27 In some cases, negotiated sales may be the only option, but in general, the greater the openness and competition in the selection process the greater the likelihood that transparency will be achieved-and the higher the price paid. In his study of Mexico, La Porta and Lopez-de-Silanes (1997) found that an additional bidder participating in a tender increases the net revenues to government by 12 percent. Public offerings or share issue privatizations are widely regarded as the most transparent and lucrative to the seller, but again, many client countries do not possess the capital markets, quality firms, or business environments to apply (very often) this method.

73. While there has been much concern about corruption in privatization, Kaufman and Siegelbaum (1996), in their work on transition economies, argue that although there has been an increase in corruption as privatization has progressed, it does not necessarily follow that privatization is the cause of that corruption. Different privatization approaches have affected the incidence of corruption, depending on the scope of control rights over economic activity retained by politicians and bureaucrats (Box 6). While privatization itself is a way to address corruption, the development of a legal and institutional framework is needed to limit the ability of insiders to self-deal.

# **Box 6. Privatization,and Cor,ruption4inT-ransition Economies**

Privatization-with all its inadequacies--is preferabledto.its absence: Kaufinann and' Siegelbaum show that the .incidence of corruption is, or would be, larger without privalization, and'that-corruption'is more.prevalent in nonprivatized sectors. Furthermore, there is evidence to suggest that kextralegal .aid unofficiai- activities are more prevalent in countries that privatized.less. And'there.is incipient evidence pointing to a positive.association between privitization and some hardening of the budget constraint (i.e< less discretionary handouts. or tax exemptions), as well as between privatization and market liberalization (i.e. less discretionary licenses in the -hands of politicians and bureaucrats). Finally, in some countries, corruption1has:been^fueled by the lack of privatization in agriculture in parts of.thelenergy-sector. 'In these areas, the study advocates fasterprivatization. Source: Kaufnann and Siegelbaun,- 1997.

## **(iv) Mitigating the social impact of privatization**

74. Where restructuring requires sizable labor force reductions, the process will always be contentious-but problems can be reduced if government, and sometimes the private buyers, dialogue with labor early in the process, and jointly work out an acceptable approach. Sometimes, this dialogue can go to extraordinary lengths. For example, in China, a Norwegian private firm entered into a joint venture with a Chinese SOE producing steel. The Norwegian investors worked closely with SOE officials and municipal authorities to determine not simply how many workers would be required in the remodeled firm, but also to ensure that the effects of layoffs were spread equitably among the workforce. Wherever possible, they made sure that when someone was dismissed, another family member was retained. Not surprisingly, the workers and the locality strongly supported this approach. In Morocco the purchaser of an SOE cement company agreed to retain all employees, even though there was an estimated 8 percent surplus. The new Managing Director indicated that he hoped that expanding business would soon make these extra people useful, and that even if business remained steady the firm would absorb the extra cost to maintain social peace and stay in good grace with the government. However, the