I0 23. In Brazil, privatization improved SOE efficiency<sup>andprofitability(Macedo,2000).</sup> Between 1981 and 1994, before the start of<sup>theprivatizationprogram, SOEs performedpoorly.</sup> The ratio of profits to net assets during the period<sup>was,onaverage,anegative2.5percent, and</sup> fell to negative 5.4 percent towards the end.<sup>Significantgains wereachievedafterprivatization;</sup> for example, the large steel mill (CSN) which had<sup>been incurringheavy losses became profitable</sup> and investments increased dramatically. Higher profits are bringing more tax revenues<sup>to</sup> government, and the company began paying<sup>dividendstoshareholders.</sup> In another study, Pinheiro (1996) analyzed the performance of<sup>50BrazilianSOEsbeforeandafterprivatization</sup> (using a methodology similar to the Megginson<sup>studies).Heconcludedthatprivatization</sup> significantly improves SOE performance, particularly<sup>when thereisachangeof controlrather</sup> than when only a minority stake is sold. The results<sup>arealsostrongerforcompaniesthat have</sup> been recently sold, indicating that privatization<sup>works betterwhencombinedwithliberalization</sup> measures, including removing barriers to entry<sup>andexit,imposing positive interestrates, and</sup> reducing access to budget resources (for more<sup>on this point,see section4 (ii) below).</sup> 24. Most success stories come from high or middle<sup>incomecountriesbutprivatizationhas</sup> yielded positive benefits in low-income<sup>countriesfacedwithdifficult marketconditionsand</sup> wary investors. Privatized companies in sub-Saharan<sup>Africaincreasedcapacity utilization</sup> through new investments, introduced new technology,<sup>and expandedtheir markets(Campbell</sup> White and Bhatia, 1998). In Ghana, sales of privatized firms increased<sup>by71percent;in</sup> Tanzania, ten privatized firms made investments<sup>that were2.5 timesgreater than17 non-divested</sup> companies. A separate study of pre- and<sup>post-privatizationperformanceof16Africanfirms</sup> privatized through public share offering during<sup>1989-96 finds asignificant increaseincapital</sup> spending by privatized firms-but only insignificant<sup>changesin profitability,efficiency,output</sup> and leverage (Boubakri and Cossett, 1999).

25. Some governments have in the past tried to raise<sup>revenuesor obtainsupport by divesting</sup> minority stakes through share issues, to state-controlled<sup>financialinstitutions(in India),to</sup> workers (in Egypt), or to the public at large<sup>(Bangladeshbanks).</sup> None resulted in major performance changes. In general, government<sup>retentionofmajorityshareshasnotresultedin</sup> improved firm performance. The problem is<sup>minimalchangesinthecorporate governanceof</sup> these firms. However, partial privatizations<sup>inMalaysiayieldedpositive results (Galaletal,</sup> 1994), largely because through commercialization<sup>managersweremademore responsiveto</sup> market pressures and because private shareholders<sup>forcedgovernmenttoshifttowardsmore</sup> economically rational decisions. Majority<sup>or fullsaleof sharestostrategicinvestorsavoidsthe</sup> incentive and contracting problems associated<sup>withminorityprivatization.Suchsalescan and</sup> have been combined with share sales to employees<sup>andthegeneralpublicinanefforttoshare</sup> the wealth and win popular support for privatization.<sup>This approach has worked well ina variety</sup> of settings, from Chile to Jamaica to Estonia.

26. To summarize, empirical evidence from non-transition<sup>economiessuggestsstronglythat</sup> privatization has a beneficial impact on enterprise<sup>performance. While therearemethodological</sup> issues involved in carrying out impact evaluations,<sup>thereisbynow sufficientandcompelling</sup> evidence from a wide range of countries<sup>andsectorsthatprivatizationofenterprisesin</sup> competitive markets leads to significant improvements<sup>inefficiency,profitability, output,and</sup> capital investment spending.