Introduction
Over the last number of years, several African Governments have embarked on privatization programs. A 1996 World Bank survey, for example, estimated that whereas in 1990 there were 6069 state owned enterprises (SOEs) in the Sub-Saharan region of Africa, this number had reduced to 4058 by 1995 as a result of privatization. This article highlights some of the concepts and challenges of privatization in Sub-Saharan Africa.
Reasons for Privatization
The reasons for the increased activity in privatization can be attributed to various factors. In Uganda, for example, privatization developed largely because of pragmatic reasons. President Museveni's National Resistance Movement (NRM) took power in 1986, after years of civil war. The NRM inherited an economy devastated by the civil war. Rather than try to rebuild a depleted industrial infrastructure, the government chose to transfer its holdings in SOEs to the private sector, which it was thought, would be more efficient in running these enterprises. Conversely, in Senegal, privatization was embarked upon in 1985 mainly because of structural adjustment policies imposed by the World Bank and IMF. This, however, resulted in the Senegalese people viewing privatization essentially as an imposed solution to their problems. Such public opposition to privatization may explain why the privatization program in Senegal has not proceeded as quickly as in Uganda. As of 1996, for example, Senegal had privatized 48 SOEs worth a total of US$65 million, while Uganda had privatized 76 SOEs worth a total of US$137 million.
Privatization Legislation
Several countries have enacted privatization legislation to govern the sale of SOEs. Others have not enacted legislation, but nevertheless still actively privatize SOEs. A good example of this is Kenya which to date does not have privatization legislation, yet it has privatized more than 150 SOEs including a public offering of shares in Kenya Airways, with a 26% stake being purchased by KLM via a private placement. Part of the reason for the absence of privatization legislation in Kenya is historical. Kenya has traditionally been a market-oriented economy. It has always been implicit that the government was authorized to dispose of its interests in enterprises. In Tanzania, on the other hand, which has a long history of socialism, private ownership of assets was anathema, and, therefore, the Tanzania Government recently had to pass an amendment to the State Corporations Act of 1993 to authorize the privatization of SOEs.
Lesotho and Zambia are examples of two countries that have adopted comprehensive legislation. The Privatization Act 1995 of Lesotho contains elaborate provisions, from the establishment of the Privatization Unit (the Unit), which is charged with overseeing the privatization process, to the methods of privatization. The functions of the Unit include deciding, in consultation with the relevant Ministry concerned, the most appropriate method of privatization, setting tender rules and procedures for public and restricted tenders, negotiating bids, contracts for sale and lease agreements, and approving any prospectus prepared in relation to a public offering of shares. The Unit may privatize an SOE by the sale of shares, sale of business as a going concern, sale of specific assets, leasing of business with or without an option to purchase, management contract, franchising, and liquidation. An interesting requirement is that the SOE must be sold for its market value. This is important because it ensures, if one draws the analogy of the government as the management of a company and the plenipotentiaries as the shareholders, that the aim of privatization is to maximize shareholder value.
The privatization scheme in Lesotho begins with the Unit preparing a Privatization Scheme for an SOE. This scheme includes a description of the SOE, the name of the relevant Ministry, a statement of recently audited accounts, and the proposed method of privatization. Once the scheme is prepared, it is then presented to the cabinet for approval. The cabinet may approve conditionally or unconditionally, the privatization scheme. Upon approval, the Unit has to identify a potential purchaser who must then be approved by the cabinet. Once all the requisite consents have been obtained, the SOE is privatized according to the approved scheme.
The Privatization Act of 1992 of Zambia (Chapter 386 of the laws of Zambia) is similar in scope. The Zambia Privatization Agency (the Agency) is charged with overseeing the privatization process in Zambia. SOEs are privatized in Zambia in accordance with a divestiture sequence plan which is prepared by the Agency and approved by the cabinet. To start the process, after carrying out relevant privatization studies, a list of companies to be privatized is published in the Government Gazette. This is usually followed up by advertisements calling for bids for individual companies. Once bids are received, a rigorous appraisal process by teams of Agency staff and other consultants is carried out. After the valuation of the business and negotiations for sale, a draft sale agreement is drawn up and reviewed by the Attorney-General, before the closing.
Privatization and Capital Markets Development
One of the positive results of privatization has been the accelerated development of capital markets in several countries. In Zambia, the establishment of the Lusaka Stock Exchange and a share warehousing facility known as the Privatization Trust Fund (PTF) in 1994 came shortly after the inauguration of the privatization program in 1992. Likewise, in Tanzania, the Dar Es Salaam Stock Exchange was incorporated in September 1996 as part of the overall privatization program.
Nigeria provides a good case study of the role of capital markets in privatization. As a general rule, before an enterprise can qualify for a listing on the Nigerian Stock Exchange it must have been profitable for five consecutive years with a record of dividend payments for the past three consecutive years. The minimum initial public offering must be 25% of the equity capital. The Securities and Exchange Commission of Nigeria after consultation with the Bureau of Public Enterprises determines the price of shares of an enterprise that is to be privatized through a public offering. Publicity for the privatization is through advertising on television and radio networks as well as through the three main daily newspapers which publish the prospectus summary. As of 1996, out of 49 federal public institutions privatized in Nigeria, 35 have been through public offerings.
In addition to increasing the capitalization of capital markets in several countries, privatization has also indirectly contributed to the development of corporate governance. Prior to privatization, many SOEs were inefficient, money losing enterprises. With privatization and the corresponding change in management, however, several privatized corporations are now efficient profit-making enterprises. A good example of this was Kenya Airways, which until privatization, was a loss-making SOE. With a change in management and technical assistance from its core investor KLM, it is now one of the most profitable companies in Kenya.
Challenges for the Future
Although privatization has engendered economic development in a lot of countries, there is still a long way to go. The privatization programs in various countries need to be continually reviewed and refined to ensure that the process is run as efficiently as possible to attract foreign investors and ensure maximum returns to the various governments. Examples from Ghana may be illustrative. According to the International Labor Office (ILO), the Divestiture Implementation Committee in Ghana, which is charged with supervising the privatization program in Ghana, was, in late 1993, coming under intense scrutiny from the public. It was accused of lack of transparency in its operations, and inefficiency in its management. It accepted these criticisms and to address them, has since published such statistics as the list of SOEs to be privatized, the names and addresses of the purchasers, the value of the enterprise, and the amounts paid to date. In order to reduce the rate of default among potential investors, it has introduced a system of bid bonds. It is conceivable that such streamlined measures, if adopted in other countries that have not already done so, will be of benefit to both foreign investors and the governments. The dawn of a potential African Renaissance is nigh, and whilst pitfalls lie ahead, the opportunities for investment have never been better. *