If, When We’ve to Sell the Family Silver

Privatisation has its benefits, but if undertaken it should be done to improve the performance of state enterprises and needs to be combined with well-thought-out liberalization and regulatory reforms. Divestiture ought to be carried out transparently and in phases, writes Fiseha Haile (fisehahaile77@yahoo.com), an economist at the World Bank. The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views of the World Bank.

The Executive Committee of the EPRDF has planned to partially privatize major state-owned enterprises (SOEs) including Ethio telecom, Ethiopian Airlines, Ethiopian Electric Power and the Shipping & Logistics Services Enterprise. The State will reportedly retain a majority stake.

Despite differences across countries, privatization is often undertaken to improve efficiency, bolster fiscal revenues or both. Ethiopia’s impending privatization is motivated, at least in part, by the severe foreign currency shortage that has made public debt repayment a daunting task. Limited access to external loans, due to risk aversion induced by rising debt burdens, is also a factor.

The privatization program constitutes a marked departure from the ruling party’s deeply entrenched tradition of keeping the private sector at bay. In the aftermath of the Dergueregime’s collapse, the government transferred many SOEs into private hands.

This time around, however, the scale and speed of the planned privatization measures are unprecedented. There seems to be a broad-based consensus on the need to privatize Ethiopia’s very inefficient SOEs, notably Ethio telecom, as evidenced by the exorbitant prices it charges for the poor service it provides. Opinions are, however, all over the map with regards to the timing, pacing and sequencing of the divestiture of public enterprises.

Privatizing strategic industries at breakneck speed, just for the sake of addressing the forex crunch, would be at best myopic and at worst a recipe for disaster.

As the adage goes, “Don’t make permanent decisions based on temporary feelings,” or rather temporary economic malaise, in this case.

Implementing reforms that entail multifaceted ramifications to resolve short-lived problems is suboptimal. Cambridge University professor and prominent economist Ha-Joon Chang strongly argues that privatization should be done for the “right” reason.  That is to improve enterprise performance, rather than as a means of raising money or foreign currency – in other words, selling the family silver.

Privatization may help reduce the egregious inefficiencies of SOEs, but the extent to which it does so depends on the presence of market-supporting institutions, functioning legal institutions and effective and independent regulation.

Given Ethiopia’s weak regulatory and legal environment, limited administrative and institutional capacities and increasingly rampant corruption, the state could easily fall prey to anti-competitive and predatory behaviours. In a country where ‘rule by law’ rather than ‘rule of law’ is the modus operandi of government, any arrangement, like partial privatization, that puts government and the private sector in the same boat is doomed to fail.

Partial privatization will undoubtedly give rise to new administrative burdens, perhaps more than wholesale privatization would do. Africa’s history of failures from the 1990s and 2000s shows that privatization is more likely to produce the hoped-for results if it is embedded in a set of appropriate, functioning legal and economic institutions, and coupled with well-thought-out liberalization reforms.

In terms of liberalizing the economy, it remains to be seen whether Prime Minister Abiy Ahmed’s (PhD) administration will reinvent the wheel and adopt a more market-oriented development strategy.

A move from state to private, or pseudo-private, ownership alone does not necessarily yield economic gains. Privatization should not be seen as a silver bullet but rather as part of a broader set of reforms to promote competition, deter regulatory capture and improve economic efficiency.

As they say, competition is the most effective regulator. The last thing government wants to do, for instance, is partially privatize Ethio telecom and not subject it to competition by opening up the sector to other private operators, as well as to a more stringent but market-friendly regulation.

Privatization may have adverse distributional implications by making services less accessible to low-income people. The effect on income distribution will partly depend on how the ownership of SOEs is transferred into private hands. Think of transfers of state assets to citizens by voucher versus transfers to a single wealthy individual, several oligarchs or the governing elite.

In addition, privatization may reduce employment during the initial restructuring phase, but employment might pick up as the newly-privatized firm becomes more efficient. Partial privatization can also lower consumer prices if it leads to efficiency gains, but prices may rise if they were initially below cost-recovery levels.

In the utility sector, profit-seeking firms do not generally have the incentive to serve less profitable customers. Electricity prices will likely increase following privatization of Ethiopian Electric Power, given that existing prices are very low, which would have negative effects on poorer consumers.

In fact, raising electricity prices to reflect underlying costs will be politically difficult, unless combined with other measures to mitigate negative welfare consequences. By contrast, given that prices for telecom services have been kept artificially high, it is likely that the divestiture of Ethio telecom would reduce consumer prices and significantly improve services – notably if competition increases post-privatization.

A great deal of caution will be needed in the pacing of divestitures, not least because Ethiopia has minimal experience of its own to fall back on. Though little is known about the pace of the upcoming privatization reforms, privatizing the above-listed SOEs all at once, dubbed the “fire sale” approach, should be shunned since it could wreak havoc on the economy. The government’s bargaining power, and thus the proceeds it receives, is reduced when privatization is desperately done at a large scale within a short period of time.

It is crucial to test the waters through phased privatization, with sequencing based on economic and social returns, in tandem with lessons from international best practices. The government should privatize only one SOE at a time, and sufficient intervals should be allowed when more than one SOE is at stake.

Experience shows that the safe bet would be to first privatize the sector that is most inefficient and unprofitable but which is potentially a competitive industry; that has the least adverse distributional impact; and where the government has adequate regulatory capabilities.

Among the SOEs that will be up for sale, Ethio telecom best fulfills these criteria. It is one of the most inefficient public enterprises, although its profitable due to its high monopoly prices. Privatization would yield sizable efficiency improvements in this sector with minimal side effects. Telecom is inherently amenable to competition but political factors have so far impeded competition.

Most, if not all, Ethiopians were caught off guard by the government’s plan to privatize Ethiopian Airlines, given that it is well-managed, even by international standards, and has consistently surpassed its profit targets. The privatization of profitable SOEs makes little or no difference to their performance, so the focus should be on unprofitable ones.

As the saying goes, “If it ain’t broke, don’t fix it.”

In fact, there does not seem to be any convincing rationale for privatizing Ethiopian Airlines in the medium-term apart from the short-term foreign currency needs. But if the airline must be privatised, it should be the last in the queue and needs to be handled with the utmost caution, given its strategic importance.

By Fiseha Haile (fisehahaile77@yahoo.com)
Fiseha is an economist at the World Bank.

Published on Jul 21,2018 [ Vol 19 ,No 951]



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