side-effects such as unemployment. The gradual

strategy is also linked with credibility problems and endangered by speculative attacks.

Above all, the danger of excessive regulation exists, which can lead to counter-reactions

or avoidance activities in the private economy. These in turn make more regulation

necessary, and the process fmally ends in a defeating spiral of regulations.

This discussion shows that both the shock method and the gradual method are plagued by

particular problems. In practice, the specific opportunities and risks of the different

methods must therefore be weighed for the given economy. Particularly important for

selecting a method is the country's concrete starting point. The most pressing problems

must first be addressed - these include sector-specific crises. In the Soviet Union, for

example, the solving of agricultural and energy problems has as high a priority as the

macro- and microeconomic stabilisation: a rapid improvement of the produce supply

situation is an undenied prerequisite for the willingness of the people to support the

reform process.

In this respect, there is much support for a "rapid" gradual strategy, which on the one

hand strives to introduce the market economy as rapidly as possible, and on the other

hand pursues a policy of the smaller steps in the prevailing context.


The following discussion depicts a possible sequence for the individual measures, which

takes into account the advantages and disadvantages of the two extreme positions:

agreement exists in theory and practice on the fact that institutional reforms must be given

absolute priority. These include the definition of property rights, the creation of a market

oriented legal system and the establishment of independent institutions (e.g. a central

bank). Above all, an effective public management structure must be built up.

Until now, no market economy has come into being through mastering these conditions.

The actual changeover point is when price controls are abandoned because it is with this

step that a free market is created. A price liberalisation requires accompanying monetary

and fiscal stabilisation measures because it is only in a stable market situation that the

prices can be legitimate in their intended steering function.

The price allocation enables a realistic evaluation of state enterprises, which often means

that at least the majority of the price controls must be lifted before the privatisation

measures can begin. There is much support for privati sing large businesses, and

especially banks, only after a successful stabilisation has occurred. The background for

this recommendation is the fear that too rapid a privatisation can lead to drastic

interruptions of production or high unemployment, which in tum increase political

opposition and make it less likely that the government will keep to the reform process.

Similar fears exist with respect to trade liberalisation. Comprehensive trade reforms which

take place in step with stabilisation measures can expand the adaptation capacity of the

economy. On the other hand, a simultaneous implementation of trade reforms and

stabilisation measures allows the immediate alignment of all production decisions with the

relative world market price. It can thereby be avoided that the businesses orient

themselves according to the distorted internal prices (due to protectionism) and are later

faced with unnecessary adaptation costs when external trade is liberalised. Financial

market reforms are in general considered to be less immediately urgent reform measures.

In any case, a liberalisation of foreign capital transactions should only take place after the

liberalisation of the domestic financial market has been achieved.

The following correlations should be kept in mind regardless of the selection of a

particular reform concept:


• A reform concept itself can be more important than the actual extent of the initial reform. A reform programme that begins with a clear presentation of the goals and acceptable measures shows the intentions of the reform more clearly than comprehensive changes which must later be undone.

• The systematic implementation of rational measures that have been announced in advance lends credibility to the reform.

• In the initial phase, the changes must allow time for the producers to adopt adaptive measures.

• Even after the implementation of the individual reform steps, the need still exists for action. Through sequencing measures, the framework conditions must constantly be improved, and, through procedural measures, a constant development of the economy must be assured.

In their most basic form, macroeconomic reforms must be established so that they

improve the conditions for the unfolding of private initiatives. The institutions of the

mesoeconomic level also contribute to the improvement of framework conditions for

economic trade and will be addressed in the next chapter.


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90 Chapter 3: Measures in the Enterprise-Relevant Environment

3. Measures in the Enterprise-Relevant Environment

3. 1 The Important Position of Meso Level Institutions

Institutions and organisations that do not fit exclusively into the macroeconomic level (i.e.

governments) or into the microeconomic level (i.e. enterprises) find themselves

categorised in the mesoeconomic level. These institutions realise intermediate tasks and,

through that, serve as transmission groups between the government and enterprise level

because they have influence in both directions. The following figure depicts examples of

important institutions of the meso level.

Classification of Meso Level Institutions

Organisa/ional level

: I ·UN Inter· na/ional ' . ..

· liuropaaA . . Union'

National 'Natlonal : ~qminist ra! io:n

-Regional . Regional · Administration

.. District· .

AdmlniStraiion

Local 'Communes '

. Village' · Adml nist~ation

State, i.e. Macroeconomic level

Organisations tor Development

and Cooperation

Organisational level

I : . Inter4Multi"

: : n:atio~a! : .Corporations

Privatisation Agencies

Export Promotion . Investment Institutions .

Promotion Institutions

Supervisory Trade BOsiMSS TrLls{s Institutions . . .... .

Trade Unions Chambers

Training Financial-

Parties Institutions

Organisations : ~n~e~priseS'

Branch Ag ricu Ru ral I

Associations Craftsmen's

Professional Associations Associations

. BuSineSses'

Religious Groups

: HOUMhoids

... Middle level • Microeconomic level

Figure 16: Classification of Meso Level Institutions

Chapter 3: Measures in the Enterprise-Relevant Environment 91

A sharp division and categorisation of institutions in the meso level - for example,

chambers and associations, privatisation agencies and export and investment

establishments - are therefore not always possible. There are, however, a number of

typical characteristics of such institutions:

• far-reaching autonomy or partial autonomy from the state;

• partial performance of public activities and special tasks;

• mediatory function between state and individual interests;

• orientation towards specific target groups;

• orientation towards material goals, with the formal goal of profit optimisation in the background;

• less bureaucracy than state and public administrations.

One can generally distinguish between two possibilities for institutions to surface on the

meso level. One possibility arises "from below" because the fact that some tasks are not

being fulfilled is considered to be a problem by some people. The founding of self-help

organisations or economic interest groups are typical examples of a formation from

below. The other possibility is founding meso-level institutions "from above", or through

the government. In such cases, the public tasks and decision power are transferred into

semi-governmental or private hands. This decentralisation process is in line with the so

called principle of subsidiarity. 1

In many developing and transforming countries, the organisations of the meso level are

only in a rudimentary form if they exist at all. The inaccessibility of the institutional

structures and the weaknesses of the organisations hinder the effective implementation of

reform and privatisation measures. They are also one of the causes of the often limited

durability of individual measures and investments in technical co-operation.

Particular problems arise as a result of not seriously taking into account the catalytic

function of the meso level. In democratic, pluralistic systems, various organisations of the

meso level (associations, supervisory institutions, etc.) play an important role as

"institutionalised conflict-solving establishments". While the founding of interest groups

is relatively free in these systems, this was not the case in planned economic systems.

Public access to information was limited by the state, and decision-making processes

were centralised. As a result of this, organisations that take on the functions of

See also Chapter 1.1.


representing special interests and providing information access and other services that are

particularly important in private economic systems do not exist.

These gaps can be closed by promoting investments in the meso level. One point of

emphasis of the GTZ system approach to privatisation therefore lies in providing support

during the formation and strengthening of organisations on this level. Through this, in

particular the decentralised leadership institutions of reform policy will be strengthened.

The GTZ, for example, advised privatisation authorities and other economically relevant

institutions in the development and implementation of reform strategies, privatisation

procedures and adequate instruments, as well as in the formation of decentralised

institutions and administrative structures. Measures for the construction and support of

private self-help organisations and interest groups are also included here.

3.2 Conception of an Efficient Privatisation Agency

The organisation and management of privatisation processes are complex and highly

politically sensitive tasks. In particular, in the planned privatisation of entire economies, it

is recommended that the privatisation task be entrusted to a newly founded institution.

Experience has shown that privatisation processes, in which each ministry is responsible

for the privatisation of businesses in its own sector, do not lead to the desired results. The

main problem in most cases was found to be in the conflict of interest resulting from the

close relationships between the ministries and the businesses that were to be privatised.

Due to these links, founding privatisation agencies and establishing clear areas of

accountability for those participating in the privatisation process are recommended. Set

courses of action for company analysis and valuation, as well as for announcements to

and selection of investors for companies to be privati sed, are also suggested.


I Structure and Relationship Network of a Privatisation Agency 1 Government, Parliament,

Public Administration

Minor government Institutions or Independent units? Accounting and control mechanisms, regulations

Prlvallsallon Agency

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Figure 17: Structure and Relationship Network of a Privatisation Agency

The figure above clarifies the structure and relationship network of privatisation agencies.

Besides an adequate internal organisational structure, the following questions must also

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How is the privatisation agency connected with the public administration: Is it a subsidiary government institution or an independent unit? How is orderly operation by the privatisation agency to be ensured?

• What responsibility does the privatisation agency have? Who is to take over the ownership and control function of a state enterprise in the transitional phase (in other words, who will have access to the business)? To what extent is the initiative for privatisation approved and desired by the state enterprise itself ("privatisation from below")?

• How will the public interest be safeguarded? To what extent will the public be involved in the privatisation process? Is the overall process transparent?

• To what extent are external experts (e.g. environmental experts, consulting agencies, accountants) involved in the privatisation process?

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The fonnation and structuring of a privatisation agency should be carried out on the basis

of the structures and situation of its environment. The matrix above should serve to assist

in this matter. It illustrates various situational factors that could playa role in the moulding

of the individual structural characteristics that should be considered in the search for the

optimal structures of a privatisation agency. The individual boxes can only be filled in

connection with a specific example of the organisational structure of a private institution.

In a generalised valuation, only statements about trends can be made, as is made clear in

the relationships between the two dimensions. Thus, for example, the size of the country

and the number of businesses to be privati sed have an influence on the structural

organisation of the privatisation agency: in the case of large countries and a large number

of businesses to be privatised, a decentralised structure of the agency is recommended.

Even the small privatisations can as a rule be carried out better with a decentralised

organisation of the privatisation structure. If a large number of businesses to be privatised

exists, a standardised method of privatisation is recommended. An unstable economic and

societal condition, on the other hand, requires a flexible approach and therefore speaks

against supporting a standardised method. Another example is the support which the

business to be privati sed needs. The greater the need for support, the more

comprehensive the tasks and competency of the privatisation institution will have to be.

Possible solutions for individual areas are discussed below.

3.2.1 Independent Institutions or Subordinated Government Entities?

The main task of a privatisation agency or institution is the development and

implementation of national, sectoral and individual economic privatisation strategies while

ensuring the public interest. In this point, the double-sided characteristic of privatisation

agencies is made clear: on the one hand, "sellers" and on the other hand "public

institutions". How can both of these basic goals be suitably connected when a

privatisation agency is being set up?

The privatisation agency can be structured without being its own legal entity, and be

integrated into the government administration, as for example in Poland or Guinea. It can

also be fonned as an independent institution; as a separate legal entity with considerable

independence. The German Treuhandanstalt is an example of an exclusively independent

privatisation agency. Many countries have chosen organisational forms that lie between

the two extremes.


Ensuring the necessary objectivity and flexibility in the privatisation process is a major

argument for an independent privatisation institution that is not tied to a particular

advisory council or organisation. Experience has shown that privatisation institutions that

are integrated into the state apparatus often find themselves under tremendous political

pressure, so that privatisations are sometimes delayed and sometimes completely

hindered, or welfare losses occur for many population levels and welfare gains only for

some individuals.

Regardless of whether the privatisation agency is conceptualised as an independent

institution or a government administration unit, clear accounting guidelines and

requirements for the agency and control possibilities by the government and parliament

must be laid down. The German Treuhandanstalt, in making its business policies for

example, is answerable to an administrative advisory body, which is made up 'of

government and private sector representatives. The influence of the advisory body in this

case extends well into the operative levels.

In formulating the legal tasks and responsibilities of the institutions accountable for

privatisations, the most clear and insightful statements as possible should be chosen.

Conflicts in goals between the individual task areas, and task overburdening should be

avoided.

Case Study:

Is the Concept of the Treuhandanstalt transferable to Developing and

Transforming Countries?

The German Treuhandanstalt (THA) wasfounded in March 1990, and, by July 1990, it

owned approximately 8,000 businesses with over 45,000 production sites including 100

combines (very large highly vertically integrated enterprises) and a total of around 6

million employees. With the unification of Germany in October 1990, the THA became an

institution of public law. The technical and legal supervision is entrusted to the Minister of

Finance, while the technical surveillance is carried out in co-operation with the Federal

Economics Minister and the respective technical ministries. Parliamentary control is

vested in the THA sub-committee of the national budgetary committee. The board of

directors of the THA is made up of experienced politicians with backgrounds in

economics, as well as renowned bankruptcy administrators. An administrative board

accompanies the board of directors, and consists of West German managers, five


representatives from the new German states and four union representatives. The

administrative board peiforms advisory and supervisory tasks.

The THA operates in 15 decentralised units that are responsible for the privatisation of

small and medium-sized businesses with up to 1500 employees. Two thirds of all

businesses fall into this category. The large businesses are administered through the

central office in Berlin, and assigned under board members according to different sectors.

For each THA subsidiary, an advisory council with advisory functions was founded.

In accordance with the Treuhand Law, the THA is constructed in a similar fashion to a

financial holding company. This means that its main purpose lies in the participation in or

privatisation of an enterprise, while the operative business is handed over to the

business's management. Moreover, the financial holding ensures the security of the

financing of its businesses. The goals of THA's activities were summarised by the late

THA president Rohwedder as "rapid privatisation - resolute rehabilitation - cautious

closing down." At the beginning, the focal point of THA work lay in the area of

privatisation because it was believed that the task of rehabilitation could be financed

through the expected sales proceeds. However, this proved to be extremely difficult. The

labour market and structural problems in former East Germany, as well as the slow

development of privatisation activities, led to tremendous pressure on the THA - so that it

actively took over the formal structural policy tasks itself. Because of this, businesses that

could not be privatised in the short run, but could be rehabilitated in the long run, were

reconstituted as management limited partnerships under the leadership of an experienced

manager.

The THA could carry out its privatisations rapidly only because redundant labour was

supported by a well-developed social safety net which included social services, financial

assistance and reemployment support. Neither the Eastern European transforming

countries nor the developing countries can provide financial help to this extent, though.

Complicating things even more in these countries is the fact that their reform measures

cannot lean on a well developed social safety net. Moreover, most of these countries do

not have an international orientation comparable to West Germany at their disposal, which

would facilitate the search for interested investors. Finally, most of the transforming and

developing countries have a significant lack of know-how in carrying out a privatisation

process - including both the employees of the privatisation agency and the managers of

the businesses.


In summary, it can be said that an unadjusted transfer of the THA approach is not

advisable. Individual components of the German privatisation process can, however, be

applied in transforming and developing countries - the procedures for deconcentrating a

business, securing finance and sales management, the organisational structure of the

THA, etc.

3.2.2 Where do the Ownership and Control Functions lie?

Who holds the rights of disposal and control functions of the enterprises that are to be

privatised should be clarified by law. Taking the assigned responsibilities away from the

privatisation agency (and reassigning them to the state holding company, for example) at

best results in considerable delay of the privatisation process, as seen in the Zambian

example below. The rights over state enterprises should remain with the privatisation

agency as a rule, and powerful state holding companies should be dissolved as early as

possible. In doing so, however, it must be ensured that qualified interim management is

made available to the enterprises slated for privatisation.

As far as the distribution of responsibilities is concerned, the extent to which the state

enterprise maintains its own right to privatisation initiatives must be established. This sort

of "privatisation from below" is practised in Eastern European reforming countries to a

large extent (in particular, in Hungary). The view that rights to privatisation initiatives

should not lie exclusively with the privatisation agency or with the government supports

and permits an enterprise's self-privatisation. Through this, potential investors should be

allowed to approach the privatisation agency with concrete investment/purchase

proposals. Moreover, the enterprises should be able to introduce their own privatisation

by showing that ready investors exist or by recommending employee or management buy

outs. The idea is that the incentive to privatise would be enhanced. This type of

"privatisation from below" endangers the transparency of the privatisation process,

however, because public announcements of private objectives no longer take place and,

therefore, the danger of insider arrangements and corruption exists.


Case Study:

Privatisation in Zambia: Problems resulting from the Separation of

Privatisation Responsibilities and Disposal Rights

The Zambia Privatisation Agency (ZPA) is responsible for the privatisation of Zambian

public enterprises as legislated by the Privatisation Act of June 1992. The G1Z advises

the ZPA in selected areas. The political responsibility lies with the Ministry of Industry

and Trade. Important privatisation decisions must be approved by the cabinet.

The ownership of public enterprises was not transferred to the ZPA. The majority of the

enterprises are owned by the state holding company, ZIMCO (Zambia Industrial and

Mining Corporation), which holds a majority of shares (sometimes through sub-holding

companies) in approximately 120 enterprises in different sectors. At the end of this chain,

the Ministry of Finance is the final owner. In addition, the respective sectoral ministries

are also often involved. They are not interested in a rapid privatisation because they would

suffer a loss of influence and - especially in the case of profitable state enterprises - a loss

of financial means. Privatisation decisions that require ministerial approval therefore often

remain untouched for months at a time. The responsibilities for important decisions also

remain unclarified more than one year after the privatisation law went into effect because

the corresponding procedures have not been formulated. Again the transparency of the

process suffers, and, given the popular discontent with tackling corruption, this is viewed

very critically by the general public.

Although the ZPA legally works independently of ZIMCO, arranging co-operation

between the two institutions is very difficult because they have very different interests.

Considering the fact that the sub-holdings and ZIM CO are going to be dissolved, . their

tactics are based on delaying everything as much as possible. Asking the all-powerful

ZIMCO management to make itself superfluous is asking a bit much ("It's like asking a

fish to dry its place. ").

The holding company's strong position came about as a result of the growing informal

relations and the holding company's directive rights over state enterprises. This strong

position is often in conflict and direct competition with the ZP A, which formally supports

its activities with its legal mandate. The state enterprises, as the units which are actually

affected by the privatisation, are often only indirectly involved in the privatisation

process, and are often disoriented due to false or conflicting signals from the holding

company, sub-holdings, line ministries and the ZPA.


3.2.3 How are Different Interests represented?

Privatisations are a politically sensitive process, whose success is largely dependent upon

the acceptance and participation of a wide spectrum of society within a given country.

Because privatisations as a rule call for decisive changes in various economic areas, there

are manr interest groups who want to have a say in the privatisation strategy. One of the

most difficult tasks in the formation of privatisation agencies is therefore involving the

various interest groups so that a political consensus can be assured without causing

inefficiencies and delays in the entire process. A fme balance must be struck - too close a

co-operation with individual economic or political interest groups should be avoided

because otherwise the decision making room for the privatisation agency becomes too

limited and its independence becomes endangered.

Many countries have tried to solve these conflicts by requiring that the privatisation

agency answer to parliament. Another, probably more effective, solution for ensuring the

representation of various interest groups lies in creating diversely filled administrative

slots in the privatisation agency. The advisory board of the German Treuhandanstalt, for

example, is made up of 16 members - at the beginning still under East German control -

where seven were selected from the ministerial board and two from the parliament, or

Volkskammer. The remaining seven members were selected by the- Volkskammer with

recommendations from the Minister President, and those members were to evidence a

high level of technical competence and comprehensive experience in managing and

rehabilitating businesses, as well as in money market activities.2

One of the most effective and most important methods for ensuring widespread support of

the privatisation process by the entire society is by ensuring the transparency of the

measures carried out by the privatisation agency. This can be achieved through clear

guidelines for carrying out the privatisation - for example, in the selection of potential

buyers - as well as through keeping the public informed about the contents and stage of

the process. A further important instrument for achieving transparency is the valuation of

the state enterprise by independent valuers.

2 See Paragraph 4.2 of the Treuhandgesetz.


3.2.4 Which Organisational Structure is recommended?

The design of the internal organisational structure of the privatisation agency can follow

various criteria. When privatisation is carried out primarily in the framework of one

method - for example, in the private sale of state enterprises - a division of the

privatisation agency into various economic areas is recommended. The Hungarian

privatisation agency was restructured according to this scheme after it became clear that

more than 90% of the state enterprises were going to be sold on account of their own

initiatives.

If, however, various privatisation methods are applied, as in Poland for example, a

division according to the respective method is sensible. Regardless of the decision for one

or another organisational structure, supplementary cross-sectional departments should be

established - for example, legal and personnel departments.

The decentralisation of privatisation responsibility and structuring the agency according to

individual regional areas are primarily recommended for large countries, but can also

make sense in smaller countries with complex industrial structures, depending on the

initial situation. Then the regional subsidiaries often take over the privatisation of smaller

businesses. For example, in Russia or in the new German states, enterprises with up to

1,500 employees were privati sed by regional offices or their subsidiaries.

In the context of structuring the agency's process flows, as clear and meaningful

regulations as possible should be instituted with respect to processes for selecting

enterprises, making announcements, contracting valuations, selecting buyers and

divesting, so that the privatisation process is not unnecessarily delayed and the possibility

of collusive agreements and corruption is avoided. Clear, simple contract outlines

facilitate and speed up agreements, especially with foreign investors. In dealing with old

administrative structures on the private and public level, shortened and direct official

channels are recommended. Ideally, legal guidelines for the process flows will exist for

the individual methods. Privatisation without a set procedure with respect to the planned

courses of action, as in Panama, for example, has led to the sale of attractive state

enterprises to well-known politicians or government officials (who, however, do not have

appropriate skills or know-how) without making public announcements. This led to the

bankruptcy of many enterprises over a short period of time.


Case Study:

Albania's National Agency for Privatisation (NAP) as an Example of a

Decentralised Privatisation Agency Concept

The National Agency for Privatisation (NAP) was founded in August 1991 in order to

assume a central role in the privatisation process. The NAP has been supported by the

GIZ since 1993 under a contract from the German Ministry for Technical Co-operation.

At the beginning Albania had difficulties with the design and composition of process

flows and organisational structure. Arguments about authority and changing areas of

responsibility had a laming effect on its activities.

According to the privatisation law, the NAP reported directly to the Council of State. The

NAP central office in Tirana has a mere ten employees. The 37 Private District Offices

(PDO) each have two to three professionals. Each PDO reports to the NAP Director as

well as to a regional privatisation commission. In addition, each ministry under which

state enterprises exist has its own privatisation department. These activities of the sectoral

line ministries are, of course, not supported by law, but nothing is done to prevent their

involvement which is due to existing property ownership relationships. A privatisation

commission in the Ministry of Finance and Economics attempts to co-ordinate the

activities of the sectoral line ministries. Finally, an enterprise support unit prepares the

run-down enterprises for privatisation through restructuring and rehabilitation.

In conclusion, it can be claimed that the Albanian decentralised concept obviously

contributed to the success of the "small privatisations". As a whole, however, such

division of privatisation responsibilities and efforts had a negative effect on the process.

The large number of groups involved and the unclearly divided lines of authority had a

laming effect on the privatisation process, above all with medium-sized and large

enterprises, and contributed to corruption. On top of this, the fact that the transfer of

property to the privatisation agency did not take place weakened the NAP's position.


3.2.5 Use of External Experts?

Most of the developing and transforming countries do not have a sufficient pool of

technical, economical and administrative skills to carry out the multitude of measures

required by privatisation. Further bottlenecks arise in control (contract controls),

supervisory and regulatory functions, which dictate conditions following a privatisation.

Therefore private sector professionals - accountants, lawyers, engineers, consultants,

environmental experts, etc. - are brought into the privatisation process. In Hungary. even

a regulated "privatisation of the privatisation" is carried out: small and medium-sized state

enterprises that are in line for privatisation can select a consulting fIrm from a list of 180

fIrms recommended by a Hungarian privatisation agency. The selected consultancy fum

carries out the conceptualisation and implementation of the enterprise's privatisation. The

consultants' work is then evaluated on the basis of the success of the privatisation. In

some cases, the privatisation agency has the right to reject the recommended privatisation

plan.

One advantage of entrusting particular privatisation tasks to private fums is the reduction

of administrative costs. Accelerating and improving the quality of the privatisation process

often become possible. Because of the demand for private consulting and support services

in the privatisation process, the development of a local consulting industry is supported

and, with that, a contribution to the development of private businesses is made. While the

initial consultancy services contracted by the Hungarian privatisation agency were

exclusively foreign, today a large portion are domestic agencies. These positive results led

the Hungarian privatisation agency to implement the self-privatisation programme in

larger fIrms as well.

The co-operation between private companies and the privatisation agency should be

clearly and meaningfully regulated in order to exclude possible negative effects of self

privatisation - such as nebulating the privatisation process, leaking confIdential

agreements and corruption. The privatisation agency's ability to control and provide

incentives for efficient and effective consultancy work is very important in this respect. In

Hungary, for example, the consultants' remuneration in the context of self-privatisation is

dependent on the sales price achieved and the speed of the privatisation. Moreover, a

clarifIcation of all strategic questions - for example, with respect to the valuation and

privatisation methods to be applied - is recommended before an external consultant is

contracted.


3.3 Institution Building and Strengthening of Enterprise-relevant Entities

While the "original" privatisation tasks in most countries are carried out by a privatisation

agency, there is an entire series of other important tasks that influence the long-term

success of reform and privatisation programmes. On the meso level, this refers to the

formation and strengthening of business-related institutions which support private

enterprises. In the context of privatisations, institutions of the meso level have a central

importance because they ease the transformation to a market -oriented economic system.

They help to ensure the sustainability of privatisations of enterprises which were

previously under government control and which had little, if any, exposure to market and

customer orientation. Above all, they serve to bring the privati sed business onto a lasting

and successful course. In the following sections, some of the important organisations in

the meso-level business environment are presented.

3.3.1 Commercial Associations and Chambers of Commerce

Commercial associations and chambers have a central importance in the development of

an economy: on the one hand, they serve as transmission bands between the businesses

and the rest of society, and on the other hand they serve as unifying elements between the

individual businesses themselves. Associations can ease the adaptation of newly

privatised and newly founded businesses to a market-oriented economy. Associations and

chambers assume the following original tasks:

• representing members' interests to the state and other groups (lobbying);

• providing services for their members:

identification, preparation and goal-oriented assimilation of relevant political, economic and professional information

development and implementation of educational programmes

technological, professional and commercial business consulting

support of members in dealing with public entities and banks, particularly in

identifying and mobilising available financial means.

While associations, as a rule, represent individual sectors or branches, chambers of

commerce take on tasks for the entire economy. Trade and export promotion - for

example, the organisation of national participation in international trade fairs - is included.


In some countries, the associations and chambers take on additional tasks that have been

delegated by the state, as self-administered institutions of the liberalised economy.

Professional education or supervisory obligations are examples of such tasks.

The delegation of tasks by the state to the associations stems from the idea of subsidiarity

and provides an effective and efficient realisation of public tasks. It does, however, often

require legally defined obligatory memberships.

Formation and Development of Associations

Task is carried out by:

Mainly employees the conceptional field

Volunteer workers, employees in the administrative fie ld

Volunteer workers

in

Creation

Interest groups

Development

Services

Maturity

Public tasks

Figure 19: Formation and Development of Associations

Tasks

The figure above shows the typical formation and developing phases of associations: the

founding of associations usually emerges from a group of individuals or organisations

with similar interests, who share the goal of validating their interests and increasing their

clout.

In the formation phase, all of the surfacing tasks are carried out by honorary officiating

members whose work focuses on representing the interests of the group. The more

influential the association and its activities become, the more work they will have to do. A


large number of the administrative and general tasks are direct responsibilities of the

members who hold offices.

In a later phase, a full-time business manager takes over the administrative matters, and

then also becomes responsible for conceptual activities. The honorary board members are

merely involved in the establishment of the strategic plan and the outward representation

of the group. Later on, more full-time employees become active, and the association

offers services to its members, for example, in the area of information and consulting. In

individual cases, the association takes on additional public responsibilities, such as

particular control or supervisory activities.

In many developing and transforming countries, associations and chambers are only

rudimentarily developed and can therefore not adequately realise important tasks in

representing interests and supporting private enterprise. The lack of development can be

partially attributed to the fact that this kind of self-organisation of the economy was not at

all necessary or even desired in economic systems that were previously directed by the

state.

Particular problems for the associations arise due to inadequate organisational structures,

a lack of legal foundations, limited financial resources and a lack of interest on the part of

those who are to be represented. The role of associations and chambers is often not

clearly and meaningfully defined. Therefore, the state often assumes the task of

operatively supporting trade although chambers of commerce could better fulfil such

tasks.

Strengthening the organisational structure of chambers and associations for effective

realisation of their service and representative functions is also supported through technical

co-operation. Individual elements of the support lie in the transfer of information,

advising and educating as a means of improving and expanding services offered to the

members, improving the internal organisation of work processes, qualifying employees

and advising in the fields of public relations and outward representation. The

strengthening of co-operative relations with other economically relevant private, state and

international establishments is an integral part of these components.


Case Study:

Knowledge and Experience Transfer through Partnership Projects

Projects have been carried out since 1983 to support small and medium-sized businesses

in the framework of small business development. These projects are implemented at the

institutional level and have the goal of developing self-help and self-administering

organisations. Through this, partnerships between German economic chambers and

associations and partner organisations in developing and reforming countries are being

initiated. In the long run - even after the end of the project - these will be maintained and

should serve to strengthen the private sector.

In this type of programme - which is conceptually based on the German Ministry for

Technical Co-operation's "Chamber, Association and Savings Bank Partnerships Pilot

Programme" - the G1Z takes on various tasks based on the level of development of the

partner organisation and the level of experience of the German counterpart unit.

In sponsorship projects, implementing the project is the GTZ's responsibility. The

German partner organisation contributes organisational, technical and professional know

how. The counterpart organisation is either in the formation stage or is in a stage of loose

association (usually of larger enterprises). In partnership projects, on the other hand, the

project is carried out by the German chamber or partner organisation. Here the counterpart

organisation already peiforms many of its functions.

An example of a partnership project is the partnership of the Diisseldoif Trade Chamber

of Commerce with FEPYME, an association for small industry in Guatemala. The co

operation between the two organisations arose in the context of the INTECAP

professional development project and has been running since 1988 as an independent

project. The goal of the project is to strengthen a Guatemalan organisation that will

represent and foster small and medium-sized industrial enterprises in various regions and

in a number of sectors.

The constitution and operation of the organisation were the main goals in the initial phase

during 1988-1990. In the second phase, from 1990-93, the work centred on the

development of institutional structure (subsidiaries, personnel qualifications,

professionalisation of the services offered).

Until mid-1992, a long-term consultant from the Dusseldoif Chamber (HWK) was

provided. Since then, the HWK provides its support primarily through short-term


experts. During the final development phase (1994-96), the weight of the targeted support

will lie on increasing FEPYME's organisational and self-financing capacity. In the course

of these advisory activities, field exchanges and educational measures in both countries

became the basis for the long-term partnership between FEPYME and the HWK

Dusseldorf.

Case Study:

The Small Industries Development Board (SIDB) in Pakistan

The G1Z was contracted by the German Ministry for Technical Co-operation to deliver

organisational and management consulting to the SIDB, which included a mandate for the

development of small industries in the Northwest Frontier Province (NWFP).

The SIDB has existed for 20 years now. It is under the control of the provincial

government and employs approximately 1,250 workers. It administers an industrial area

with individual businesses and business centres, as well as shops in which crafts are

sold. Crafts and handiwork are fostered, and there are establishments which concern

themselves with credit advising and project development.

Analyses show that the SIDB did not fulfil its own tasks and that it evenforced others out

of the market in many cases by inefficiently running its own industries. The combination

of technical assistance and commercial orientation proved to be problematic. The G1Z

suggested a decentralised concept to the provincial government, which touched upon the

founding of Local Enterprise Development Agencies (LEDAs). The main features of such

LEDAs include:

• LEDAs offer a comprehensive services package, but do not found their own

businesses.

• LEDAs are financed through a combination of public and private means; the local

private sector should be highly involved.

• A LEDA should be able to be run by a maximum of five employees.

3.3.2 Export and Investment Promotion Entities

Many developing and transforming countries must go through major adjustment during

the reform and privatisation process. During this process, one cannot solely rely on the

self-healing power of the market. The advanced Central European countries faced

problems in the early 1990s where, on the one hand, the traditional eastern sales markets


had collapsed, and on the other hand, the long-term exclusion from western markets had

severely affected their competitiveness. Targeted economic and regional support measures

are necessary in order to ease the adjustment.

Successes are promised through the implementation of export and investment promotion

measures, especially in the area of improving the initial competitiveness of the privatised

and newly founded businesses. In the framework of privatisations, investment promotion

measures support the search for investors for the government enterprises that are to be

privatised. Export promotion measures ease the companies' adaptation to market-oriented

environments and contribute to the sustainability of the privatisations.

Many privatised businesses in developing and transforming countries cannot sell their

domestically produced products on international markets. The reasons lie in poor product

quality and limited familiarity with regional and international markets and marketing

techniques. These deficits can be compensated by targeted export-promotion measures

which are, for example, carried out by export-promotion establishments or by national

chambers of commerce.

Export promotion includes the following measures:

• collection and presentation of information about sales markets (export conditions to other countries, quality and quantity trade barriers, world market prices, exports and imports of other countries);

• product development according to market demands;

• advising with respect to export plans and questions about carrying out such activities (bank guarantees, trade insurance, customs documentation, freight delivery, etc.);

• planning and carrying out educational programmes;

• planning and carrying out advertising and informational campaigns;

• organising and participating in trade fairs and exhibitions;

• bringing together potential buyers and sellers;

• arbitrating trade disputes;

• specific support in exporting (origin certificates, test confirmations).

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Particular support in the context of export promotion is needed in the area of trade fairs

and exhibitions. The importance of these types of events for promoting exports is

uncontested. Although most of the developing and transforming countries are represented

at a number of trade fairs, they do not take advantage of most of the potential benefits of

participating. The following figure shows the most common mistakes in this area.

The Most Common Mistakes made by Enterprises in Transforming Countries with Regard to Fair and Exhibition Participation

• The selected fair or exhibition is insignificant or not suitable for the exhibited products.

• The products exhibited are not competitive - frequently they do not fulfil the customers' demands.

• The enterprises do not have the capacity to exploit possible contracts as a result of taking part in these fairs.

• The entire marketing concept of the enterprises is not consistent, there is very little information about the target groups, the planning and implementation of the marketing measures are unprofessional.

• The individual marketing measures are not goal-oriented nor are they optimally co-ordinated with each other. For example taking part in a fair is meaningless if the enterprise would like to target only a few large customers.

Figure 21: The Most Common Mistakes made by Enterprises in Transforming Countries with Regard to Fair and Exhibition Participation

In order to avoid these mistakes, careful selection, preparation and participation in trade

fairs are necessary. This often overwhelms the enterprises in developing and transforming

countries. Export promotion establishments, such as those managed by chambers of

commerce, can help businesses by providing the relevant information.

The GTZ supports export -promotion measures in the framework of the PROTRADE trade

and fair support programme. Emphasis of this support lies in product- and market-related

consulting of businesses (for example, on quality assurance), as well as in making

systematic market information and didactic material on marketing education available. The

participation of businesses from developing and transforming countries in German trade


fairs is supported financially and technically, and the development of such trade

exhibitions and fairs in the host countries is assisted.

Promoting investment is one of the most frequently used measures for supporting

developing and transforming countries with respect to export competitiveness. Foreign

direct investment brings does not only bring the necessary capital into a country, it also

provides import help for economic development through knowledge and technology

transfer and access to new markets.

Chapter 3: Measures in the Enterprise-Relevant Environment

The Twelve Most Frequent Investment Promotion Measures

1. Advertising in newspapers 2. Taking part in exhibitions 3. Advertisements in magazines 4. Through trips, e.g. business trips 5. Organisation of information events on investment

possibilities - -Creation of a Positive Image

6. Through circulars or telemarke~ing measures 7. Organisation of sector-specific business trips 8. Through information events on investment in specific

sectors 9. Search for investors for specific enterprises

-Direct Promotion of Investment

10. Provision of services for investors 11. Acceleration of the execution of the investment plan 12. Provision of services subsequent to investments

-

- -Support of the Investment· Plan I

Figure 22: The Twelve Most Frequent Investment Promotion Measures

113

Investment and co-operation supporting measures strive to stimulate foreign investors to

undertake activities in the host country. In addition to providing tax incentives, carrying

out infrastructure projects and engineering a trustworthy, investment-friendly

environment, the state can also attract foreign investment through targeted investment

support. In the area of fostering co-operation, above all the identification of willing


businesses, the active search for business partners and advising on the structure of co

operation agreements are important.

Figure 22 shows the 12 most common measures in the framework of investment

promotion, which are divided into three groups based on the type of goals to be pursued:

building up a positive image, direct promotion and stimulation of investment, and direct

support in carrying out specific investment plans.

The main purpose of image campaigns is not enrolling specific investors, but rather

building up a generally positive image for a country. Individual image campaigns that are

carried out with the goal of generating specific investment generally do not have

immediate results.

Image improvement measures are, as a rule, an initial step in investment promotion

measures. They are carried out after a country has gone through particular decisive

changes. In this manner, investors were attracted to Ireland in 1970 with the argument of

low salaries and costs. By the beginning of the 1980s, however, as wages and

educational levels rose, a new image campaign was launched with the slogan "We're the

young Europeans", which included subtitles referring to the relatively high qualification

levels of Irish workers.

In this respect, African nations have an especially difficult situation with the

implementation of investment promotion measures. Many investors have a generally poor

picture of Africa and, in addition, do not differentiate between different African countries.

Efforts by individual states to improve their images are therefore often unsuccessful. One

possibility for getting round this situation is through co-ordinated actions of several

countries.

Broad, comprehensive image campaigns are associated with high costs and cannot be

financed alone by most developing and transforming countries. Instead, individual

measures targeted at specific groups are recommended to optimise the use of scarce

resources.

In the context of measures aimed at direct support of individual investments, concrete

investment plans should be facilitated. In contrast to image campaigns, which address a

relatively large audience, these measures are aimed at specific potential investors. In this

process, clarity must prevail that the degree of success depends largely upon how

successful the efforts to select and contact potential investors are. Investment promotion


personnel must be fully versed in the investor's business and be of appropriate calibre in

order to act with credibility.

Experience in the area of marketing durable goods has shown that impersonal marketing

measures are most successful at the beginning of the buying decision process, while

personal contact is important in the later phases of the buying process. Because the

decision process for durable goods purchases is similar to the investment decision

process, these similarities can be very helpful in conceptualising investment promotion

measures. Above all in later phases of investment promotion, the implementation of

personal contacts, e.g. through business trips, is recommended.

Investment promotion measures can also promote the implementation of investment plans.

This takes place, above all, through making services available that facilitate interested

investors' decisions or by supporting them in the implementation of their plans. Investors

who have received professional support and invested once in the given country can

stimulate further interests in that country.

A typical example of this kind of implementation support are the services offered by the

Investment Promotion Centre in Zambia. In addition to the general support of domestic

and international investors in Zambia, the tasks of this establishment lie in the area of

supporting the implementation of concrete plans. Employees of the Investment Centre

help investors to cope with any existing red tape, authorisation procedures, etc. as well as

in the search for co-operation partners. Above all, domestic investors learn how to present

themselves in a professional manner. Thanks to the support of the Investment Centre,

investors can count on wrapping up the authorisation procedures within 30 days. After

that, there is nothing else formally standing in the way of an investment.

Which institutions should carry out these export and investment promotion measures?

There are some arguments for setting up a government organisation for this: promotion

activities that promise to be successful require support through economic policy measures

- for example, allowing tax incentives for foreign direct investment. Close co-operation

with government offices is also required in the context of investment plan authorisation

procedures.

On the other hand, it should be noted that investment and export promotion measures are

marketing tasks that can generally be performed better by private organisations:

investment promotion demands constant dialogue with the private sector as well as

flexibility in order to be able to react quickly to the investors' needs. Other influencing


factors include management knowledge of modem marketing practices and a certain

autonomy of those responsible, in order to plan and implement investment promotion

measures over a longer period of time.

Because of these relationships, it is recommended to form investment and export

promoting organisations or institutions that are more or less fmances by the state but still

possess the necessary flexibility and autonomy - and whose work involves the private

sector to a large degree. The management of partly state-run investment and export

promotion agencies could be answerable to a ministry, without actually being a part of it.

The employees of the agency are not government employees, but rather qualified experts

in the area of marketing with a good knowledge of the private sector. In addition

individual tasks can be contracted to private firms, for example, public relations agencies

or consulting firms with an international network of subsidiaries.

3.3.3 Finance Institutions

One of the inhibiting factors to flourishing private initiative in developing and

transforming countries is the lack of suitable sources of finance. In the framework of

privatisations, the weaknesses of the domestic financial market have a particularly

negative effect because frequently the necessary capital for purchasing enterprises or for

financial rehabilitation cannot be mobilised. The situation of the fmancial markets in many

developing and transforming countries is characterised by the following elements:

• A lack of financial resources from private businesses and institutional investors which has negative effects on:

founding new businesses and the development of entrepreneurs;

expansion of existing businesses;

financial restructuring and rehabilitation of existing businesses;

privatisation of government enterprises.

• Low savings levels due to the poor savings environment (for cultural and other

reasons) as well as an insufficient network of savings bank branches.

• Capital flight: the small upper class with high income and savings levels often invests

its capital abroad.

• Not enough banks able to close these existing gaps. Banks have problems with proper

credit analysis, risk assessment, distribution and performance monitoring. In


particular, small private businesses and businesses from the infonnal sector have very little access to credit, in part due to overreliance on collateral-based lending.

• Limited access to national and international capital because of the lack of local intennediary institutions. The development of a strong private sector requires a fitting financial infrastructure consisting of banks and savings institutions with a network of branches. These have to, on the one hand, be in a position to attract savings in order to mobilise the savings potential in that country, and, on the other hand, they must be able to effectively distribute credit.

• A lack of, or poorly organised, stock exchanges.

• Development banks are admittedly important establishments. However, they cannot completely make up for these other deficiencies. In addition, they are often misused as "self-service" institutions by local politicians and their own management.

A sensible solution to the financial limitations of many businesses - which, as a rule,

surface together with poor management capabilities - lies in building up investment funds

which are coupled together with management assistance services. These can tackle

financial and management problems in a "twin-prong approach". The example of

PrefundIRAS in Kenya, discussed in Sub-chapter 3.3.5, provides a comprehensive

picture of this approach. The following figure shows the necessary steps in building up

this fonn of establishment.


Important Steps in the Creation of a Financial Fund with an Integrated Consulting Unit

• Search and definition of possible addressees to participate in the capitalisation and provision of technical support (e.g. possible concentration on the support of privatisation / rehabilitation or on the creation of new private enterprises)

• Analysis of the economic framework of the entire economy, the legal structures as well as the economic policy on private enterprises. Analysis of existing institutions for the support of private economy. (e.g. foreign trade provisions, foreign exchange provisions, customs laws, regulations for domestic and foreign investment, level of privatisation, expected conditions for the state enterprises to be privatised, analysis of the financial markets, institutions of the financial markets, expectations and aims of major institutional investors )

• Search for a powerful national or regional institution that will create and support the fund extensively, identification of "prime mover" (e.g. existing organisation or management consultantcy- of special emphasis is the meaning of national/local aspects: the fund should not be established from outside but considered as a response to local needs)

• Compiling a requirement catalogue on the service unit to be installed and working out a concept for the possible structure of the fund or consulting support (e.g. laying down of aims and function of the fund, size of offer, principles for equity participation, legal structure, necessary know-how, necessary personnel, number of extemal experts, retraining and further education of local

personnel, construction of organisational processes and structures, preparation of business plans)

• Search for and negotiations with those interested in participating

• Creation and promotion of fund, consulting unit

Figure 23: Important Steps in the Creation of a Financial Fund with an Integrated Consulting Unit

The GTZ, in co-operation with the Gennan Savings and Clearing Bank Union, supports

financial infrastructure development and the improvement of the supply of financial

services through so-called Savings Bank Partnerships. The co-operation between the

Gennan savings bank organisations and foreign banks is carried out primarily in the

following areas:


• Support in the establishment of banks and in the founding of credit associations

• Development and implementation of organisational improvements, for example, restructuring state-regulated postal banks into functioning, self-sustaining credit institutions

• Further education for financial institution personnel.

• Introduction of target-group-oriented savings programmes (mobilisation of savings potential, expansion of the branch network, decentralisation of the finance system) .

• Introduction of target-group-oriented credit programmes (intensive co-operation with artisan and small business associations, fostering the distribution of small credit sums, speeding up the decision process for awarding small credit, integration of the informal sector in the economic system)

• Expansion of services offered at existing banks

Case Study:

The Trafalgar Development Bank Ltd. (TDB), Jamaica

The Trafalgar Development Bank (TDB), founded in 1985 and listed on the Kingston,

Jamaica, stock exchange, is a private corporate entity which provided debt and, to a lesser

extent, equity financing. TDM's target groups are medium-sized and larger private

businesses in Jamaica with an average staff of 125. In addition to low-interest debt

capital, the companies financed by TDB are also offered advisory and educational

services. As a private enterprise, TDB takes on tasks that had, until now, been mostly

taken on by government development banks in almost all of the developing and

transforming countries.

TDB funding is made possible through equity participation and concessionary loans from

such organisations as the DEG. FMO. USAID and CDC. and, in limited cases, through

the issuing of shares on the Jamaican capital market. The bank has been freed of having to

pay corporate taxes until 1996 and was promoted by the Government of Jamaica, which

assumed the currency exchange risks for the bank until 1991.

TDB helps to close the gap in the Jamaican financial market in the area of long-term

investment financing for private businesses. Through this, TDB supports the private

sector in Jamaica and helps to secure existing jobs and create new ones.


Since 1992 consulting assistance has been given to TDB with respect to overcoming

weaknesses in its strategy, organisation, and credit portfolio. In addition, the 012

consulting component includes advising companies financed by TDB in the fields of

management, production, marketing, controlling and finance. In order to ensure the

sustainability of the project, assistance is also given in raising unsubsidised on lendable

funds. Last but not least, a clear division must be made between financing and

management assistance in order to minimise competitive distortions - the financing

business should cover its own costs and not "borrow" from the subsidised management

assistance business.

3.3.4 Supervisory Institutions

Market-oriented economies do not function on their own - institutions must be established

which oversee that certain rules and practices are followed. This includes, for example,

the development of an anti-trust authority and an institution for overseeing the privatised

fmancial sector.

In many cases this does not only concern supervisory issues, but also establishing

fin.ancial and technical standards, which are a key ingredient in export development. One

can assume that products that are tested by an independent institution with given quality

specifications are, ceteris paribus; more desirable and easier sold in international markets.

Many western countries even require tests according to particular standards for some

imported goods, in particular technical products. An example of this is the German

Industry Standard (Deutsche Industrie-Norm - DIN). But even in non-technical areas,

"seals of approval" can be helpful in marketing. Examples include the "Appellation

Contr8lee" for French wine and the German CMA seal on agricultural products.

Some supervisory institutions must be newly created, while others can be developed from

existing establishments. In the transforming countries, a large number of the existing

institutions which controlled economic activities have to be either closed down or

completely reoriented. This includes establishments for administering prices, currency

and import controls, as well as for investment approval procedures.

Because the work of supervisory institutions in market economies does not consist of

detailed observation and control as were required in centrally controlled systems, the new

supervisory organs can be smaller and more effective than their predecessors. The

establishments that result from restructuring measures, which concern themselves with


economic, statistical technical analyses, should move away from centralised hierarchical

procedures and towards transparent, standardised decision making. On top of this, legal

guidelines must be created to allow enterprises to contest supervisory fmdings or other

decisions. Further legal guidelines are necessary in order to define the relationships

between supervisory authorities, government departments and government enterprises.

In some cases, supervisory functions can be delegated to the private sector - e.g.

educational activities can be delegated to commercial associations or trade chambers. More

over, some guidelines can come from the private sector itself, so that the role of the state

is minimal in overseeing these activities. For example, tax advisors, bookkeepers, legal

advisors and medical experts can provide information for adequate internal standards

within their professions.

Case Study:

Supporting the Standards and Industrial Research Institute of Malaysia

Malaysia intends to introduce a privatised system of regular motor vehicle surveillance in

order to reduce the alarming increase in traffic accidents, as well as harmful vehicle

emissions (particularly in the congested area of Kuala Lumpur). The G1Z is therefore

supporting the Standards and Industrial Research Institute of Malaysia (SIRM) as well as

other Malaysian institutions in creating the technical and legal framework through:

suggestions for formulating guidelines for regular motor inspections;

• efficiency analyses;

• specification of standards and equipment for control centres;

• training of control personnel;

• establishment of registration and surveillance procedures for private inspection centres.

With respect to the organisation of vehicle surveillance, a more efficient and effective

accomplishment of these tasks is expected from a private institution. In 1993, the

privatisation of the national government vehicle surveillance organisation was therefore

announced to eight national and international bidders. The transfer to a private company is

to take place in 1994.


3.3.5 Strengthening Enterprise-Relevant Services

Not only investments for renewing antiquated machinery in developing and transforming

countries are necessary to make companies competitive. More importantly, know-how

must be developed in the areas of product quality, production technology, organisation,

accounting and marketing.

The hypothesis that technical knowledge in particular functional areas is a determining

factor for successful transformations was presented in a recent publication.3 The access

to decentrallyavailable information and know-how in market economies is becoming an

important factor for success in the transformation of East German businesses. Similar

links can be assumed for other transforming and developing countries. While prescribed,

regulated relationships between businesses and their suppliers and customers exist in

centrally planned economies, private companies in market economies must adapt

themselves to the needs of potential customers.

Organisation of market activities demand appropriate changes in the internal management

structure and employee training. Another important requirement for adequate development

of companies consists of external impulses: for example, businesses require information

about customer structure, potential competition, quality standards and product and

process innovations for the development of strategic guidelines.

This kind of information is delivered by related research institutes and can often be

retrieved by way of electronic data banks in developed markets. In transforming and

developing countries, the business-related services are often only available in a

rudimentary form. Therefore the development of institutions for political and general

economic analyses as well as the establishment of mechanisms for ensuring sufficient

information for users, producers and investors should be encouraged. It must be ensured

that all interested businesses - including small businesses in the informal sector - receive

access to information in the areas of marketing, financing possibilities, technological

developments, quality standards and product and procedure innovations.

The necessary change is not difficult for many businesses. A typical example of possible

adaptation difficulties can be seen in the experience of a paint producer in Saxony-Anhalt,

Germany. The business was part of a large combine during the time of former East

Germany, and at that time received professional information exclusively from East and

3 See Albach Horst: Zerrissene Netze--Eine Netzwerkanalyse des ostdeutschen Transfonnationsprozesses, Berlin 1993.


West German trade magazines. No professional exchange took place either with the

customers or with the suppliers. Since the fall of the Berlin Wall, representatives of the

business regularly visit trade fairs and are in contact with the customers, suppliers and

trade associations. The necessary know-how for production of quality products,

however, cannot be acquired through public information sources alone. Targeted support

measures can be more effective - for example, through coaching by western co-operation

partners.

Case Study:

Rehabilitation: An Approach with a Promising Future

In 1989, an innovative pilot project in Africa was initiated and financed by the Deutsche

Investitions- und Entwicklungsgesellschaft (DEG) and the European Community:

"Rehabilitation Advisory Services Ltd." (RAS). The implementation and care of RAS

were contracted to Kienbaum Development Services. The goal is to bring troubled

enterprises back to profitable economic performance, irrespective of whether the

enterprises declined due to external condition or internal weaknesses.

Kenya was selected for the pilot project because it has to struggle with some of the typical

problems of Sub-Saharan Africa, such as high population growth, limited development in

the economic sector and weak domestic demand potential.

The RAS rehabilitation approach connects two elements with respect to the African

environment:

1. A consulting unit that offers a wide range of consulting services for the businesses to be reformed. Through this, all important functional areas and weak points can be covered. The basis of the rehabilitation consists of working towards an integral, future-oriented business concept for reviving the enterprise's competitiveness. An important part of the service packet is also the active support of management in carrying out and overseeing the recommended measures, a task that must be given special attention due to the local conditions. This also includes taking over operational

responsibilities in the framework of interim management contracts. RAS is also active

in the Kenyan Parastatal Reform Program. One of the tasks taken on is the preparation of the sale of businesses (valuations, sales memoranda, etc.) as well as the

rehabilitation of weak businesses prior to divestiture. In addition to the DEG as majority owner, three Kenyan development banks hold equity stakes in RAS.


2. Capital is needed for the implementation of required rehabilitation measures, as a rule. However, shareholders and banks often cannot or will not provide rehabilitation capital. For this reason, afinancial unit, PREFUND, was created in addition to the consulting unit of RAS. It offers the clients appropriate long-term financing in the form of debt or equity participations. PREFUND is managed by RAS.

These institutions appear on the market as one unit. Financing without concurrent

consulting of the company and accompanying management support is not accepted. In

addition, RAS reserves the right to have a say in important questions on running the

business and to be represented on the board if PREFUND should invest in the business.

The long-term survival potential of the company is a prerequisite for a commitment from

RAS andfor the availability offundsfrom PREFUND. Other criteria that are taken into

account are the creation of jobs, in particular in rural regions, the use of domestic input

materials, the potential of the given management team, the export potential, and finally the

possibility for substitution of imports. The short-term goals of this work lie in improving

the liquidity and in reaching profitable margins. In the long run, a competitive and

profitable business should surface.

RAS ends its consulting and interim management activities when the crisis situation has

been overcome and the enterprise reaches profitability. The financial involvement by

PREFUND is then cut back as well, and the partners in the businesses are generally

granted a preferential right to purchase shares.

In addition to long-term German experts, Kenyan professionals are employed who learn

about consulting activities through on-the-job training. For specific tasks, external experts

are sometimes brought into the project for short technical assignments.

The project is financed by consulting fees, fees for the management of PREFUND and

support from the EU, CDI, European Investment Bank and other donors. Financing the

consulting division through consulting fees alone is being striven for; it could take some

time, however, until this goal is reached.

As a whole, the experiences from this combined approach of consulting and financing

have been positive, and there are thoughts of developing such programmes in Zambia,

Uganda and Tanzania, as well as in Central and Eastern Europe.


3.4 Creation of a Privatisation Network

Carrying out privatisation programmes, as well as building up an adequate format for

private economic activities, are complex tasks that require co-operation between various

institutions. It is therefore strongly recommended that a horizontal network of those actors

participating in the privatisation process be built up, which, on the one hand, allows a

concentration on priority measures, and, on the other hand, optimises the vertical

influence of these organisations in their relevant fields. Figure 24 depicts the institutional

privatisation network.

Examples of co-operation between institutions on the meso level consist of the

involvement of associations and chambers in working out privatisation strategies with the

privatisation agency - for example, in order to clear up questions about the optimal

company size - or the co-operation between the privatisation agency and investment funds

or investment and export promotion establishments in the search for potential buyers of

the state-owned companies to be privatised.

The co-operation of organisations in the meso level through the development of networks

leads to better integration of these organisations into the privatisation process. The

necessary structural change of the overall economy can be carefully fostered and can

thereby be accomplished with less friction. Networks serve above all to co-ordinate

various organisations on the meso level, in particular with respect to desired economic

development through competitive private sector forces. For small organisations, it is

particularly useful to link themselves up with the network because, through this, they can

avoid high information costs and make use of the opportunity to have a forum for

exchange of experience and a broader articulation of interests.

One possible application for co-operation betWeen institutions in the meso level exists in

the development of a forum in which privatisation questions and problems can regularly'

be discussed. A further application lies in developing a lead institution for public

enterprises and organisations. A prototype for this kind of organisational form is India's

"Standing Conference of Public Enterprises (SCOPE)". This type of institution serves as

a data bank, discussion forum, further education institution and general broker. It is

useful to integrate representatives from the private sector. Intensive dialogue with the

public and private sector leads to an easy and relaxed exchange of information, desires,

concerns and views. Care must be taken, though, to ensure that such co-operation does

not lead to collusive agreements or to negotiations for privileges of any kind.

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Bibliography

Albach, Horst: Zerrissene Netze - Eine Netzwerkanalyse des ostdeutschen Transformationsprozesses, Berlin 1993.

Bolay, Friedrich F.and Stilzer, Rolf: Organisations- und Managementberatung in der Technischen Zusammenarbeit. Begriffserkliirungen, Deutsche Gesellschaft fUr Technische Zusammenarbeit (GTZ) GmbH, Eschborn 1992.

Boschmann, N., Reichert, Chr.and Lowe, P.: Leitfaden zur Forderung des Informellen Sektors, Studie im Auftrag der Deutschen Gesellschaft fUr Technische Zusammenarbeit (GTZ) GmbH, Eschborn 1993.

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Busacker, Dietrich: Forderung von Organisationen in der Technischen Zusammenarbeit, Deutsche Gesellschaft fUr Technische Zusammenarbeit (GTZ) GmbH, Eschborn 1993.

Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ) GmbH: Programme zur Forderung des Privaten Sektors, Beitriige zur WirtschaftsfOrderung, Vol. 1, Eschborn 1989.

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International Trade Centre, UNCT AD/GAIT, International Chamber of Commerce: The Role of Chambers of Commerce in Trade Facilitation, Geneva 1984.

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Komer, Heiko (ed.): Zur Analyse von Institutionen im EntwicklungsprozeB und in der internationalen Zusammenarbeit, Schriften des Vereins fUr Socialpolitik, Neue Foige

Vol. 186, Berlin 1989.

Kropp, Erhard et al.: Linking Self-help Groups and Banks in Developing Countries, Deutsche Gesellschaft fUr Technische Zusammenarbeit (GTZ) GmbH, Eschborn

1989.

OECD, Centre for Co-Operation with European Economies in Transition: Trends and Policies in Privatisation, Institutional Aspects of the Privatisation Process, Vol. 1., No.2, Paris 1993.


MUller-Glodde, Rainer: Organisationsentwicklung in brasilianischen Unternehmensverbanden, Deutsche Gesellschaft fUr Technische Zusammenarbeit (GTZ) GmbH, Eschbom 1993.

Schmiedling, Holger, Koop and Michael I.: Privatisierung in Mittel- und Osteuropa: Konzepte fUr den Hindemislauf zur Marktwirtschaft, Kieler Diskussionsbeitrage Nr. 165, Kiel 1991.

Wegener, Alexander: Ansatz zur Typisierung von nicht-staatlichen Organisationen in Entwicklungslandern, Deutsche Gesellschaft fUr Technische Zusammenarbeit (GTZ) GmbH, Eschborn 1992.

Wells, Louis T. Ir and Wint, Alvin G.: Marketing a Country, Promotion as a Tool for Attracting Foreign Investment, IFC, Washington 1990.

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Chapter 4: Measures on the Enterprise Level 129

4 . Measures on the Enterprise Level

Privatisation - understood as moving state property into private hands - takes place on the

microeconomic level at the end of the day. Now that the conceptual basis for privatisation,

the macroeconomic framework and the related mesoeconomic level have been presented in

the previous chapters, this final chapter of the handbook focuses on the analysis and

evaluation of enterprises. The relationship between privatisation and rehabilitation serves

as the starting point because of its central importance.

4 .1 The Relationship between Privatisation and Rehabilitation

Rehabilitation and privatisation are closely connected. Their sequence is often a point of

discussion: privatisation before rehabilitation, or rehabilitation before privatisation? On the

one hand, privatisation is seen as a promising path to rehabilitation. On the other hand,

enterprises to be privatised must also keep paths to rehabilitation and survival in a

competitive environment open.

Rehabilitation - in the context of privatisation - cannot be understood simply as debt

forgiveness or technical modernisation of production. Instead, a complete concept is

required which is directed at all aspects of the enterprise and its business in order to help it

establish or regain competitiveness. A prerequisite for rehabilitation is therefore

developing a credible and comprehensive business concept that shows how the company

will sustain itself in a competitive market. Performance, financial, legal and organisational

aspects, among other things, must be represented in the concept.

Rehabilitation prior to privatisation was favoured in the early privatisations of the 1970s

and 1980s. This was the case, for example, with British privatisations of the Thatcher era

and the early privatisations in Chile. It was feared that private purchase interest could

otherwise not be sufficiently mobilised.

Particular success is often promised by rehabilitation performed under state supervision,

when state-owned enterprises receive new management and the privatisation date is set

immediately following the rehabilitation. The imminent privatisation is seen as a sufficient

threat to enable the enterprise to overcome resistance to rehabilitation from the ground up.

130 Chapter 4: Measures on the Enterprise Level

Comparison: Rehabilitation prior to Privatisation

Pros • Increase the attractiveness

of the enterprise to potential investors

• Chance of larger sales proceeds from divestiture

• Possible short-term avoidance of social hardship

Cons • The state continues to be involved

• Privatisation is delayed

• No "real" rehabilitation

• Danger of preservation of uneconomic measures

• Rehabilitation is costly and burdens the state's budget

• The effective rehabilitation of state-run organisations is doubHul

• Insufficient market and private economy orientation

• (Undesirable) preservation of state holdings

• Lack of transparency

Figure 25: Comparison: Rehabilitation prior to Privatisation

Rehabilitation before privatisation is often criticised because the maintenance of

distortionary subsidies is feared. This is the case, above all, when entire economies have

to be privatised and rehabilitated. Enterprises then tend to try to secure their future

existence with their old structure rather than expose themselves to the difficulties of a

comprehensive rehabilitation.

Here is where a basic problem becomes clear: how can rehabilitation-related business

decisions prior to privatisation be kept free from political influence and capture? How can

rehabilitation measures be prevented from becoming chronic subsidies for enterprises that

cannot ensure their own survival?

A further problem lies in the financing of state-led rehabilitation: especially in developing

countries, the state-run companies are often so run down that they consistently incur

substantial losses and thereby burden the State's budget. The resources for introducing


more or less expensive restructuring measures are simply not available. The privatisation

agency in Zambia, for example, made it clear that state-led rehabilitation was only

possible in theory; if a privatisation was not possible, then in most cases it had to be

liquidation.

One of the principal arguments against rehabilitation prior to privatisation is that the future

private investor will restructure the company to suit his preferences. Only a rehabilitation

that is oriented towards the future goals of the enterprise is economically efficient. Private

owners are more likely to be trusted to carry out a successful rehabilitation of their

company because decentralised rehabilitation takes place through market forces and, with

that, resources are allocated more efficiently than through state-led rehabilitations. The

motto then becomes "rehabilitation through privatisation".

This motto is, for example, the legal basis for the work of the Treuhandanstalt

(privatisation agency) in the new federal German states. This approach also incorporates

the view that, as a rule, the final owner - not the Treuhandanstalt as the interim owner - is

in the best position to develop and implement an appropriate and effective rehabilitation

concept.

There are various cases, however, where rehabilitation is a necessary precondition to

privatisation. The experience of Albania shows that the overriding goal is to reduce

unemployment. Privatisations that are based solely on business-competitive criteria would

very likely lead to a further increase in unemployment. This is not acceptable for political

reasons. Moreover, the danger exists that a complete disruption of industry could take,

place: of course, in early 1994, farming, services and trade were as good as privatised.

However, industrial production is still in complete chaos. Factories are literally falling

apart or being stolen piece by piece. The local committees that are supposed to auction off

manufacturing firms complain about a lack of demand: local investors do not have the

funds and foreign investors do not have the interest. In order to prevent a total collapse of

the entire Albanian industry, a strategy is being followed in which the state enterprises are

being rehabilitated - many must first be made capable of producing again - and will then

be privatised in a second phase.

The calls for rehabilitation by the Treuhandanstalt in the new German federal states also

became louder as privatisation progressed. As it became apparent that those companies

which remained unsold and which were in need of rehabilitation were not attracting

investor interest, unions, state governments and municipalities called for the


Treuhandanstalt to take rehabilitation into its own hands, in order to increase the

companies' competitiveness and saleability.

These demands are also made in connection with the so-called "preservation of industrial

cores". In those areas or regions hosting a concentration of unprofitable, unsold

enterprises - which are often characterised by a monoindustrial culture - the

Treuhandanstalt is to restore the competitiveness of key enterprises by completely

rehabilitating them. The economic basis of the region is preserved by rehabilitating

promising candidates, even if they are not sustainable under strictly commercial terms.

Supporters of this concept argue that strictly commercial views are too narrow and that

wider economic perspectives must prevail.

In summary, as a rule the sale of enterprises should take place prior to rehabilitation when

weighed on commercial terms. However, individual cases often merit being treated

separately, under consideration of wider economic and other factors. A possible

compromise can be seen in so-called "prerehabilitation": Costs are contained and

profitability improved by short-term measures (12 to 24 months) in order to secure the

enterprises' liquidity - without significant new investments. Parallel to the

prerehabilitation, contacts are systematically established with potential strategic partners

and/or buyers.

It should, however, be determined in each individual case whether a company has

sufficiently promising prospects towards privatisation and successful rehabilitation, and

whether it would be worthwhile to make use of limited resources for provisional

maintenance and for financing the rehabilitation prior to the privatisation. When determing

this, the calculations and costlbenefit analysis must reflect that investment resources are

limited and that global competition among and for investment locations is keen and

increasing.

The analysis of the company itself and of its relevant environment is a prerequisite for the

selection of an appropriate privatisation strategy. The comparison of the current situation

of the company with the developments in its environment makes the assessment of

opportunities and risks for continued existence possible, as well as determining the

appropriate privatisation strategy. The analysis can also be used as a basis for structuring

the respective strategy details.

Chapter 4: Measures on the Enterprise Level

Four basic alternatives are available:

• privatisation as a whole or in parts;

• state-led rehabilitation;

• state-led commercialisation;

• liquidation.

• Development of a privatisatlon plan

• Clarification of ownership and legal Issues

• Sales prospectus • Search for I selection of potential Investors

• Sale negotiations ·Sale • Accompanying mea

sures I control

Measures at Enterprise Level

Enterprise assessment and valuation. analysis of competitiveness and

development of future strategies

• Restructuring measures (aim: minlmislnf the burden on public budget)

• Commercialisation • Increase In efficiency

• Restructuring measures (aim: long-term minimisation of government subsidies I grants). profitability

• Following successful rehabilitation: privatlsatlon

• Following failed rehabilitation: liquidation

Figure 26: Measures at the Enterprise Level

I

• Asset valuation • Determination of total

liquidation value • Identification of potential buyers

• Sale

133

First priority is usually accorded to determining whether the company should be

privatised in parts or as a whole. A change in ownership structure should contribute to an

improvement in the problematic situation of many public enterprises.


State-led rehabilitation is difficult, as previously discussed. The company analysis can

show, however, that this is the best method in a given case. Commercialisation is to be

striven for when public businesses are to remain under state sponsorship, for example, in

the case of strategically important enterprises or with enterprises that provide public

services. The commercialisation should take place through appropriate measures within

the company. These efforts should improve the profitability of the company in order to

minimise the burden on the state budget.

For companies that are not able to be rehabilitated, and therefore do not undergo

privatisation, all that remains is, as a rule, liquidation. In liquidations, the destructive

aspect of structural change comes to light. However, this does not always have to have a

destructive character: liquidation also means that resources are made available from

unprofitable uses and therefore become available for other purposes. Not infrequently it

proves valuable to separate parts of the company and sell them as separate units. Real

estate and buildings can also be used for other commercial purposes. Jobs can be - at least

partially - saved.

4.2 The Most Important Privatisation Steps in Time Sequence

The starting point for the privatisation process at the microeconomic level is the selection

of the companies that are to be privati sed. This is generally done by the government or

through the responsible (subject to directives) privatisation agency) These bodies also

make decisions about procedures and time schedules.

The divestiture of enterprises requires the clarification of the ownership relationships as

well as other legal conditions, such as preemptive purchase rights. Therefore the question

as to which firms are to be privatised should be answered at an early stage.

Further requirements for a sale to private investors is the change of formal state

ownership into private legal forms.2 In the classical developing countries, many state

businesses are owned by large holding companies, which, as a rule, own the majority of

the shares in the company. The companies usually show characteristics of a private legal

form, in which case a privatisation through share transfer is relatively unproblematic.

Difficulties are more likely to arise from the other side: many of these companies have

2 See also Chapters 1.4 and 1.5 of this handbook. For the creation of an adequate ownership law, as well as other legal conditions, please see Chapter 2.2.1 of this handbook.


high levels of debt, and the creditors have signed the necessary contracts so that the

disposal of the shares in the company can only take place with the creditors' approval.

The state is seen as guarantor for payment of the debts. Privatisation is not possible

without negotiations and consent from these creditors.

After clarification of the legal framework, an analysis of the company to be privatised

should be carried out in order to develop an adequate privatisation strategy. A company

valuation should provide the sellers with a range of reasonable selling prices. According

to the attractiveness of the country (investment climate) and the company to be privatised,

more or less strong marketing activities should be conceptualised and implemented in

order to win investors for involvement in the privatisation.

After negotiations and contract signing the step of monitoring and controlling the

provisions stipulated in the sales agreement comes next. In this step, one should consider

to what extent the agreements that have been made will be kept by the investors. The

following figure provides an overview of the sequence of privatisation on the

microeconomic level, the most important privatisation steps being depicted in detail.

Privatisation Process at the Microeconomic Level

Figure 27: Privatisation Process at the Microeconomic Level


4.3 Privatisation Strategy on the Basis of a Company Analysis

A company is a complex entity, and therefore the company analysis also represents a

complex task. Gauging the specific situation of a company requires the analysis and

evaluation of competition, existing cost structures, competition, technology, sales and

procurement markets, financial and cost structures, human resources, organisational

structure, etc. The clear identification of the key weaknesses and strengths, as well as an

estimate of opportunities and risks, are important in order for the business to be able to

hold its own with the available resources in its key markets. Building on this, an

appropriate strategy can be developed, which is to be carefully implemented in a later

step.

In order to take into account all of the relevant aspects that influence the selection of an

appropriate privatisation strategy, the following working areas should be included in the

company evaluation as a guideline:

• production, process flows and systems

• quality assurance, product or service improvement

• materials flow and handling, stocks and inventories

• marketing and sales, customer orientation, transport and logistics

• organisation and information technology

• management and human resources

• finance and accounting

• asset inventory and goodwill

• research and development

• legal issues

• strategy and planning

• external environment

The environmental analysis can depart from the analysis of the sales and procurement

markets and must take into account all relevant external developments. In the following,

the areas of internal company analysis are briefly presented.3

3 In the appendix you will find checklists for each of the areas of analysis listed here, which list the questions to be addressed in each of the areas.


The starting point of the analysis should be the evaluation of the operative areas of the

company. The goal is to be able to make qualitative statements about the technical

standards and capacities of the production plant, productivity, quality levels, necessary

investments for renovation/performance improvements, etc. In this respect the situation in

transforming countries is problematic. In Eastern Europe, most of the production facilities

are extremely outdated.

In many countries, the machine and equipment and other productive facilities are of

previous generations. The few modern production facilities were designed for the

monopolised production and delivery of goods to eastern markets. These companies have

more difficulties today than competitive advantages resulting from their modern facilities.

They face international competition which they have to meet with more than suitable

technology. This is suggested by the example of many machine tool companies, where

often only those in partnerships/joint ventures with western companies are making

tangible progress in securing their place in the future.

Another problem that can only be touched upon at this point is the conversion of

producers in the defence industry. Here, a situational analysis must be made regarding the

current capabilities of the employees and production facilities in order to be able to

determine what other production possibilities exist and to develop a market-pulsed

production programme for the company. This would also be a part of the privatisation

process.


Areas of Enterprise Analysis

Strategy & Business Planning

(Vision, mission, marketing, production, procurament,

financing, personnel development and

organisational strategy, management systems etc.)

Production (Production planning, equipment, technical standards, unil costs,

quality, Innovative ability, process Organisation &

Information Technology (Organisational structure,

efficiency and flexibility, delegation 01 tasks, information

systems and flow, data processing, etc.)

'_.mj ....... ~1

Materials Management & Log istics

(Purchasing, material plann i ng, updating of

Inventory, costs of materials etc.)

-Marketing Be Business

(National and intemational market share, image, price policy, customer service, market research, trade

channels etc.)

Management & Human Resources - (Top management qualification,

middle management qualification, leadership qualification, motivation,

organisational culture, education and training, social security etc.)

Accounting & Finance

(Financial structure, assets, liabilities, liquidity,

profit & loss, retum on investment, accounting,

costi , ratios, etc.

Environment Analysis (political, SOCiocultural, economic, regional,

sectoral etc.

Figure 28: Areas of Enterprise Analysis

The analysis in the areas of marketing and sales should, above all, clarify the relationships

and the position of the company in the sales market. How has market share changed, how

is regional distribution, what image does the company have with the customers, etc.?

These questions are aimed at revealing future market development and the company's

potential. It is noted that commercialisation in Central and Eastern European reforming

countries is particularly difficult. Traditional sales markets have evaporated and

relationships to western customers must be laboriously established since formerly foreign

trade monopolies held these to the exclusion of the producers, Existing contracts with

suppliers and customers also require analysis in order to ascertain possible effects on

privatisation,

An analysis of the company's organisation should clarify the existing internal structure.

Viable business areas can be distinguished for the privatisation and sold separately. When

it is necessary for the company to refocus on its core business, peripheral or non-core

areas of the company can be separated out. An analysis of the organisation should give

suggestions for possible efficiency improvements which would increase the value of the

company. Usually reorganisational measures have to be taken in order to realise efficiency

and effectiveness gains, In Eastern Europe in particular, the deconcentration of large

companies into independent profit centres is the predominant focus.


Production and process flows, material handling, and stocks or inventories also show

peculiarities: influented by past experience of rationed allocation, many companies still

maintain over proportioned stocks and inventories. Cost-effective sourcing and

procurement options need to be identified and examined. The existing depth of internal

integration must be critically analysed ("make or buy") and most often reduced. The

accumulated and unnecessary material inventories are forced to be reduced in competition

for scarce liquidity.

Special attention should be paid to the area of management and human resources since

management and workers represent a company's most important capital, and, with that,

also playa significant role in determining the privatisation strategy (e.g. MBO, EBO) and

the value of the company. With privatisations, employed human capital is generally

restructured and often reduced in order to reach optimum levels of productivity - which

are demanded by the market. Measures for fostering the proper qualifications and

motivation (performance incentives) of employees are also important. Remuneration

structure and policy are key ingredients. Remuneration is too frequently not performance

related and therefore leads to low levels of employee entrepreneurial behaviour and

creativity. Performance-oriented compensation can make considerable productivity

increases possible.

In Eastern Europe special attention must be given to this evaluation because management,

as a rule, lacks experience in assuming personal responsibility for market-oriented

product development as well as necessary active marketing for well-calculated purchases

or cost-favourable production levels. There is also a lack of business-oriented or

commercial leadership: political capture and party-policy motivated tasks have been the

basis of business decisions for decades. Market or commercial profit-oriented business

leadership skills must first be learned by many managers.

The function of finance and accounting in transforming and developing countries is

limited to the extent that it fails to provide a reflection of economic reality. Internal

information, even in such standard measures as turnover or sales, costs and expenses,

and contributions or profits, is reflected by data which is aged, imprecise, and very often

contradictory. Bear in mind that financial and accounting data is useful only to a certain

extent when considering company valuation in the following sub-chapter: the valuation

team must test the data for proper reflection of economic reality, consistency in the

reporting procedure, and, when necessary, adjust it under defensible and clearly

articulated assumptions.


All knowledge gained from the company analysis is finally synthesised under the area of

"strategy and corporate planning". This is then compared to existing corporate plans and

strategies. The demands of privatisation are then included when the company's strategy is

designed and formulated.

The privatisation strategy, however, must not be oriented on the existing company

internal conditions. An comprehensive outlook is required. The figure on the following

page provides an overview of the most important aspects which must be considered in the

systematic evaluation of various privatisation alternatives.

Approaches to the Evaluation of Different Privatisation Methods

• Effects on the international competitiveness of the enterprise considered {Management, controlling, efficiency, effectiveness, Human Resource Development, investments, technology, etc.}

• Social effects {Employment, social security, participation of employees, etc.}

• Macroeconomic effects {GOP, taxation effectiveness, subsidies, balance of payments, repatriation of returns}

• Regional development {Considering local suppliers, infrastructure}

• Environmental burdens {Emissions, effluent, existing pollution, newly created waste, treatment, recycling, energy efficiency, etc.}

• Political effects (Participation of population on a local level, transparency, social conditions, etc.)

• Attractiveness for potential investors (Profitability of investment, investment conditions, etc.)

• Implementation (Speed of implementation, transaction costs, complexity, feasibility, manageablity, etc.)

Figure 29: Approaches to the Evaluation of Different Privatisation Methods


Case Study:

Strategic Options for the Privatisation of the Zambian Copper Mines

The Zambian copper mining industry is embodied by "Zambia Consolidated Copper

Mines Ltd." (ZCCM) employing 51,000 and, in 1993, producing in the region of

430,000 tonnes of copper. ZCCM is one of the largest copper producers in the world.

The entire economy of the country depends upon copper, which generates 85% or more

of the foreign exchange. ZCCM is an excellent illustration of the need for a systematic

company analysis and analysis of privatisation options (e.g. sale as a whole or in

packages) based on criteria that cover more than just the economic factors.

ZCCM's international competitiveness is the starting and ending point and an important

criterion for privatisation. It has been declining continually for years, as the declining

production figures attest. At the same time, the rate of increase in demand for copper has

lagged - and is forecast to continue lagging - behind the rate of increase in the supply of

copper. Increasing global competitive intensity compounds the situation.

In ZCCM's case a privatisation strategy should be adopted which ensures continuity of

production in the immediate and short term, which increases competitiveness and secures

the Zambian copper mining industry's future. Without international competitiveness, the

industry is threatened - and without resources to subsidise it - ends in liquidation. The

basis for financing social measures is gone.

Considerable social effects are feared in Zambia as a result of the privatisation of ZCCM.

With respect to the average amount of copper produced per employee, the company

compares very poorly with the global copper mining industry. The company is

overstaffed and retrenchments will be necessary. And this would hit an almost totally

mono industrial region: employment in the Za~bian Copperbelt is concentrated in the

mining and supplying industries. Other sectors which could compensate with an

appropriate number of employment opportunities do not exist.

In addition, ''Administrative'' staff(read overheads) represent an overproportional part of

total employment. ZCCM's headquarters (located in Lusaka, not in the Copperbelt) and

the costs associated with them have been subject to political capture in the past and today

represent a formidable obstacle to the political decision makers striving to secure the

maximum long-term economic benefits for the country. Keen on preserving status and

privileges, ZCCM headquarters are effectively thwarting the rehabilitation and rebirth of

the Zambian copper mining industry.


Concurrent measures which foster economic diversification across various sectors need to

be included in the chosen privatisation strategy .

In a company the size ofZCCM in a country like Zambia, certain overall economic effects

automatically take place in connection with the privatisation. The state, as owner, is

particularly interested in what fiscal effects can be expected. The integration between

ZCCM and the political apparatus is very strong. The company as the largest (non-public

administration) employer in the country not only determines the national income to a large

extent, but also takes over many other social support functions. In the Copperbelt, for

example, the health care programme was taken over for the most part by ZCCM. The

important contribution of ZCCM to the foreign currency flow has already been

mentioned.

Regional development is closely correlated with employment and social effects. Potential

buyers' plans and concepts must be tested to see to what extent they provide a positive

contribution to regional economic support.

Even though ZCCM considers itself, even in its most recent annual report, to be a "green

company" (that is, environmentally friendly), it is still far from reaching this goal.

Environmental experts continually point out the extensive pollution and contamination

generated by mining and metallurgical operations, especially at Kabwe, its lead mine. The

costs for clearing up past burdens are considerable. Potential investors are hardly willing

to take on these costs if the selling price is not drastically reduced. Although one of the

most difficult undertakings in such a privatisation, the delineation of past environmental

liabilities is a necessary measure. Different methods exist for the state to assume these

liabilities, and the investor would commit himself to reducing future environmental

burdens. A reduction of the total environmental burden is a goal worth striving for.

The fact that political effects should be considered as a criterion in the decision-making

process is clear. The same thing is true for the attractiveness to potential investors: there is

world-wide competition for scarce capital investment. Countries with poor investment

climates, therefore, have little chance of attracting these resources. Finally, the

implementation itself also plays an important role, whereby the speed of implementation,

transaction costs, transparency, complexity and steerability should all be considered.

All of these criteria should be taken into consideration in the selection and design of a

privatisation strategy and in determining the privatisation methods if the final goal is to

make a decision that is optimalfor the country.


4.4 Company Valuation

Estimating the value of an enterprise slated for privatisation is a difficult and important

undertaking. Valuation is understood as ascertaining the possible price for which the

company can be sold. Such a price is composed of various components, including cash

and cash equivalent paid, investment and employment pledges, etc.

The company value provides clues about the price; but in the end, the final price is always

the result of negotiation, and therefore it is influenced or determined by the market. Due to

the complexity of valuations, the effects of intransparent valuations and the politically

explosive nature of valuations, the valuation team must proceed very carefully.

The choice between different approaches to valuation is determined by two criteria: the

demand for simplicity and the need for objectiveness. To what extent an approach can be

simplified and how objective it must be are again dependent on the purpose of the

valuation. In valuations that are connected with privatisation programmes, one must also

consider the need for transparency in addition to simplicity and objectivity.

This makes it clear that it is really difficult to come up with the "right" company value.

Determinations of value serve diverse purposes; the "right" company value depends upon

the aims of the valuation. With this, multiple evaluation factors exist, whose methods lead

to different company values. In the following, a brief overview of the various valuation

approaches is provided, as well as information about appropriate valuation procedures for

privatisation.4

4 In this text. as well as in the preceeding diagram. only the most important methods and values are represented. Deeper considerations. for example. the depiction of combination procedures such as mean estimation. are not touched upon at this point. Those who are interested in looking into this topic a bit deeper can make use of the literature list at the end of the chapter.

144

Figure 30:


Overview of Important Corporate Valuation Methods

Generally Past Related Generally Future Related

ASSET VALUE

Overview of Important Company Valuation Methods

An important valuation which is increasingly requested is the value of capital assets. This

value is basically understood to be the sum of the replacement prices of the individual

assets, minus the debts. The determination of the capital asset value is based on the idea

of what it would cost to duplicate the entire company which is being valued. This is,

however, not a question which stands in the forefront of the privatisation discussion.

According to the adequacy principle, the asset value is less appropriate to value state

enterprises which are to be divested.

Even less appropriate for the valuation of state-run enterprises is the net book value. This

is the sum of all assets listed in the balance sheet, as estimated for their given book values

(purchase cost minus depreciation) minus other commitments. Property assets are

depreciated in order to distribute their purchase costs over their useful life span. The given

book value therefore says little about the possible disposal price of the economic goods.

In this manner, a machine that has been written off due to depreciation could still be worth

more if resold. Furthermore, consideration is given to the experience which reflects that


the value of the sum of the parts is greater than the value of the whole. It should therefore

be clear that the net book value is not adequate as an indicative value at the time of

divestiture.

The liquidation value is to be seen as the floor to the range of value estimates. If the

company was sold below the liquidation value, then the state has lost economic benefits

(unless the investor has pledged employment guarantees, specific investments or other

valuable pledges). If no offers above the liquidation value are received, then the option of

liquidating the company is given.

The asset value represents the tangible parts of the company. The intangible items are, on

the other hand, embodied in the value of the business (or goodwill). The business value

represents the difference between the capitalised value of potential returns and the asset

value.

The value as a going concern is determined by the discounted (present) value of future

returns. The potential buyer pays for those returns which accrue to him at the time of

purchase and the seller takes into account those returns which he loses at the time of the

sale. The most widely accepted approach is the "discounted future cash flow" method. In

this method, the future expected cash flow between the company and the investor is

estimated at the present time using a discount factor that takes into consideration the

opportunity cost of the capital involved.

As much as discounted future earnings reflect an orientation towards the future, the

valuation team must bear in mind that future returns are in themselves difficult to calculate

given information and data constraints. In order to build a meaningful model which can

analyse various scenarios, a bottom-up approach is called for which begins with an

historical assessment of production capabilities given certain constraints. Mining

technology, geology, and production process flows are examined with a view to

identifying best recent performance, and, adjusted by clearly identified assumptions,

future attainable production is projected. Production costs and other factors are treated in a

similar manner, resulting in a model which can also be used to run sensitivity analyses.

The analysis rests on the company's internal environment and incorporates external

factors of the economic and political environment as well as wider product, procurement

and capital markets.

A different valuation concept assumes the existence of developed capital markets: here,

the enterprise to be valued is examined in comparison with a similar company whose


shares are traded in a sufficiently deep market. The value of the comparable company on

the stock market can then be used as the basis of the valuation, whereby peculiarities of

the companies are to be taken into account. This concept also assumes future yield

expectations in the valuation process. However, it is not possible to apply this method in

most developing and transforming countries due to the non-existence of stock markets or

their lack of depth.

The art of company valuation lies in joining together analyses of past and future. The

information gained from return determinants of the past, i.e .. those which were gathered

with hindsight, are taken into consideration of the future. They, together with the

information provided by the analysis of the future, shape the picture of the expected

returns.

The valuer must orient himself to the so-called equilibrium price principle in the valuation

of the possible sale or purchase of the company. The equilibrium price is understood to be

the maximum price that a potential buyer would pay, or the minimum price that a seller

will accept. Valuation means comparison: the potential buyer determines the maximum

price according to the returns that he believes can be generated by the given company, and

according to the price that he would have to pay if he were to obtain the same return from

an alternative source. Thus the equilibrium price is estimated by valuing future returns.

Valuation teams should hold to the principle of an equilibrium price in order to facilitate

reaching optimal sales proceeds. The necessary estimation limits in this case can be

achieved through an objectification of the value of returns - in which, instead of the actual

returns, estimated but easily verifiable returns are used, and, instead of the actual

capitalisation, easily verifiable capitalisation levels are worked with. In general, one

depends upon an average of the adjusted past returns and on a risk-adjusted cost of

capital.

A generally recognised, singly valid valuation method does not exist. In Poland, for

example, the Minister for Privatisation issued the decreeS that, in the evaluation of

companies, at least two of the following values must be applied: going concern value

(discounted cash flow method), reconstruction value, net book value and liquidation

value.

5 Decree of February 20, 1990.


Even when there is general agreement that valuation procedures which are oriented to

future returns can properly grasp the value of the company, the related insecurity,

however, forces the fact that asset evaluations and past-oriented procedures also find

acceptance and application.

The valuation of future returns runs into special difficulties in transforming and

developing countries. The question of the relevance of the analysis of the past is

particularly valid in transforming countries: to what extent can historic numbers even

provide speculations about the future returns of the company when the overall economic

structure of the country is in the process of radical change? In many developing countries,

one must fight the problem of a lack of data: company-internal as well as external data are

only partially available or are outdated, and therefore make the valuation even more

difficult.

These steps in the analysis are made more difficult still in an inflationary environment. In

the case of inflation, the valuer must carefully decide between nominal and real (inflation

adjusted) indicators. This is true for the analysis of the past, but is particularly valid with

respect to the expected returns and the capitalised interest.6 When the same assumptions

about surpluses and inflation expectations are made in nominal and real calculations, then

the valuations in both cases will lead to similar company values. However, meticulous

attention must be paid to ensure that a compounding of both calculation methods is

avoided.

The company valuation is often strongly politicised as an important and critical component

of the privatisation process. Therefore the most objective and transparent process possible

must be selected. In some countries, the public was of the opinion that the majority of

companies were sold for too Iowa price (insider dealing, etc.). Those who were

accountable for the privatisations saw the comment as an accusation that they had sold out

the state's "family silver".

In order to avoid these kinds of tendencies, some countries - e.g. the Philippines - have

determined that the state-run companies should not be sold for less than their net book

value. Because many assets are, however, overvalued, this can lead to tremendous delays

in the privatisation process.

6 The capitalised interest rate remains a sensible evaluation yardstick, also in the case of expected inflation, as long as the nominal capital interest lies above the expected inflation rate.


In order to ensure enough transparency and objectivity, some governments (e.g. the

French) have built up privatisation committees in which bodies consisting of independent

members oversee the valuation and the divestiture of state-run enterprises.

The issues of financial and environmental liabilities are often problematic. Many

companies are only saleable without these existing liabilities. In many countries, there. is

also no clear environmental legislation, a situation which increases uncertainty, and

therefore risk, for potential investors. The costs of neutralising existing liabilities should

be viewed as the responsibility of the accountable owner, the state. A further solution to

this problem is the procedure used by the German Treuhandanstalt: the buyers were

required to take responsibility in the form of a previously set fixed amount for clearing up

these existing liabilities. Up to 90% of the remaining liabilities were assumed by the

Treuhandanstalt; for the investor, a maximum amount was set which covered about 10%

of the costs, which he paid.

The final company price realised depends largely on the willingness of the investor to

guarantee employment or investment. On the other hand, the costs of redundancy and

retrenchment as well as social plans have a large impact on the obtainable price.

This description has shown that valuation is an extremely complex and difficult topic.

There is no such thing as a single "right" value or valuation procedure. The main principle

has to be adhering to the relevant purpose of the valuation. To the extent that the valuer

can adhere to that and make the basis of the evaluation transparent, he can supply what is

required: support in decision making for the potential buying or selling party. The final

price received is the result of negotiations. The valuer can have an effect on these

negotiations through the preparation and provision of information that strongly influences

the mandates of the negotiators.

4.5 How to Promote the Sale of State-run Companies

The succcss of privatisation programmes clearly depends upon the extent that investors

are prepared to invest scarce capital in participating in privatising state-run companies. In

many developing and transforming countries, the involvement of foreign companies is

necessary because the available capital in the home country is not adequate. With that, the

increasing intensity of world-wide competition for investment locations must be borne in

mind if one wants to successfully attract investors.


A stable political and economic environment, sound future perspectives, realistic

valuations and obtainable prices, and, as far as possible renunciation of restricting factors

are important requirements for attracting investment capital. Moreover, active marketing is

also necessary, in particular for the small and medium-sized companies in privatisation

programmes.

The sale of companies in Eastern Europe is particularly difficult. Because of the many

weaknesses in all of the functional areas of the company, as well as unstable political and

economic conditions, western investors only show limited interest in these companies,

with some exceptions. The Eastern European companies are not competitive in

comparison to the West and, at the same time, are severely hit by the collapse of

traditional markets.

Active marketing should be oriented towards both domestic and foreign investors,

including existing and potential contacts. Existing contacts with private companies are

often a good starting point for identifying potential investors. Here, for example, contacts

may revolve around management organisation or minority shareholders. This is, to some

extent, the case in the previously mentioned privatisation of the Zambia Consolidated

Copper Mines. Considerable interest was shown in the large copper mining company by

the South African minority shareholder. Other possible interested parties could be found

in the circle of competitors or in customers or suppliers who want to make use of vertical

integration possibilities or synergistic effects.

In addition to these potential candidates, other companies should be systematically

identified for whom the company that is to be privatised could be of interest. In this, one

must pay attention that the required investment capacities are available and that both

interest in and capability for economic involvement abroad exist. This target group should

then be appropriately addressed.

Privatisation agencies can, for example, send potential investors company catalogues in

which the company to be privatised is presented and summarised with the relevant

information. A sector-oriented categorisation is a good alternative here. In the work of the

Treuhandanstalt, this instrument proved to be extremely successful, in particular when

one considers that it was dealing with companies that had, until then, awakened

absolutely no interest with potential investors without an active marketing plan. In the


case of the Treuhandanstalt, over one-half of the companies presented in the catalogues

were privatised before the end of 1993.7

Other possibilities exist in the participation in trade fairs, carrying out investment missions

or investment conferences and, finally, through advertising campaigns in appropriate

publications and specific public relations measures. Through this, a selection of the

companies to be privati sed is presented in each of the possible ways (like a "wanted"

poster approach). These company profiles give a very good impression of the important

characteristics of a company, without going into detail. Moreover, the German

Treuhandanstalt founded a number of subsidiaries abroad to support the campaigns for

international investors. However, these kinds of offices abroad are not an appropriate

marketing instrument for privatisation processes in many transforming and developing

countries, principally due to the lack of resources.

In many countries, Investment Promotion Centres were built up for supporting marketing

activities. In addition to marketing companies to be privatised, they also support other

private economic activities.

A combination of these various instruments should be implemented in order to attract the

largest possible interest from potential investors. Unco-ordinated, individual or isolated

measures seldom lead to the desired success. A targeted marketing strategy, on the other

hand, is more likely to attract the necessary interest, and, with that, also bring in the

necessary investment capital.

7 Around 600 companies were presented in different catalogues that were printed with a total circulation of 40,000 copies.


.. .: .. E c o 'iii

~

Selected Instruments for Privatisation Marketing

151

I BROKER I ~OVERTlSING AGENC~ PRAGENT INVESTMENT BANK

CONSULTING FIRMS

Presentations at Carefully directed Forwarding of firm associations, chambers approaches of potential prollies / catalogues .!l and other organisations Inveators c ~ A tender Participation In trade 2 Seiling contracts to 0; announcement broker / banks fairs/ exhibitions .5 In the press Investment missions

Branch meetings / Carrying out of Specific seiling Initiatives

Investment conferences Information events (e.g. small enterprises projects)

Figure 31: Selected Instruments for Privatisation Marketing

Investors with a serious interest in buying should then receive a comprehensive sales

prospectus ("Memorandum of Sale"). This memorandum summarises the results of the

company analysis and evaluation: it should provide the most important information about

the company. When preparing such sales memoranda, one should take into account the

interest situation of the potential investors so that the strengths and the usefulness of the

company for the potential buyer can be determined from the memorandum.

These memoranda serve to provide the potential investors with an evaluation of the

enterprises being sold. Frequently the memoranda are only distributed in exchange for an

interest commitment fee.

Case Study:

Privatisation and Sale of Morogoro Canvas Mill Ltd., Tanzania

Morogoro Canvas Mill Ltd. (MCM) was conceptualised as a part of the Morogoro

Industrial Complex. With extensive support from the World Bank and the European

Community, the National Development Corporation, Tanzania's largest state holding,


completed the planning of the complex in 1975. The industrial area included the canvas

mill, a shoe factory, a textile refinery and production factory, leather tanning works and

other supplier companies. Several profitability and feasibility studies were carried out that

concluded sufficient domestic demand and promising export opportunities for the goods

to be produced. With massive financial help from the European Investment Bank and the

Government of Tanzania, MCM began operations ten years later in 1984. Equipped with

modern European textile machines, MCM should have been in a position to meet the

demands of the world market.

With the three production areas of spinning, weaving and sewing, MCM produced 35

cotton materials in various qualities. Light and medium cottons were produced for the

domestic market, while heavy cottons were produced for the export market. Because of

the narrowness of the markets and the low domestic demand, in contrast to the original

planning, today 70% of the production is exported. The fall in world market prices, the

world-wide recession and internal problems at MCM resulted in a dramatic deterioration

in the economic situation of MCM in the recent past.

The complete privatisation of MCM is a part of the privatisation programme of the

Government of Tanzania. In 1993, Kienbaum Development Services (KDS) was

entrusted by the Ministry of Industry and Trade, Tanzania, with undertaking a

privatisation study for MCM. The study contains the company analysis, company

valuation and the development and implementation of a privatisation strategy.

A Memorandum of Sale was produced in the framework of the search for investors. This

sales prospectus provides a comprehensive overview of the company. The privatisation

study was used as the basis for the memorandum.

The search for potential investors was began in parallel to the production of the

memorandum. The search was carried out by direct and indirect means: indirectly through

the announcement of the sale in international economic and professional magazines and

journals. In the advertisements appearing there, investors were solicited to make contact

and later to provide a sales offer. The direct way of searching for investors was carried

out by, of course, directly contacting potential investors. In a preselection phase, the

regions where investors should be targeted were determined. Contact was made with

unions, chambers of commerce and other national institutions in these regions, which

then led to concrete hints on potential investors. The experience with the various

institutions shows a very diverse picture: while the contact with the unions was very

positive, the chambers of commerce were sometimes not very co-operative. The quality of


information made available through these methods is very difficult to assess, in particular

that from the areas outside Europe. The use of databases as a further form of obtaining

information is sometimes very cost-intensive and therefore requires a very careful cost

benefit weighing. Through specialised data bases and professional information brokers,

however, information can be obtained fairly quickly.

A further approach to the search for investors lies in making use of existing contacts.

These contacts include investors currently involved with the company, as well as

customers, suppliers and large national and international financing companies. This

investment group is often more or less already familiar with the specific situation of the

enterprise to be sold. On the seller's side, the familiarity with the investors allows an

assessment of the intentions of the buyers with respect to the company to be sold.

In further steps, investors with serious interest in taking over the company are extracted

from the pool of potential investors and the necessary negotiations are carried out with

them after they have been prequalified. These negotiations should lead to an acceptable

solution for both buyer and seller.

4.6 Negotiations with Potential Investors

In the sale of state-run companies, the offered price should not be the only decisive factor

in a sale decision. Other important criteria to consider include:

• Maintenance and creation of future employment.

• Continued operation of the company: therefore qualified, financially strong investors should be selected in order to ensure the future of the company.

• Obtaining a competent management team.

• Ensuring transfer of technology.

• High level of investment.

• Taking into consideration the political goals, such as equal participation in the

privatisation by all levels of the population.

Moreover, in the case of particularly large or strategically important companies, additional

criteria also playa role:

• Organising investor consortia in which, in particular, a technical partner is represented

who has extensive experience in the appropriate economic field (for example, in the


privatisation of TELMEX in Mexico, the participation of a foreign partner with experience in the field of telecommunications was required).

• Limiting the sale of the company to national or particular ethnic groups or conditions such that these groups should make up the majority of a consortium (for example, sale of property only to natives).

• Sales only to reliable investors with a solid financial background who have the capacity to ensure the continued existence of the company includes carrying out the necessary investments. (In Chile, in the first privatisation wave of the mid-1980s, many companies were sold to economically unstable investors. Therefore a large

number of these companies later became state-run once again because they would otherwise have had to have been liquidated.) This condition is of particular importance for companies in strongly regulated areas, such as telecbmmunications, energy and

transport, where the performance of the company and the quality of the service have a large impact on the population.

Creation of an investment programme that is to be carried out following the

privatisation.

In order to obtain an insight into the quality of the potential investor, the possibility exists

of defining the minimum contents of the written sales offer as follows:

• Suggested sale price.

• Payment plan.

• Business concept, consisting of the management plan for production, investment and financing.

• Employment plan.

• Business connections (suppliers, customers).

• Financing concept for acquisitions and investments.

• Proof of bona fide offer.

In the negotiations with potential investors, these factors are often stated based on the

worst possible economic conditions of the company to be privatised in order to push the

price down. Even if this is appropriate in the majority of cases, it can be counter-argued

that, after the privatisation, there is the distinct possibility of improving the performance

and profitability of the company. Areas in which performance can be improved in the

short run should be appropriately represented. A further important argument could be the


access to the local and regional markets. The domestic market position of the company to

be privatised should be determined and appropriately used in the negotiation process.

Further important sales arguments could be low costs (in international comparisons, in

particular with respect to the productivity-unadjusted cost of labour) and, with that, the

possibility of high productivity gains and ultimately profitability

In order to ease subsequent controlling of the contract, special attention must be paid so

that the positive responses - that is, among other things, the decision to buy - from the

investors are clearly fixed in the contract. This refers to clear employment and investment

agreements. In the contract, a requirement that the buyer proves his adherence to the

agreements should be included in order to facilitate future monitoring and control of

contract compliance. The question of how a privatisation agency should negotiate when

an investor cannot fulfIl his contract requirements due to economic reasons must still be

raised. If the agency makes concessions in future negotiations, this sets a precedent and

could result in an avalanche of further renegotiations.8 If the agency remains steadfast, it

could ruin the company and endanger the privatisation goal. A generally valid way out

does not exist. In justified exceptional cases, the agency or the state should step in and

lend its support. Contracts sometimes also include correction clauses in case the economic

situation of the company deteriorates sharply.

4.7 Measures for ensuring the Sustainability of Privatisations

Privatisation itself does not, of course, guarantee that the companies will survive in the

market. As explained above, privatisation is becoming more and more simply a necessary

requirement for the redevelopment of companies, but in no way a sufficient means in

itself. It must first be seen how the new owners operate the company and what success

they have in doing this.

Typical problems that appear after the privatisation lie in creating the necessary capital for

the required investments and for financing working capital; unless large international

enterprises are the new owners. Local banks are often unwilling to take risks for given

commitments by these young companies, or, as in many developing countries, they do

not provide long-term fmancing. Foreign banks are also not appropriate partners because

8 In the new German states, according to what we hear, there are possible renegotiation needs in approximately a fifth of the 10,000 or so companies that have been privatised.


they, as a rule, pass on the currency exchange risk to the borrowers. The development of

the currency's external value in most developing countries has, in the past, led to the

bankruptcy of many companies that had made use of foreign-exchange-denominated

credit.

In addition to limited availability of foreign capital, there is also often a lack of internal

capital generation. The strengthening of the capital base is necessary in order to provide

the companies with the necessary means for surviving the first and often critical phase

following privatisation.

These problems could be met by the establishment of privatisation funds that could offer

effective assistance, above all, to small and medium-sized companies and MBOs and

MBIs. These funds could provide credit, as well as acquiring shares in the companies that

are to be privatised. A combination of these alternatives would prove to be useful in most

cases.9 In addition, they would offer an important supplement to the relatively

underdeveloped financial markets in many transforming and developing countries.

A further point that is typically weak in this area is the quality of management. In most

transforming and developing countries, there is a lack of market economy experience and

competent management. The successful redevelopment of these companies, however,

requires just this kind of management. Above all, small and medium-sized companies

have difficulty in finding qualified management in the restructuring phase in the areas of

distribution, marketing, controlling, organisation, and sales. Suitable personnel for these

positions within the existing staff often does not exist. The contracting of qualified

management or interim management consultants is often sacrificed for financial reasons.

The German Treuhandanstalt also recognised this problem and managed to find an

interesting solution for it: the model of the sponsorship programme provides for part-time

or honorary care of the privati sed company by qualified people with management

experience from West Germany - for example from the members of the Senior Expert

Service (SES). In this programme, one or more appropriate experts take on a company

and provide on-site help and advice. The advice is, for the most part, based on the

transfer of know-how and recommendations for business policy; the involvement

includes establishing contacts and connections with potential suppliers and customers, or

initiating other appropriate business contacts. The sponsors do not receive any fees, only

the payment of their expenses, from the company. The German Federation of Chambers

9 See also the previously presented RASIPREFUND example.


of Industry and Commerce plans to continue to carry out this programme in the future in

the new German states.

These are possible starting points for supporting the post-privatisation phase. Other points

lie, for example, in the areas of export promotion or in establishing trade unions. 10 All

measures serve the ultimate goal of ensuring competitiveness and, with that, securing the

future of the pri vatised company.

Case Study:

Privatisation and Rehabilitation of Mount Kenya Textiles Ltd., Kenya

Mount Kenya Textiles Ltd. (Mountex) was founded in 1974 as a fully integrated textile

factory. The company concept envisioned the production of colourful materials for the

domestic market. This concept suffered due to a lack of demand. The company ceased

production in 1977.

One year later, Mountex was transferred to state ownership: the state took over 97% of

the shares, and the remaining 3% were taken over by the Industrial Development Bank

(IDB). New management and new machines were acquired and the capacities were further

increased. It was not possible, however, to profitably set up the production organisation.

Month after month, losses were made, and, by mid-1991, more than 800 million KShs

(approximately DM 53 million) in liabilities had been accumulated.

Under the pressure of these financial burdens, a contract for restructuring and

rehabilitation was signed between the owners and the lenders in February 1992, which

contained the following important elements:

• Reducing the GoKlIDB share to 48.5%;

• development banks and DEG would take over the majority (51.5%) of the shares and

the majority in the executive board of the company;

• partial deductions for the accumulated losses;

• contracts with consulting firms.

10 See also Chapters 3.3.1 and 3.3.2 in this handbook.


Rehabilitation Advisory Services Ltd. (RAS), Nairobi, was contracted with carrying out

the rehabilitation. In a status-quo analysis, the strengths and weaknesses of the company

were analysed, and, building on that, a detailed redevelopment plan was drafted. It

quickly became clear that the old Mountex management had been appointed for political

reasons. The interests of the company did not always stand in the forefront of decisions

that were being made. Because of the new composition of the executive board, the

necessary changes in management could be carried out.

The management team was considered to be critical for the entire process of rehabilitation.

A qualified consultant entered the business operationally and took over the interim

management at Mountex. He introduced a team-oriented management style: motivation,

delegation of responsibilities and team spirit. In production too, particular measures were

able to increase the productivity: in addition to the performance orientation in the

employee rewards, other measures that seemed to be unimportant, such as improvement

of the cafeteria or putting together a Mountex soccer team also had a positive influence on

the company's situation.

The interim management was supported by a small specialised consulting team for the

areas of marketing, production and technology. Overcoming weaknesses was a goal that

was actively worked on. Company planning, liquidity control and general controlling, as

well as measures for improving cost consciousness, also helped the company to begin

making a profit again within approximately a year. A new executive director was chosen

by the majority shareholders, who then took the place of the interim manager.

In the case of Mountex, the privatisation was a prerequisite for the rehabilitation. But

without external support and without the change of management, the redevelopment

would never have been so successful. In order to maintain the positive effects of the

privatisation, in this case the employment of the interim manager followed by a new

director from an external source was necessary. These personnel changes would have

hardly been possible without the new, more suitable composition of the executive board.


Bibliography

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Appendix 161

Appendix

A Checklist for evaluating the Legal Policy of the Status Quo

Criteria

Division of power,

legality and freedom of

contract

Ownership

Securing competition

Market constitution

Possible Questions

• Is there a legislative, executive and judicial branch with

reciprocal controls (checks and balances)?

• Is legal action - also with respect to public power - open

to all?

• Are there limitations to freedom of private contracts?

• Are there incentives to adhere to the terms of contracts?

• Is the acquisition of private property allowed?

• Are there restrictions on the acquisition of private property

and on the transferability through private contracts?

• Is the restitution of former property possessions planned or

already being carried out?

• Is the privatisation of public property planned or in progress?

• Are there principal limitations for market entrance by foreign

competition?

• Does an institutionalised control of competition-hindering agreements exist?

• Is there an institutionalised control of economic power?

• Do state monopolies exist?

• To what extent is there free price setting in the products and

factors market?

• What limitations on market entries exist, and where (general

regulations in the goods market, special regulations in

individual goods and services markets, special regulations

in the capital and labour markets)?

• Are there limitations on market withdrawals (settlement,

bankruptcy and liquidation laws)?

162 Appendix

Macroeconomic • Who is accountable for price stability? Are prices

division of roles subject to directives from the central bank?

• Who is accountable for full employment? Are they subject to directives from the wage parties?

• How is the exchange rate determined?

• To what extent is the state responsible for the

production of private goods?

• Is the government bound to financial soundness?

• What large interest groups are there, and what is

their relationship with the state?

Opening of external • What role do import restrictions play (direct and

markets indirect)?

• What role do interventions in exports play?

• What role do foreign trade monopolies play?

• Does freedom of capital flows exist (foreign

direct investment, other capital flows, private

foreign currency exchange and convertibility)?

• Does freedom of worker mobility exist?

• In which international organisations is the

country represented?

Foreign direct • Are there licensing and registration conditions? investment • Do majority restrictions exist?

• How is taxation controlled?

• Are there incentives for foreign investment?

• Does the possibility of profit repatriation exist?

• Is there investment protection?

• Is the acquisition of land by foreigners allowed?

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)

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ajo

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s 0

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nnin

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info

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0 0

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of

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flow

0

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sitin

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DP

eq

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me

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D

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ed

on

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P

0 0

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ta P

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pene

trat

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0

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ata

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(qu

ality

) 0

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oth

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IT

0 0

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00

~

'"15 II>

;::s

~

~.

Rolf-Dieter Reineke / Rolf Sulzer (Eds.)

Organizational Consulting in Developing Countries

1995, VIII, 334 pages, DM 98,ISBN 3-409-13781-5

The advances made by many developing countries cannot be overlooked, but the manner in which the development process is effected is another matter. This discrepancy has led to intensive discussion about the approaches and effectiveness of international development cooperation. One conclusion emerging from the variety of analyses is that sustainable development is unlikely without a network of functioning organizations. With this in mind, international experts, consultants and practitioners pursue in this volume the question of how changes in and by organizations may be effectively brought about under the circumstances in developing countries. The authors offer in addition concrete indications for

designing restructuring processes in Mrica, Asia and Latin America, and observations on the effectiveness of foreign adVIsors.

The theoretical discussion is made concrete in six case studies in which organizational consultants present their contributions to restructuring processes in varying types of organizations.

Organizational Consulting in Developing Countries is aimed at scientific institutions, organizational consultants and staff and advisors of state organizations and NGOs involved in development cooperation in the field of organizational development.

Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH, Taunusstr. 54, 65183 Wiesbaden

Inlr Special Issues .......... Brij Kumar (Guest editor)

Euro-Asian Management and Business I Cross-border Issues

mir - Special Issue 1/95

1995, approx. 150 pages, approx. OM 89,- (approx. US$ 60.-) ISBN 3-409-13772-6

Euro-Asian Management and Business II Issues in Foreign Subsidiary and National Management

mir - Special Issue 2/95

1995, approx. 150 pages, approx. OM 89,- (approx. US$ 60.-) ISBN 3-409-13255-4

mir Special Issue 1/95 and mir Special Issue 2/95 analyze the current change in Euro-Asian business and its implications for management. These publications help to understand the significance of what is happening in Europe and, particularly, in Asia. They show the possible consequences for European and Asian corporations. Leading International business scholars and managers from Europe and Asia contributed to these editions. The authors discuss the challenges both European and Asian business and management have to face. Euro-Asian Management and Business I - Cross-border Issues deals with crossborder management and business in

Euro-Asia: market entry strategies, cross-border aspects of foreign subsidiary management, cross-border trade flows, and risk-management. Euro-Asian Management and Business II - Issues in Foreign Subsidiary and National Management reports on research on comparative management and business abroad: management in Japanese subsidiaries in Europe, culture-bound aspects of Japanese management, and aspects of financial management in Europe and Asia. Euro-Asian Management and Business I and II provide the European reader with an inside view into Asian market strategies and into the causes of Japan's current economic crisis.

Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH, Taunusstr.52-54, 65183 Wiesbaden

privatisation in transforming and developing economies: strategies â€” consultancy â€”...

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