metadata: authors: 0: author: Sader,Frank
docna: 0: docna: Privatization and foreign investment in the
            developing world, 1988-92
docty: Policy Research Working Paper
subtopic: Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Telecommunications Infrastructure,State Owned Enterprise Reform,Public Sector Administrative & Civil
            Service Reform,Privatization,Energy Privatization,Business Cycles and Stabilization Policies,Transport Services,Democratic Government,Economics and Finance of Public
            Institution Development,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: Finance and Financial Sector Development
abstracts: cdata!: Foreign direct investment in the
            developing world has grown rapidly in recent years, making
            it one of the most important sources of financing to
            developing countries.  The author presents a database on
            about 1,100 global privatization transactions from 1988
            through 1992.  Between 1988 and 1992, developing country
            governments earned almost US$62 billion in revenues from the
            sale of state-owned assets.  About a third of those revenues
            came from foreign sources.  Privatization in Latin America
            represents about 66 percent of privatization in the
            developing world.  Privatization in Europe, including
            Eastern Europe, accounts for 17 percent, and privatization
            in East Asia, 13 percent.  The heaviest foreign
            participation is in Eastern Europe, primarily for lack of
            domestic financing.  Foreign investors' general
            participation in privatization programs was strong,
            providing developing countries with substantial amounts of
            foreign exchange.  The relative size of the privatization
            program and the degree of openness to foreigners are
            important determinants of foreign direct investment.  Each
            dollar in privatization revenue generates an additional 35
            cents in new foreign direct investment inflows, and a 1
            percent increase in foreign participation adds another 50
            cents. In addition to the direct inflow of funds through the
            sale of assets, many developing countries also increasingly
            attracted foreign investment outside of their privatization
            programs.  Privatization of infrastructure and the financial
            sector especially seem to have sent important signals to
            foreign investors, indicating an improved economic
            environment and possibly the eventual elimination of
            bottlenecks. Improved expectations about the profitability
            of investment projects render these countries more
            attractive to foreign investors.
repnme: repnme: Privatization and foreign investment in the
            developing world, 1988-92
display_title: Privatization and foreign investment
            in the developing world, 1988-92
listing_relative_url: /research/1993/10/698798/privatization-foreign-investment-developing-world-1988-92
topicv3: State Owned Enterprises m1326323 721,Manufacturing Sectors m1326521 1281,Transport m1326661 135,Privatization m1327236 1283,Telecommunications and Broadband Access
            m1327340 286
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: UNKNOWN
no_of_pages: 67
author_keys: 0: author_key: 94980
model_extractions: 6
cr: V ~ **~** ~ ~ ~ ~ ~~OC

**VWPS 1202**

- Ths paper a product of the Debt and Intemnational Finarce Division, International E-conomics - DepAzMcnt is part of a larger effort In the department to evaluate foreign Investment as a source of financing for developing countries. Copies of the paper are available from tht; World Bank, 1 81I8 H Street NW, Washingt, DC 20433. Please contact Roe Vo rom SB-042, exteon 31047 (October 1993,62 pages)

Foreigv? direct investment in the developing world has grown rapidly in recet years, making it one of the most importat sources of financing to developing countries. Sader presents a databasw on about 1,1I00 global privatizatlor transacdons from 1988 through 1992.

Between 1988 and 1992, developing country governments eamned almost US$62 billon in revenues from the sale of state-owned assets. About a third of those revenues came from foreign sources. Privatization in Latin America represents about 66 percent of privatization in the developing world. Privatization in Europe, including Eastern Europe, accounts for 17 percent, and privatization in East Asia, 13 percent. The beaviest foreign participation is in Eastern Eumpe,; primarily for lack of domestic financing.

Foreign investors' general participation in privatization programs was strong, providing developing countries with substantial amnounts of foreign exchange.

The relative size of the privatization program and the degree of openness to foreigners are important detenninants of foreign direct investment. Each dollar in privatization revenue generates an additional 35 cents in new foreign direct investmnei **n** t flows, and a 1 percent increase in foreign participation adds another _50_ cents.

In addition to the direct inflow of funds through the sale of assets, many developing countries also increasingly attracted foreign investment outside of their privatization programs. Privatization of infrastructure and the financial sector especially seem to have sent important signals to foreign investors, indicating an imnprov **e** d conomic envirounment and possibly the eventual elimination of bottlenecks. Improved expectations about the profitability of investment projects render these countries more attractive to foreign investors.

T'he Prlicy Reseach Working Pape Series disseninates the findings of work under way in the Bank. An objective of the seTies is to get thee _findings_ out quickly, even if presentations are less than fully polished. The findings, interpretations, and conchisions in theme papers do not necessarily represent official Bank policy.

Produced by the Policy Reseach Dissemination Center
# **PRIVATIZATIONS** AN.3

# **FOREIGN INVESTMENT IN THE DEVELOPING WORLD: 1988-1992**

by Frank Sader World Bank International Economics Department Numerous individuals within the World Bank<sup>as well as outside provided support in the data collection.</sup> Without their help, this study would have been impossible.<sup>Special thanks in this respect go to Antonio</sup> Estache and Maziar Minovi. Also thanks for many<sup>helpful comments on earlier drafts from Stijn</sup> Claessens, Guy Pfeffermann, Gerd Schwartz, as well as<sup>the economists at IECDI,</sup>
7...................7

# **TABLE OF CONTENTS**

|I. Introduction ..........<br>,<br>...<br>3|
|---|
|IH. Early Experiences with Privatizations ..............................<br>........5|
|II.1 The Formation of State-Owned Enterprises (SOEs)<br>_.5_|
|11.2 The Early Phase of Privatizations..............<br>7..|
|III. The Recent Wave of Privatizations, 1988-1992 .10|
|11.IThe Data ........<br>,,,,<br>10|
|III.2 Global Trends in Privatizations .11|
|111.2 Trer,ds in Developing Country Privatizations ............................................ 12|
|IV. Privatizations as a Source of Foreign Exchange .17|
|IV.1 Data ....<br>17|
|IV.2 Overall Trends ............<br>17|
|IV.3 Portfolio Equity Investments .19|
|IV4 Foreign Direct Investment ....................<br>21|
|V. Privatization Experiences at the Country Level .22|
|VI. Do Privatizations Attract Foreign Direct Investors<sup>.</sup><br>24|
|VII. Conclusion .....................<br>31|
|ANNEX: COUNTRY NOTES .33|
|A Latin America and the Caribbean .......................<br>, 33|
|B Europe and Central Asia .37|
|C East Asia and Pacific .39|
|D South Asia .40|
|E Sub-Saharan Africa .41|
|F North Africa and the Middle East .......................<br>42|

# APPENDIX

Table A-1: Privatization Transactions in the Developing World: 1988-1992 Table A-2: Privatization Transactions in the Industrialized World: 1988-1992 Table A-3: Foreign Direct Investment from Privatizations: 1988-1992 Table A-4: Privatizations as Share of Foreign Direct Investment: 1988-1992

# BIBLIOGRAPHY
# **SUMMARY**

Foreign direct investment in the developing world experienced a rapid growth in recent years, rendering it one the most important financial flows to developing countries as a whole One of the driving forces behind this renewed interest by private investors in developing country economies is the privatization of 3tate-owned en:erprises, which expanded rapidly over the last years in many developing countries. In order to gain a better understanding of the relationship between privatizations and foreign investment, a database was constructed for privatization transactions worldwide for the period 1988-92. The data were compiled based on information from a wide variety of public sources such as newspapers and journals, country and regional departments as well as residence missions of the World Bank, and privatization groups and ministries within the individual countries. The database ',omprises about 1,100 transactions and is available from the author upon request.

The study shows that during the period 1988-92, developing country governments earned almost IJS$62 billion in revenues from the sale of state-owned assets. About a third of these revenues came from foreign sources in the form of portfolio equity and foreign direct investment. Measured in sales volume, the largest privatizers are located in Latin America, which accounts for 66 percent of total privatizations in the developing world. European countries, including the Eastern European economies, account for 17 percent, followed by East Asia with another 13 percent. The degree of foreign participa n differs substantially among countries, but the Eastern European nations clearly show the most substantial invoivement of foreign investors compared to other large privatizers, primarily due to the fundamental lack of domestic investment finance. But besides being a direct source of foreign exchange, privatizations also serve as an important vehicle in attracting additional foreign investments, not directly obtained from h..e sale of state-owned assets to foreigners. An econometric analysis shows that the relative size of the privatization program as well as the degree of openness to foreigners are important determinants of foreign direct investment inflows. In fact, for the analyzed sample of countries, it turns out that each dollar in privatization revenue generates an additional 38 cents in new foreign direct investment inflows, and that a one percentage increase in foreign participation adds another 50 cents. The analysis also shows that privatizations in the financial sector and infrastructure have a strongly positive effect on foreign investors, while privatizations in manufacturing or services do not appear to attract foreigners to any significant extent beyond the initial sale of the state-owned enterprises themselves. Thus, developing countries can use privatizations as a vehicle to attract additional foreign investment in two ways: directly through the sale of assets to foreign investors as well as by improving the general economic environment such that it appears more profitable for foreigners to engage in ventures in these countries.

2
# 1. **Introduction**

During most of the 1980s, the inajority of the developing countries were basically shut out from the international capital markets, following the borrowing binge of the 1970s and the breakdown of normal financial relations in 1982/83. This financial constraint, particularly severe for the heavily indebted countries, quickly translated into declining investment expenditures and growth rates in these countries. In recent years, however, these same countries witnessed a substantial increase in inflows of equity capital in the form of portfolio equity and foreign direct investment (FDI), reflecting a renewed trust in the economic potential of many developing countries. FDI alone rose by almost US$29 billion between 1987 and 1992, reaching a projected US$38 billion last year. Together with portfolio equity investments of US$35 billion, private investments in the developing world accounted for almost 60 percent of total net resource flows in 1992.1 This remarkable turnaround in private flows is driven by a general climate of macroeconomick btabilization and liberalization, providing a more attractive environment to private investors. In most countries affected by the deb' crisis, stabilization was achieved through an extensive program of sound macroeconomic policies comnbined with several rounds of debt work-outs with official and, in particular, private creditors. Economic liberalization is generally pursued via the reduction of trade restrictions as well as the elimination of distortions within the domestic economy in order to improve internation?l competitiveness. For many countries, a centerpiece of this liberalization effort is a stroll move towards privatization of formerly state-owned enterprises (SOEs). After a relatively slow start in the mid-1980s, privatization programs expanded remarkably over the last five years in many developing countries and fueled a rapid growth .n foreign direct investment, supporting the recovery in gross domestio investment which fell substantially during the mid-J 980s.

The existence of privatization programs is generally acknowledged as one of the central reasons for the renewed access to international capital markets as well as rising investment levels in developing countries. As of yet, however, no detailed study has been undertaken to analyze the size and extent of privatizations and its impact on capital inflows and investment levels. This paper intends to fill this gap by providing information on privatization transactions world-wide at a micro-level. A database was constructed, listing privatization transactions during the period 1988-1992 for all developing and industrialized countries for which information was available. Based on this information, the foreign exchange content of these tr nsactions in the form of foreign direct investment and portfolio equity investment was estimated, allowing some inferences regarding the financial effects of the existing privatization programs.

The study shows that privatizations grew at an unprece(4 ented rate in recent years and contributed substantially to the boom in foreign financing from private investors. While privatization programs started in many countries during the mid-1980s already, they became effective and wide-ranging not before the end of the decade. During the period i see World Debt Tables 1992-93, Vo.I, p. 160.

3
1988-92, the developing world wvitnessed the privatization of about 870 medium- and large-sized enterprises, generating a revenue of almost $62 billion. The strongest privatizers were located in Latin America and Eastern Europe, while sub-Saharan African countries did barely engage in any significant sell-offs of state assets. Foreign investors contributed substantially to this privatization boom through portfolio eq"ity as well as foreign direct investment, accounting for about 30 percent of total revenues. But besides the direct gain of foreign exch4nge through the sale of SOEs, privatizations also have the ability to attract additional investments indirectly. It appears that extensive privatizations in infrzstructure projects and financial institutions have a posiiive effect on foreign direct investment inflows by enhancing the profitability of the economic environment for private ventures.

The following section lays out experiences with privatizations in developing countries prior to 1988 based on previous studies undertaken. In Section III, the data on recent privatization transactions are presented and analyzed at an aggregate level . The direct inflows of foreign exchange in the form of foreign direct as well as portfolio equity investment resulting from privatizations are analyzed in Section IV. Section V describes privatization exp.eriences at the country level and provides a comparison of the intensity of privatizations among countries. A more detailed discussion of the privatization programs in individual countries that engaged strongly in privatizations is relegated to the Annex. Besides the direct gains from asset sales to foreigners, privatizations, in the areas of infrastructure and finance in particular, played an important role in attracting ?dditional FDI, as shown in an OLS regression analysis in Section VI. Section VII concludes the study by summarizing the findings and discussing the prospects for privatizations in the near future.

4
# H. **Early** Exoeriencts with Privatizations

**IL1 The** Formation of State-Owned Enterprises (SOEs) ' Starting in early 1960s, the developing world witnessed a steady expansion of economic act{vity carried out by the public sector. Governments increasingly intervened directly in the economic process to suppoit econormic development. Ideological reasoning aside, the primary arguments for this economic strategy were based on efficiency c,iteria. Particular sectors such as mining, petroleum, telecommunications, finance, transportation, and heavy industry were viewed as central to the development strategy by providing crucial goods and services to all other industries. Governments hoped to accelerate eco*nomic growth by eliminating bottlenecks in these crucial areas, enhancinig the profitability and performance of all other sectors. Most importantly, these intended efficiency gains were expected to translate into increased export earnings, reducing the often severe foreign exchange constraint. The export of raw materials in the mining or hydrocarbon **s** ectors, in particular, were thought to boost export performance directly, while the provision of :ntermediate goods and services was expected to improve the comrpetitiveness of domestic industries in the world markets.

The development of these core sectors was, however, generally quite unsatisfactory due to structural market failures which impeded the progress of the economy as a whole. In most cases, the private sector was viewed as structurally weak, not having access to the necessary skills and financial means to provide these strategically important "public goods". In order to overcome these inadequacies, the public sector began to carry out a steadily increasing share of domestic capital formation, reaching on average over 45 percent in 1985 in the developing world.<sup>2</sup> The main instrument for government intervention was the creation of SOEs in those sectors deemed most important. By the early 1980s, SOEs are estimated to have accounted for an average 17 percent of GDP in Su'. -Saharan Africa and around 12 percent in Latin America. Asia, on the other hand, revealed a relatively modest share of only 3 percent (excluding China, India, and Myanmar), while Eastern Europe's SOEs were responsible for up to 90 percent of total domestic production.3 All too often, however, the efficiency cor.;jerations, initially used as an explanation for the rapidly expanding economic activities of the public sector, were quickly replaced by short-term political goals, rendering SOEs primarily as large employers and suppliers of highly subsidized goods and services to the public. Thus, in many cases, SOEs did not contribute significantly to the long-term development process, being directed at quelling temporary economic dissatisfaction rather than improvin,g long-term economic efficiency. Instead of generating economy-wide multiplier effects, fostering the development of private industry through the provision of essential services and raw materials, they typically turned out to be grossly inefficient, resulting in bottlenecks and generally

> **2** see Pfeffermana **n** d Madarassay (1992), Table 4b, p.26. 3see Kikeri, Nellis, and Shirley (1992), p. 15.

5
inadequate and de. iorating infrastnictural conditions.<sup>4</sup> The social benefits resulting from the provision of subsidized goods and services to the public in the form of staple goods, energy, transportation and others became an increasing financial burden to the governments, when many of these SOEs incurred substantial financial losses, draining resources from the budget as well as the domestic financiai markets. In 1982, the Mexican government had to spend 4 percent of its GNP in transfers and subsidies to its SOEs. During 1989 to 1991, SOE losses are estimated to have reached 9 percent of GDP in Argentina and, on avei - over 5 percent in Sub-Saharan African countries.<sup>5</sup> SOEs also generally failed to enhance export growth and to provide the country with additional foreign exchange. )n ,ie contrary, with relatively easy access to foreign capital during the lending boom of the 1970s, SOEs absorbed a substantial amount of loans taken on in the international financial markets, rendering them a substantial contributor to the ballooning of sovereign debt during the 1970s. With cieditors e.fectively treating them as part of the goverment based **or.** public guarantees issued by the authorities, SOEs coL;d obtain loans independent of their economic pe.formance. Hence, during the period of 1970 to 1982, the real stock of debt of SOQ.s grew at an average annual rate of 10.8 percent, comnared to an average 7.4 percent growth of Non-SOE debt, reaching $164 billion at con-cant 1991 dollars, or 23.6 percent of the total stock of debt. Servicing the old debt proved to be a heavy burden for the governnents: SOE debt alone accour:ted for almost 30 percent of total debt service. Creditors managed to avoid extensive defaults by continuously rescheduling the outstanding debt. Within this process almost $100 billion liad to be rescheduled, accounting for 16.5 percent of total reschedulings for the developing world. With SOEs being unable to service their debt and requiring reschedulings, public guarantees became reality in the sense that the government effectively had to take over the rescheduled portion of the SOE debt, further increasing the stoclz of public debt and exacerbating the debt burden for the governments of developing countries.<sup>6</sup> Confronted with the generally disappointing performance of the SOEs and the dire financial straits, many developing countries found themselves in during the 1980s, privatization became an important economic policy tool n many developing countries. The transfer of ownership is generally hoped to improve the efficiency with wh,ich these strategically important goods and services are provided, forcing the firms to ifolow market signals by eliminating the existing soft budget constraints. Equally important, maiiy governments hope to reduce budgetary pressures resulting from subsidies and tra,isfer payments, while at the same time generating revenues as well as foreign exchange through the sale of these assets.

> 4 For an example in the case of Latin America see World Bank (1991).

> 5 Kikeri, Nellis, and Shirley (1992), P. 15.

> 6 Based on the World Bank's _Debt Reporting System_ (DRS).

6
# **11.2 The Early Phase of Privatizations**

**The beginnings of** pri',atization programs, defined **z** a systematic strategy by the public sector to withdraw from direct economnic activity, is usually associated with the United Kingdom and Chile as the _two_ most outstanding cases. In both countries, the initial motivation was primarily ideological and politic&! in the sense that **the** government intended to return to private ownership assets **tlrit** tve!' nreviously nationalized.

In the United Kingdom, an ext _en3ive_ privatization program was initiated by the Conservative Party shortly aRer its ele 'zon **in** )979. The general goal. **.ere** to reduce government involverr?nt **in** commercial activities, widen private share o-wnership, and raise government revenue to help finance a notorious budget deficit. A large number of well-known companies were transferred to private ownership, among them British Petroleum, British Gas, British Telecom, British ;.'-Cays, Jaglar, Rolls Royce, and Cable & Wireless Over the last 13 year2 it is estintn-t1 that thii country has raised approximately $65 billion through privatizations.7 Chile developed probably the most eteisW..e pniv,tra.tion program in the world. According to one estimate, Chiie has transtf&-ed .wice tV.e value of state-owned assets relative to GNP coinpared to the _U.K^. 8_ The progilim was started in 1974 under the rilitary regime of General Pinociiet as a eaaction to the socialist government under Salvador Allende who during 1970-7/. nationq.al...,1 about 350 enterprises, giving the government control over approximraely 600 enterprises accounting for almost 50 percent of GDP.<sup>9</sup> In the first two years, around _240_ -,nterprises were returned to their previous owners, and by 1983 another 1 10 er.rprises h,A been divested. Duiring this time, only around US$1 billion was raised in revei,ue, because, in most cases, the assets were simply returned without anv official sjes transaction. Following the financial shock of the debt crisis, whlich led to ar increased iiivolvement of the state by bailing out many large financial and industrial cor-donwerates, a final phase of privatization began in 1985. Since then, Chile has divested most of the remaining 40 large industrial enterprises under state control, predominantly via the sale of shares, gerierating a total revenue of approximately $1.4 bil,ion.

For the overwhelming majority of developing countries, however, the recent trend in privatizations was not based on particular ideological reasoning, but rather initiated out of economic necessity. Given the stringent financial constraints most countries faced during the 1980s, ways had to be found to relieve the already strained budget from any additional pressures. Clearly, one of the first items on the list were transfers and subsidies to SOEs, a move strongly supported bv tl e multilateral organizations. In most structural adjustment programs by the IMF as well as the adjustment loans made by the World Bank, a reduction of SCE sUppoit paymenrts, combined with pricing at operating costs and a general deregulation were envisaged.10 These adjustment programs were oflen heavily

> 7 Euromoney, 1992, p.<sup>3</sup> .

> 8 The Financial Times, April 1 1, 1990.

> **_9_** Nankani (1988), p.18. **10** see International Monetar) Fund (1985), and Mosley (1988).

7
Contested in the political arena of the developing country concerned. A reduction of public expenditure combined with the elimnination of subsidies on basic goods and services affected predominant6y th, lower income groups who are disproportionately dependent on the provision of subsidized public services. Large price incre.asts on staple goods and essential services such at transportation effectively meant a Lurther rdjuction in living standards in an environrne't of economic decline and rising unemployment. rhe "medtiling" with the public sector as the last economic stronghold for a large poltion of the population proved to be a potential social explosive, rendering the implementation of public sector reforms politically dangerous. Thus, attempts to establish extensive privatization piograms all too often tot bogged down in drawn-out political debates, resulting in a iather slow take-off of .ivatizations until the late 1980s.

However, despite these political problems, quite a substantial number . f SOEs were already privatized during the period 1980-87. In a recent Worid Bank study analyzing the techniques of SoE privatizationsl 1, Candoy-Sekse compiled information on privatization transactions worldwide for this time period. While the provided information is very detailed for the 83 countries included, some essential data are unfortunately missing. In particul^r, information on the date of the transaction as well as its size in terms of the sale amount is usually not provided. Thus, it is impossible to determine the privatization volume and to track its development over time, only allowing for a comparison of countries based on the aggregate number of transactions. This, of course, carries the danger that individual countries are misrepresented if compared by the number of transactions, given that the importance of each privatization program relative to the size of the economy cannot be eetermined. Furthermore, Candoy-Sekse herself points out "that the information provided is uneven" 1 2, depending on the availability of data from government sources or World Bank reports.

But despite these caveats, some interesting inferences can be made regarding the extent of privatizations during 1980-87. The study lists a total of 696 completed privatiz. +;on transactions, 456 of which were carried out in the 64 developing countries included. According to these data, Sub-Saharan Afiica and Latin America and the Caribbean, two regions with a stro,.g record of government involvement in economic activity, were the most intensive privatizers during the period. Europe and Central Asia had practically no privatizations due to the fact that Eastern Europe at that time still had a centrally planned economic system. ;he la;gest privatizers in Sub-Saharan Africa ware Guinea with 40 transactions, follow-d by Cote d'Ivoire with 36, Togo with 17, and Niger with 14. In Latin America, Chiz. .eads the list with 40 individual privatizations, followed by Jamaica with 34, Brazil with 29, and Mexico with 10.

With respect to the sectoral distribution of privatization transactions, agribusiness clearly dominates with over 100 transactions, followed by services with 70 transactions and manufacturing with another 55. It is interesting to note that these three sectors account for a total of 50 percent of the total number of transactions, while energy, finance,

> II Candoy-Sekse (1988). 12ibid., p.vii

8
transport, and hydrocarbons, which accounted! for 90 percent of the SO1 stock of debt in 1986, had a combined share of only 21 percent of all completed privatization projects during the period 1980-87. It thus seems that during thJs period most countries had not yet managed to rid themselves from the most prevalent pressure stemming from the public enterprise sector but rather engaged in privatizing other, relatively minor governmentowned assets, possibly as the first timid steps toward extensive and economically meaningful privatization programs.

Table 1: GLOBAL PRIVATIZATION 'RANSACTIONS, 1980-1987 by number of transactiort

|Sector|Sub-Sahara<br>**Atrica**|n South<br>**Asia**|East**Asia**<br>&**Paclfio**|Latin Amerioa<br> &**Caribbean**|Europe&<br> Central Asla|Middle East**&** <br>North Africa|Subtotal|Industrialize<br>Countries|d TOTAL|
|---|---|---|---|---|---|---|---|---|---|
|**Agribusineas**|**63**|2|1|27|0|9|102|2C|122|
|Chemicals|**6**|1|0|7|0|0|**14**|5|19|
|**Energy**|1|0|0|**6**|**0**|**0**|7|**6**|13|
|Finance|4|**2**|3|26|0|0|**35**|27|32|
|**Heavy**Industry|**'1**|1|5|4|0|1|23|**6**|29|
|Hydrocarbons|7|0|2|2|0|1|12|1**6**|28|
|Menufacturing|24|4|7|17|0|3|**55**|**56**|**111**|
|Mining|4|1|0|4|0|3|12|2|14|
|**Services**|31|0|**'**1|22|0|6|70|**26**|96|
|Telecommunicatio|n<br>0|1|1|5|2|0|9|13|22|
|Transport|13|1|10|9|0|2|35|35|70|
|others|19|0|55|7|0|1|S`2|28|110|
|ITOTAL|184|13|95|136|2|26|456|240|696|

_S.wce:_ **_R.hcca_** _Candoy-Se*a.. rchnhcuss_ **_of_** _Prvetizfton of_ **_Srats-Owned Enterprise.s_** _Vo/l/,_ **_Woed Bank_** _Trchnkei_ **_Arpew_** _N._ **_9', Washkinton. D C. ISI_**

**Note: others' of** _6G_ for Enst **Asia** & **Pacific rewts** from Privatuation4 in the Philippines, which **were only** cted in **the aggregate.**

However, as already indicated, this comparison of countries based on the number of privatization transactior.s alone is misleading, not reflecting the size and irrortance of individual transactions for each country and in comparison among countries. The fact that Sub-Saharan Africa turns out to be the region with the strongest privatization efforts during this period appears counterintuitive given the observation in recent years, as will be seen in the following section. Taking into account that the vast majority of concluded privatization projects occurred in agribusiness indicates that the information includes a substantial number of small-scale privatizations with assets of very low absolute value. Thus, while the privatization effort in certain countries might look impressive in terms of the actual number of transactions completed, it is very likely that the actual economic impact of these privatizations was relatively sma!l.

9
# mH. **The Recent Wave of Privatizations. 1988-1992**

# **11.1 The Datn**

In order to evaluate the magnitude of privatizations in recent years, a database was compiled at a micro-level for the period 1988-1992, which is presented in the Appendix in Tables A-1 and A-2. In general, the data are based on publicly available information from numerous sources ranging from newspaper and joumal articles to direct information from privatization agencies and m.nistries as well as country operations, regional support groups, and resident missions within the World Bank. 13 For the purpose of this study, privatizations are defined as the transfer of productive assets from the public to the private sector involving some type of sale agreement. This includes **all** direct sales of public assets to private investors in the form of public offers or private sales. It also includes the contracting out of government services through concessions or licensing agreements. Any divestitures of SOEs in the form of simply shutting down operations and mothballing assets, on the other hand, are not included. This should not be interpreted as implying that such mothballing are considered unimportant. In fact, the benefits of shutting down inefficient enterprises can be substantial in the long-run through the elimination of sectoral distortions as well as through the alleviation of budget pressures resulting fro.n subsidy and transfer payments for the purpose of covering losses. Typically, however, this strategy is restricted to relatively minor operations with small asset value, thus not contributing significantly to the evaluation of privatization programs when measured in monetary units. In addition, data on this type of divestitures are not easy to come by and, even if available, are far from comprehensive.

Some warnings regarding the interpretation of these data are necessary. First of all, despite the already extensive list of individual transactions, any claims regarding completeness of this data set cannot possibly be made. For one, it can be expected that many small-scale privatizations have been carried out by governments which are not listed here, because individual transaction information is plain not available. For the sake of consistency, projects with a sales value of less than $50,000 were excluded, even if information was available. In addition, some countries might not appear in the list, despite having carried out privatization projects, simply having escaped the author's attention. This might be true in particular for some Sub-Saharan African countries, whose privatization programs are in terms of monetary units so small in comparison to other countries, that the, are usually not mentioned in standard sources. With respect to individual transaction information, great care has been taken to verify and update all data. However, for many projects certain pieces of information could not be obtained. In some cases, it was also impossible to distinguish between sales price and committed investments. Especially in the case of Eastern Europe, privatization contracts are often written such that the buyer commits to a certain amount of future investments besides the actual cash transfer for the purchased asset itself This makes it difficult to determine the 13 For more information on data sources and details on data compilation and estimation refer to the Appendix.

10
actual sale price as well as the timing of the actual inflow of cash revenue. While additional informnation could be obtained in the cases of Hungary and Poland to, at least partially, correct for this problem, no better information was as of yet available for the former Czechoslovakia.

# m.2 Global Trends in Privatizations

Over the period 1988-1992, the number of annua! privatizations worldwide grew rapidly from 62 in 1988 to almost 480 in 1992, generating a total cash revenue for the public sector of almost $185 billion in a total of slightly over 1,100 transactions. Not included here are privatizations in the former East Germany. According to the Treuhandanstalt, the German state agency responsible for privatizations, a total of 11,043 entities were sold between 1990 and end-1992 for about $25 billion with an additional $106 billion in investment comnmitments.

The expansion in the number of privatization transactions carried out clearly stems from the developing world, where various sizable privatization programs began to take off during this time. Revenues also increased steadily, and by 1992, the public sectors of the developing world had earned $61.6 billion in about 870 privatizations. For industrialized countries, on the other hand, the list of completed privatization projects grew at a far slower pace, reaching 67 recorded transactions in 1992. One oh-ious reason for this is that the number of entities in public hands is far smaller in industrialized countries. Their asset value, however, is on average significantly larger: a total of around 250 projects generated a total revenu^- of about $123 billion, resulting in an average revenue per project of almost $600 million, compared to less than $85 million in the developing world.'<sup>4</sup> In 1992, however, the total snies volume in developing economies of $23.2 billion was, for the first time, larger than the revenues generated by privatizations in industrialized countries ($17.3 billion).

But revenues in industrialized countries are generally quite erratic over time, being to a large extent dependent on the size of the relatively small number of individual projects carried out by industrialized countries each year. Thus, revenues are extraordinarily high in 1988 for the simple reason that the Japaniese government decided to sell 9.6 percent of Nippon Telegraph and Telephone for $22.8 billion, accounting for over half of total privatization revenues in the world that year. In 1991, the United Kingdom privatized British Telecommunications for almost $10 billion as well as four major power utilities for an additional $9 billion, generating another boom in privatization revenues.

The U.K. also is still the strongest privatizer in the industrialized world, having privatized 62 entities during the period with a strong focus on power and water utilities, which accounted for over 56 percent of the total $48 billion generated in revenue. Other particularly strong privatizers in the industrialized world are Canada with 25 transactions

> 14 For the purpose of this calculation, only transactions were taken into account for which information about the sales price was available.

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for $5.7 billion, Italy with 17 projects for $6.6 billion, New Zealand also with 17 projects for $6.3 billion, and Australia with **15** transactions for $6.2 billion.

Figure I GLOBAL PRIVATLZATIONS, 1988-1992 **By Number of Transactions** <!-- Start of picture text --> 500-<br>450 i Developing Countnes<br>400 S<br>350 - 0 Industnalized Countries<br>300 -<br>250-<br>200 . ......<br>150 - -<br>100- _<br>50<br>0<br>1988 1989 1990 1991 1992<br>US Billion By Amount of Revenue<br>6ri<br>Developing Countries ]<br>50-M Industrialized Countnles|rm<br>40.......<br>30-<br>20 -<br>10 " - ~ " '<br>0<br>1988 1989 1990 1991 1992<br>PvFi2zao h Xu fmw, ESa Owmw by m TmuANl wan exc&ed<br><!-- End of picture text -->

# **ITI.2 Trends in Developing Country** Privatizations

In developing countries, privatizations increased drastically over the last five years, both in terms of the number of transaction'q as well as in revenue. The number of transactions rose from a meager 26 in 1988 to 416 in 1992, and, over the same time period, privatization revenues increased from $2.6 billion to $23.2 billion, implying an average nomninal growth rate of about 73 percent per year While privatization programs are generally becoming more popular and expand rapidly, the developments differ quite substantially across regions. In the region _Middle East and Northern Africa,_ only Tunisia showed any substantial privatization activity, _Sub-Saharan Africa_ has generally not to any major extent participated in the recent wave of privatizations and progress has been very slow. While some countries engaged in not insubstantial privatization programs in terms of number of transactions, the asset value of the SOEs involved is overall only marginal with the exception of two sales in South Africa during 1989. Over the period as a whole, 76 transactions could be recorded for a total volume of about $240 million or only a meager 0.4 percent of total sales revenues in the developing world. 5 For _East Asia and the Pacific,_ no transactions could be found for

**15** Excluding South Africa with two transactions worth US$1.4 billion in 1989.

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1988, but the number of completed privatizations infreased, reaching 20 in 1992 for $3.8 billion. **While** the number oa' transactions was not particularly large, the average asset value of the individual projects was quite large, resulting in a total revenue of $7.8 billion over the period as a whole. In comparison, 1992 was the year for privatizations in _South Asia._ While only a small number of SOEs were sold in the previous years, 1992 saw an explosive growth in privatization transactions because of strong activity in Pakistan and Sri Lanka, reaching 69 privatizations. Most of the companies sold were, however, only of small value, resulting in a total revenue of not more than $0.6 billion. But the strongest growth in privatization transactions was, not surprisingly, found in _Eastern Europe and Central Asia._ In 1992, 173 SOEs were sold for a total revenue of $4.3 billion.<sup>16</sup> Privatization programs in _Latin America and the Caribbean_ expanded steadil ' _.r_ the last years and are certainly the most successful in the developing world in terms # enue generated, with a peak of $17.9 billion in 1991. In 1992, the sales voiur,- a.Jine.i slightly, but was still substantial with about $14.6 billion.

Figure 2 PRIVATIZATIONS IN THE DEVELOPING WORLD by geographic region, 1988-1992 <!-- Start of picture text --> By Number of Transactions<br>4__ -. O North Africa & Middle East<br>* Sub-Saharan Africa<br>300 - . South Asia - . .-....<br>* East Asia & Pacific<br>200 - Latn America & Caribbean<br>* Europe & Central Asia<br>100-<br>0<br>1988 1989 1990 1991 1992<br>US$ Billion By Amount of Revenue<br>25 -<br>C] North Africa & Middle East<br>20 - . Sub-Saharan Africa<br>Q South Asia ............<br>15 - U East Asia & Pacific<br>El Latin America & Caribbean<br>10* Europe & Central Asia<br>lo<br>1988 1989 1990 1991 1992<br><!-- End of picture text --> 16 Note that small-scale mass pnvatizations, in particular for the case of the former Czechoslovakia, are not included here because disaggregated data were simply not available. Government sources indicate, however, that the government received slightly less than $300 million through the voucher scheme for the privatization of 1491 small enterprises. But she also argues that this scheme was irrelevant from a budgetary point of view, with the proceeds being used to cover the expenses of running the scheme.

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A comparison of the regions over the last five years points to some interesting differences. The massive privatizations in Eastern Europe resulted in a total number of transaction of 373 for Europe and Central Asia, but only $10.6 billion in revenue were generated.<sup>17</sup> In general, the average asset value in Eastern Europe is significantly smaller relative to other middle income countries, rendering these privatization programs far less attractive from a budgetary perspective. But, of course, revenue generation only plays a secondary role in the effort to restructure the economic system as a whole. Privatizations in these countries primarily served as a mechanism to support the transfornation process by rapidly expanding private ownership, even if at the expense of government revenues. Latin America, on the other hand, privatized a total of 266 entities for $40.9 billion during the period, providing the governments concerned with substantial amounts of additional income.

Figure 3 PRIVATIZATIONS IN THE DEVELOPING WORLD, 1988-1992 Aggregated by Geographic Region <!-- Start of picture text --> Prooeeds hi USS Bilion Number of Transactions<br>50 - 400<br>10- Transactions|<br>I....... ..... ... . ............. -_ - 1300<br>4 0 -, . . .. ... . ......... ... ' I ... ....<br>........... ~~~~~~~~~~~~~~200<br>20 -<br>100<br>10 - . .. . .<br>0 ~~~~~~~~~~~~~~~~~~~~~0<br>Europe and Latin America East Asia and South Asia Sub-Saharan North Africa £<br>Central Asia and Caribbean Pacific Africa Middle East<br><!-- End of picture text -->

In terms of econonic sectors, privatizations in infrastructure, which includes electric and water utilities, transportation, and telecommunications, are clearly dominating, accounting for 34 percent of total revenues for the developing world as a whole. Industrial production, comprising chemical production, heavy industry, and manufacturing is the second most important sector. having generated a fifth of total revenues. Privetizations of financial institutions was also very strong during the period, accounting for almost 26 percent, resulting primarily from the re-privatization of commercial banks that were nationalized in many countries during the early stages of the debt crisis. With respect to the primary sector, privatizations were relatively strong in petroleum-related activities. The number of mining transactions was relatively minor, and while a not insignificant 17 Excluding Portugal and Turkey, the only non-Eastern European countries in the group, 294 entities were privatized for a total of only $5.7 billion.

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number of agribusinesses were sold by developing country governments, they were typically small in terms of asset value.

<!-- Start of picture text --> Figure 4 PRIVATIZATIONS IN THE DEVELOPING WORLD<br>By Sector, 1988-1992<br>All Developing Countries<br>(Total Revenue: $61.6 Bn)<br>Umh WU<br>815.0ne<br>k*iucUa incAudk pow, wwoonmuicoor, bmwnpoil, wnd waw Pnmny Sector ndudas agrobufIb, hdrocarboon, an mng;<br>InduWy hckdm dchja, hu wutry, "nd mamAactumV; odwa Wmiudm imnCes and LtracbcM which coWd not be cwa.ed.<br><!-- End of picture text --> But again, these trends differ quite substantially among geographic regions. Given that _Latin America and the Caribbean_ represents two thirds of worldwide privatization revenues, the sectoral distribution in this region is very similar to the global one. Due to the privatization of large telecommunication entities in Argentina, Mexico, and Venezuela, **as** well as the sale of numerous utilities and transportation enterprises, particularly by the Argentine government, infrastructural privatizations amounted to 14.5 billion or 34 percent of the total. Mexico privatized the entire banking sector during 1991 and 1992 for a total of $12 billion, making privatizations in financial services particularly important, accounting for over 30 percent of total revenues. Privatizations in industry of almost $10 billion were boosted by the sale of the Brazilian Usiminas for around $1.5 billion in 1991. The quite sizable amount of revenue through sales of primary sector enterprises resulted foremost from the privatization of large stakes of petroleum- and gas-related activities in Brazil and, especially, in Argentina, as well as from the privatization of Mexicana de Cobre in 1988 for almost $1.4 billion.

Privatization revenues in _East Asia and the Pacific_ are overwhelmingly dominated by infrastructural projects, accounting for almost four fifth of the total sales revenue of $7.8 billion during the period. The largest projects in this area were one energy utility in South Korea for $2.1 billion as well as several largc utility and telecommunications projects in Malaysia for a total of $3.9 billion. Sales of manufacturing enterprises as the second most important sector accounted for only 9 percent of total revenue.

Privatizations in _South Asia_ are only minor in asset value, amounting to only $600 million or 7 percent of total revenues for all of Asia. But in terms of numbers of transactions, significant programs exist in Pakistan, Sri Lanka, and to a smaller extent also in India.

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The sell-off of manufacturing enterprises amounted to almost half of total revenues, followed by the primary sector, which accounted for another quarter.

_Eastern Europe and Central Asia_ differs quite significantly from other regions in the sectoral composition of its privatizations. Infrastructure projects are marginal, representing less than 3 percent of total revenues. Industry with almost 54 percent of the total is by far the strongest sector. Eastern Europe alone carried out around 150 transactions in chemical production, heavy industry, and manufacturing. In addition, Turkey actively pursued a privatization of its cement producing industry, which generated almost 60 percent of its total privatization revenue.

In _Sub-Saharan Africa_ (excluding South Africa), revenues from privatization were relatively low, adding up to only $250 million over the five years. Privatization in industry and services being the most relevant transactions, amounting to 44 percent of total revenue. In comparison to the other regions it is especially noteworthy that practically no infrastructural projects have been privatized.

Privatizations in _North Africa and the Middle East_ are determined by the sales of the Tunisian government during the period. Two thirds of total revenues were generated through the sale of large hotel complexes, followed by another 30 percent from the sale of various manufacturing enterprises of only minor asset value.

Figure 5 SECTORAL DISTRIBUTION OF PRIVATIZATIONS IN THE DEVELOPING WORLD as share of total revenue, 1988-1992 <!-- Start of picture text --> ni percent<br>80%<br>80%<br>40%<br>20%<br>0%<br>Latin America Europe & East Asia South Asia Sub-Saharan North Africa &<br>8 CarIbbsan Central Asia & Pacific US$0.6 bn Africa * MId'ti. East<br>UIS$40.9 bnl US$10.6 bn US$7.8 bn US$0.3 bnl U5SC.1 bnl<br>I* Infrastructure 0f Financial Services r- PriaySco<br>*0 Industry U Oth~ers<br><!-- End of picture text -->

**_Wrk*4Lrez_ nckudm** **_poww._ IlcWonmmNcabomans. vpo,L an** **_walW,_ Primary Sectwr nekide** **_agobusneu tydrocarboru_ ad rmnng, Inkdhtr** **_wckncu_** duffkals **heaw, IndiSy, 4mand u. ,qr** **_011w, mkud"_ sunces** _"_ **_arcwl_ emaa,** **_wkach_ coud rn,A be c4faSfabd %acud.ng SoA1. Ah,A**

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# **IV. Privatizations as a Source of Foreign Exchange**

# **IV.1 Data**

Foreign investors can participate in privatization transactions through foreign direct investment or portfolio equity investment. In the case of portfolio equity investment, the foreign buyer engages in a purely financial investment with the indivi eal share not exceeding 10 percent. For an investment to qualify as foreign direct investment, the investor has to acquire 10 percent or more and is usually interested in having, at least, substantial influence over the operations of the company.

Privatization transactions involving portfolio equity investments are rare, but typically quite large in volume. Henec, this information is generally well documented and easily available. In most cases, hc -ever, foreign investors tend to be more interested in direct investments, allowing them to shape the future of the enterprise bought, as independent as possible from interests of local groups, including the state. Information about the participation of foreign buyers in privatization programs including their share in the purchase is typically not readily available, especially not at a disaggregated level. Hence, in cases where no additional information could be obtained, the amount of foreign direct investment resulting from privatizations had to be estimated based on the nationality of the buyer. If no information was at all available regarding the buyer's identity, it was assumed that the investor was local, involving no foreign investment. In this respect, the foreign exchange values obtained are a lower bound of actual inflows. On the other hand, inflows are possibly overestimated in cases where committed investments were included in the purchasing price. Especially in Eastern European transactions, contracts are often written such that future investments are included. While adjustments could be made based on additional information in the cases of Hungary and Poland, the numbers for Czechoslovakia have to be taken with a grain of salt due to data limitations.

# IV.2 Overall Trends

The involvement of foreign investors in privatization programs is sought after by most governments despite - often strong - political opposition, fighting against the "selling out" of domestic interests. However, the participation of foreign investors is often essential, particularly for large projects, because the local capital market is too thin and needed technological and managerial expertise is not available. Furthermore, the sale of such assets promises the receipt of sizable amounts of foreign exchange, needed in a situation of limited access to foreign capital. But in order to attract foreigners, the privatizing authorities first have to prove their political willingness and commitmen **t** o an extensive privatization effort, characterized by a reliable and transparent system of rules and regulations. Hence, during the take-off period, most privatization programs do not show any extensive foreign participation, but over time the number of foreign buyers rises quickly, should the program prove reliable.

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While foreign investors only participated in **8** operations in 1988, they were involved in 200 by 1992 and a total of 392 over the whole period. A total of $18.5 billion in foreign exchange was generated during this time, with a peak of $8.8 billion in 1991, representing 40 percent of the total revenue from privatizations that year.

Figure 6 FOREIGN PARTICIPATION IN DEVELOPING COUNTRY PRIVATIZATIONS, 1988-1992 <!-- Start of picture text --> By Number of Transactions<br>150 . Europe & Central Asia<br>El Latin America & Carbbean<br>* East Asia & PacAic<br>100 QSouthAsia...<br>* Sub-Saharan Africa<br>sO North Aftca & Middle East . _<br>50 -<br>1988 1989 1990 1991 1992<br>By Amount of Foreign Exchange Generated<br>US$ Billion<br>10<br>* Europe & Central Asia<br>8 E Latin America & Caribbean<br>1 East Asia & Pacific . .<br>0 O South Asia<br>4 Sub-Saharan Africa<br>O North Africa & Middle East ...... l..<br>2<br>0<br>1988 1989 1990 1991 1992<br><!-- End of picture text --> Due to the lack of domestic savings, _Eastern Europeani countries_ were especially dependent on the participation of foreign investors, who paid a total of $5.3 billion for 194 enterprises during 1988-92 which amounts to over 90 percent of the total revenues generated. 1<sup>8</sup> _Latin America_ clearly was the region that managed to attract the largest amount of foreign exchange through its privatization effort since 1988, amounting to 64 percent of foreign exchange from privatizations in the developing world. 1991 was the peak year for the region with almost $6.8 billion in foreign exchange, primarily due to the privatization of large telecommunication units in Argentina, Mexico, and Venezuela. On average, Is Including Portugal and Turkey, 207 companies were privatized in Europe and Central Asia with a foreign exchange content of _$5.9_ billion, amounting to 56 percent. Also note that the share of foreign exchange in total rcvenue in Eastern Europe is slightly exaggerated by the fact that revenues from smallscale and mass privatizations are excluded.

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foreigners provided more than a quarter of the total privatization revenues during the period.

While foreign participation in _East Asian_ privatizations rose quickly over the last two years, overall it was not particularly strong with only 18 projects during 1988-92. Foreign privatization investments provided only about $0.7 billion in foreign exchange, slightly more than 8 percent of total revenues.

_South Asian_ privatizers received a total of 52 million from foreign investors in 17 transactions during the period. While the amounts involved appear rather small, it is interesting to note that 11 of these 17 sales with foreign participation occurred in 1992, showing a strong upward trend.

In absolute terms, the foreign exchange inflow into _Sub-Saharan Africa_ was only marginal with a total of about $100 million for the whole period, in 21 transactions with foreign participation, reflecting the small average asset value of the SOEs sold. As a share of total revenues, however, foreign investors still contributed an average 37 percent (excluding South Africa).

_North Africa and the Middle East_ had barely any foreign participation in privatizations. During the five year period, only four transactions involving foreign investors could be recorded. Only about US$27 million were generated this way, dominated by the sale of three Tunisian hotels to a French and Swiss investor group for US$19.2 million in 1992.

Table 2 FOREIGN EXCHANGE AS SHARE OF TOTAL REVENUE

||(|inperce|nt)||||
|---|---|---|---|---|---|---|
||<br>1988|<br>1989|1990|1991|1992|AVG|
|Europe & Central Asia|80.58|55.59|36.10|55.81|63.04|55.73|
|<br>Latin America&Caribbean|8.21|43.91|37.80|38.44|16.75|28.85|
|East Asia&Pacific|0.00|0.00|0.00|19.46|12.99|8.36|
|South Asia|0.00|3.85|36.18|3.54|8.42|8.79|
|Sub-Saharan Africa|0.00|34.67|47.19|1.14|35.91|36.73|
|North Africa & Middle East|0.00|7.09|0.00|18.82|35.27|25.£7|
|TOTAL|9.34|20.86|33.40|40.23|24.64|**30.72**|

Note: Foreign exchange is composed of portfolio equity and foreign direct investment.

# IV.3 Portfolio Equity Investments

Financial investments in developing country companies can be made either directly by buying a small share in a company or by purchasing equity instruments, traded in international security markets. The most commonly used instruments are so-called ADRs (American Depository Receipts) and GDRs (Global Depository Receipts). ADRs are negotiable equity-based irstruments publicly traded in the U.S. securities markets, attracting U.S. investors who are legally limited in their capability of directly investing in foreign stock markets such as several institutional investors. GDRs function exactly like 19
ADRs with the additional feature that they can be traded simultaneously in different securities exchanges all over the world.<sup>19</sup> With respect to privatization transactions, such instruments were used extensively in the sale of large Latin American telecommunications companies. Chile was the first country to use equity instruments in July of 1990 for the sale of the remaining part of Tdlefonos de Chile. $98 Million in instruments were offered at the New York Stock Exchange and represented the first international equity offering by any Latin American country for 25 years.<sup>20</sup> In 1991, Argentina was the first country to make use of GDRs in thf privatization of Telefonica de Argentina, issuing securities for a nominal value of $364 Million. In March 1992, Argentina issued $270.3 Million in ADRs and GDRs for the sale of 30 percent in Telecom Argentina. The largest single issue of ADRs was carried out by Mexico in May 1991, when the remaining 15 percent of Telefonos de Mexico (TELMEX) were privatized for a total of $2.4 billion. A year later, TELMEX offered another $1.2 billion in ADRs. In addition, Mexico issued GDR. worth $638 Million in 1991 in the privatization of its largtst bank Bancomer, which sold for a total of $2.5 billion. In February of 1992, Veneziela also issued GDRs worth $1 10.5 Million when it privatized Sider4rgica Venezolana.

But securities issues in privatization transactions were not limited to Latin America. Since end-1991, China allows foreigners to buy non-voting "B"-shares in a small number of companies, offered by the government in the stock exchanges of Shanghai and Shenzhen. Up to end-1992 such "B"-shares were offered for 11 companies, generating almost $280 million in foreign equity investments. While the termn "privatization is not officially used by the Chinese governnent, these transactions effectively represent a transfer of partial ownership in assets from the public sector into private hands.

Direct portfolio investment, in which an investor acquires a minority share in an enterprise, is rather unusual. While good information on this type of investmcnt is difficult to obtain, three cases were recorded. The largest case was the partial privatization of TELMEX in 1990, when Southwestern Bell and France Telecom each acquired 5 percent of the stock for a total of about $860 million. In the case of the Brazilian Usiminas, one of the country's largest steel producers which was privatized in 1991, foreign investors bought a stake of only 6 percent for approximately $90 million. When Hungary sold 56 percent of the state-owned travel agency IBUSZ, foreign financial interests participated with 41 percent for around $13 million.

In general, 21 transactions were recorded for the period 1988-92 qualifyinf as portfolio equity investment for a total $4 billion. This amounts to 8.5 percent of total privatization revenues for the developing world and almost 28 percent of total foreign exchange inflows resulting from privatization transactions. Furthermore, in some cases such as TELMEX or Aerovias de Mexico, which was privatized in 1988 and issued equity securities in 1991, these newly privatized companies made use of the rapidly growing portfolio investment market by issuing additional securities. Hence, inflows in the form of equity investment9

> 19 see Gooptu (1993), pp.21f. 20 ibid., p.52.

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can be expected to grow further in the near future, directly through additional large-scale privatizations and indirectly through follow-up equity issues by already privatized companies.

# **IV.4** Foreign Direct Investment

Direct investment (FDI) was clearly the most common vehicle used by foreign investors in privatization transactions, especially in sma!l- and medium-sized transactions. FDI accounted for the remaining 371 recorded privatizations with foreign participation during 1988-1992, worth $14.5 billion. Hence, privatizations were certainly one of the reasons underlying the rapid increase in FDI over the last five years, accounting for an average of abl,ut **11** percent of total FDI to the developing world during the period.

_Europe and Central Asia_ received the largest share of its FDI inflows from privatizatiors, reaching an average of almost 32 percent during the period. This reflects the strong dependence of the transforming economies in Eastern Europe on privatizations as the main vehicle to attract foreign investors. While the available FDI information generally does not appear very reliable for the Eastern European countries<sup>21</sup> , they seemed to have received almost 85 percent of their FDI from the sale of their SOEs.

_Latin American_ countries showed a strong growth in privatization revenues stemming from foreign investors, in particular during 1990 and 1991, when privatizations accounted for over a quarter of total FDI flows. Over the period as a whole, privatization FDI still accounted for over 16 percent. Especially in the cases of Argentina and Venezuela, privatization FDI was particularly strong, accounting for a share of 36 percent and 41 percent respectively over the period (see Table A-4). Mexico, on the other hand, as the strongest privatizer of the region in terms of sales volume, only showed an average share of slightly more than 5 percent, primarily because the sizable privatization of the banking sector during 1991 and 1992 was for all practical purposes limited to domestic investors, generating no FDI inflows at all.

In _East Asia, South Asia, Sub-Saharan Africa_ and _North Africa and the Middle East,_ privatizations only contributed marginally to FDI inflows. For one, no indication could be found that foreign participation in the existing privatization programs is particularly strong. This is due to the fact that in many countries strong restrictions are imposed regarding the participation of foreigners in privatizations. In East Asian countries, on the other hand, FDI flows have been very large over the last years, rendering privatization transactions marginal. In addition, the capital markets in these countries are already so

> 21 For HLugary, for example, the IMF does not report any FDI inflows until 1991, uhilc privatization transactions with foreign participation are recorded since 1989.

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**strong, that a participation of. foreign investors** is not **essential** in **order to obtain an adequate** price **for SOEs.**

Table 3 FOREIGN DIRECT INVESTMENT FROM PRIVATIZATIONS22 (in US$ Million and percent)

||198a|1989|1990|1991|1992|1988-92|
|---|---|---|---|---|---|---|
|Europe&Central**Asa**|||||||
|**-fDlf**rom privatizations|33.2|**61**6.6|586.6|1,930.0|2,704.8|6,869.2|
|**-asshareof**total**FOI (%)**|2.38|22.06|17.84|36.37|47.87|31.86|
|**Latin America & Caribbean**|||||||
|-FDI from privatizations|213.7|157.3|2,136.3|3,299.9|2,311.8|8,119.0|
|**-as**shareof total FDI**(%M**|2.67|2.20|27.65|26.85|16.78|16.43|
|**Eet Asia& Pacific**|||||||
|-FDI from privatizations|0 0|**0.0**|0.0|75.0|301.7|376.7|
|**-as**share**of**total**FDI**(%)|0.00|0.00|0.00|0.58|1.95|**0.68**|
|South**Asia**|||||||
|-FDl from privatizations|0.0|0.1|10.6|4.2|37.0|51.9|
|**-as**share**ot total**FDI**(%**|0.00|0.04|3.64|1.18|**8.81**|3.39|
|Sub-Saharan**Africa**(a)|||||||
|-FDI from privatizations|0.0|13.8|38.1|2.8|44.0|98.5|
|-as share**of**total**FOI (%)**<br>|0.00|0.56|5.70|0.15|3.44|1.37|
|North Africa&Middle**East**|||||||
|-FDI from privotizations<br>|**0.0**<br>|1.0|0.0|3.2|22.5|26.7|
|-as share**of**total FDI%%)|0.00|0.06|0.00|0.45|1.09|0.38|
|TOTAL|||||||
|-FDl from privatizations|246.9|787.8|2770.6|5314.9|5421.8|14,542.0|
|-as share of total FDI (%)|1.25|3.38|11.54|15.67|14.17|10.44|

_So,rceforPFD data: DMW,_ **_Balanc ofPayments_** _Yearbook 1992_ Note: Foreign dired invcsment data for 1992 ae World Bank and DM staff esrimate. (a) excludLng South Africa

# **V. Privatization Exoeriences at the** Countra **Level**

For the period 1988-92, privatization transactions were recorded for a total of 72 nations, of which 47 were developing countries. Several countries, however, only show one or two transactions, therefore not indicating the existence of an extensive privatization prograr aiong those 29 developing countries with numerous privatization transactions, the experiences differ substantially in terms of size, sectoral focus. and foreign participation.

In terms of sales volume, Mexico clearly leads the developing world with a total of almost $21 billion during 1988-92, about $5 billion of which came from foreign investors. The three largest sellers, Mexico, Argentina, and Brazil, accounted for 60 percent of total privatization revenues among developing countries. With respect to numbers of 22 A country breakdown on FDI resulting from privatizations and its share in total FDI is provided in the appendix in Tables A-3 and A-4.

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**transactions, however,** the same three were responsible for only 19 percent of all developing country privatizations. This is only marginally larger than the 141 transactions recorded for Hungary alone. In fact th. three largest privatizers in Eastern Europe, Czechoslovakia, Hungary, and Poland, accounted for 30 percent of all transactions. The degree of foreign participation is quite different among individual countries, but it is interesting to note the strong participation of foreigners in privatizations in Eastern Europe in terms of sales volume as well as number of transactions.

<!-- Start of picture text --> Figure 7 THE 15 LARGEST PRIVATIZERS IN THE DEVELOPING WORLD<br>Ranked by Revenue, 1988-92<br>;'.JSS Billion)<br>Turke<br>t0^wi E= =z .<br>Chilepna<br>PAnama .ii:E~ *Foreign Exchange<br>0 1 2 3 4 5 6 7 8 9 1 0 11 12 13 1 4 15 1i 1 7 18 a1I9 20 21<br>Ranked by Number of Transactions, 1988-92<br>'<br>Hungary .. .<br>Poland<br>Turkey E ..;i ....<br>Czechoslovakia<br>Pakistan .... :...<br>Tunisia<br>Nigeria<br>Honduras<br>Brazil n. ..omestic Deals<br>.Lanka * Exvangor. U e Foreign<br>Portugal<br>Venezuela<br>0 10 20 30 40 e 50 0 70 80 90 100 110 120 130 140 150<br>Ranked by Revenue per capita, 1988-92<br>(in US$)<br>Belize.<br>Hungary<br>Czechoslovakia<br>Portuga=<br>Argtna<br>Mexico<br>Malaysia<br>Venezuela<br>Chile<br>Jamaica<br>Berin<br>Tunisia E3 Domestic Proceeds<br>TOg , Foreign Exchange<br>Brazil ____________________________<br>0 20 40 60 8 00 120 140 160 180 200 220 240 260 280 300<br><!-- End of picture text --> In order to get an understanding of the intensity of the existing privatization programs relative to country size, the ranking according to privatization revenue per capita is m8ore 23
revealing. Surprisingly, Belize appears as the most intense privatizer. Through the sale of the country's telecommunication **s** ervices since 1988 as well as the its main electricity generator, the country received almost US$60 million or about US$300 per person. Besides Belize, several other smaller countries such as Jamaica, Benin, and Togo also appear in the ranking. Relative to their size, these countries privatized more intensively than some large countries such as Brazil or Poland, while their efforts received practically no press coverage at all. It also shows that Sub-Saharan African countries are quite capable of carrying out extensive privatization programs. The second and third place are occupied by the two main privatizers in Eastern Europe: Hungary with US$238 and Czechoslovakia with US$121. Poland, on the other hand, drops to the 17th position with only about $4 per capita in privatizations.

Especially the participation of foreign investors is strongly dependent on the host country's willingness to open the privatization program to foreign interests. Only in exceptional cases such as Mexico can the government be selective writh respect to sector-specific access to the program. While foreigners were basically excluded from the comprehensive privatization of the banking sector, outsxie investors were not deterred to participate in other sales, providing a large volume of foreign exchange. In most cases, even limited restrictions on foreign participation generally appear to deter foreign investors, resulting in only linited international interest. A more detailed discussion of individua. country programs can be found in the Annex.

# **VI.** Do Privatizations Attract Foreign Direct Investors?

While privatizations contribute directly to overall foreign direct investment inflows through the sale of assets to foreign investors, they might also have an indirect effect by attracting additional investors outside of the privatization program. First of all, privatizations can have a signaling effect, indicating an increased openness of the particular country regarding private entrepreneurship and an increased willingness by the authorities to accept and support private economic activity. Thus, foreign investors might expect an improved regulatory environment that is less restrictive and therefore conducive to prospective investment projects. Secondly, investors might also expect an improvement in the general profitability of investment projects through the elimination of market distortions via the transfer of inefficiently run SOEs to the private sector. This should be particularly relevant in sectors that have a public-goods character in the sense that they provide certain ser ses which are relevant for the profitability of all other economnic sectors in the economy. The decision of a foreign investor to engage in a project in a developing country is certainly dependent on a wide variety of factors. However, the availability of certain basic goods and services, essential to the success of any standard entrepreneurial venture, will always be a crucial determinant. Thus a foreign investor can be expected to be deterred if the infrastructural environment is weak, reducing the expected profitability of the venture because of unreliable energy supply, low-standard communications and transportation media, or limited availability of local financing. The privatization of such infrastructural services can therefore have a strong effect, attracting 24
additional investment in the expectation (or realization) of an improved econornic environment.

In a recent study, Edwards [11990] attempted to estimate the deterrminants of foreign direct investment to developing countries. Based on the empirical and theoretical literature on FDI, he selected a set of structural variables, deemed to be of relevance in the decisionmaking process of a foreign investor. Tfhese variables were used to estimate the everage level of FDI relative to GDP as well as the percentage share in total FDI to developing countries for a cross-section of 58 developing countries during the period 1971-81. The central independent variables, Edwards included in his regression, were: _- Income per capita_ as a proxy for the (inverse of the) return on capital and its coefficient was expected to be negative. While it seems obvious that foreign direct investors will detennine their investments based on the expected rate of return, such data are not generally available, especially in the case of poorer countries. As a proxy, Edwards uses income per capita, expecting that countries with a lower per capita income will tend to receive a higher share of FDI.

_- Foreign trade_ as a measure of the country's openness with a positive coefficient expected. Given that most foreign investment projects are directed towards the tradables sector, the country's degree of openness with respect to international trade should be a relevant factor in the decision.

_- Domestic investment_ as an indicator for the general investment climate. Given that domestic and foreign investments are complements, the coefficient should be positive.

_- Government consumption_ as a measure of the size of the government with a negative expected coefficient. The government size with respect to domestic economic activity is assumed to be proxy for the host country's stance towards private initiative.

- the _real exchange rate_ as measured by Summers and Heston as an indicator of the country's degree of international competitiveness with a depreciating real exchange rate reflecting improved competitiveness. As in the case of the foreign trade variable, the foreign investors' focus on the tradables sector implies that exchange rate movenients and the general economic competitiveness of the host country should matter for the investment decision.

_- real GDP_ was included in the FDI share regression as a measure of the size of the economy and potential extent of scale economies; the coefficient was expected to be positive.

Using these same independent variables, the model was first re-estimated with only minor modifications for a cross-section of 21 countries<sup>23</sup> for the period 1988-92 using OLS. The selection of countries was based on the existence of sizable privatization programs during the period as well as data availability.24 Following Edwards, the FDI determinants were

> 23 These countries are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Honduras, Jamaica, Kenya, Malaysia, Mexico, Nigeria, Pakistan, Peru, the Philippines, Poland, Portugal, Sri Lanka, Thailand, Turkey, and Venezuela.

> 24 Seven countries had to be elimninated for data icasons: Benin, China, Czechoslovakia, Hungary, India, Panama, and Togo.

25
estimated for the level of FDI (FDI per capita)25 as we!l as for the share of FDI in FDI to all developing countries.26 Except for the variable real GNP in the FDI share regressions, all variables are calculated as treans for the observations 1988-92 and weighted by population. The estimated equations have the following forn: <!-- Start of picture text --> FDI, GDP~ EX7M, 1NV CON<br>(1) + A ' +X ' + 'I' ' + ' +FXR +e<br>(2) n a+1p 3X+ +x M+pX, ++ + -,GDP, "' + e<br>fjDI APO, P, POP, POP,<br>i=,<br><!-- End of picture text --> where EXIM represents the sum of exports and imports, INV stands for gross fixed domestic capital formation, CON is government consumption, EXR is the real effective exchange rate, and the denominator POP stands for population. The subscript i indicates the ith country.

The re-estimation generates results very similar to Edwards' study as shown in Table 4.

Table 4 Re-estimating the Edwards Model

|Dependent<br>Variable|FDI**pr cap4ita**|FDI shae|
|---|---|---|
|Constant|-7.372<br>(-0.859)|1.3171<br>11.0372)|
|GDP per capita|0.0043<br>**(0.8865)**|**-0.0005**<br>(-0.5908)|
|**Trade**|0.0229 * *<br>(2.7279)|0.0011<br>(-0.8538)|
|Inves.**nent**|0.0491<br>(1.0815)|0.0217<br>(3.2524)|
|Government|**-0.04**|**-0.02**|
|Consumption|(-0.954)|(-3,21641|
|Exchange Rate|**-0.06e**<br>**(-0.722)**|40.0174<br>(-1.2893)|
|Real GO)P|_-I-_<br>I<br>1|2.1 2E-05<br>**1~~~~~3,3334)**|
|Adi. A-Squared|0.8908|0.6728|

t-statistics in **parenthes"s** "I indicates statistical significance **at the** 98%-level.

The trade variable is positive and statistically significant in the FDI per capita estimation, indicating that economic openness is an important aspect of the decision to invest abroad.

25 Edwards weights FDI by GDP rather than by population, but the results obtained here are quite similar to results when GDP is used as weight. Using population generally resulted in a better fit, possibly related to measurement difficulties in GDP, especially when calculated in dollar terms. 26 'Nhile Edwards calculates the FDI share based on OECD data, IMF data on FDI were used here.

26
In the share regressions, however, the variable was not significant. Investment<sup>27</sup> , on the other hand, appears to be more relevant in the allocation of FDI among developing countries, being positive and statistically significant in the FDI share estimation, but not in the FDI per capita one. The same holds true for government consumption28, which is as expected negative and significant, but only in the share regression. Thus, a reduction of the economic size of the government attracts foreign investors, probably due to reduced intervention and market distortions. Differing from Edwards, the per capita income variable, which was statistically not significant but consistently negative in Edwards' analysis, does gea,erally not show the expected sign. This indicates that GDP per capita might not be a good proxy for profitability, as Edwards himself suggests. In fact, as he himself points out, investors will also be attracted by larger markets, allowing them to internalize prorits from sales within the country, rather than producing at low cost for exports only. Consequently, the coefficient on GDP per capita **turns** out insignificant simply because it picks up both effects simultaneously. The results on the international competitiveness variable were consistently positive and significant in the Edwards study. Here, however, the variable is insignificant, while of the correct sign.<sup>29</sup> The reason for this is most likely data related. Edwards used the Summers and Heston real exchange rate index, which is, however, not available from 1988 onwards. Therefore, the real effective exchange rate as calculated by the IMIF was used as a substitute.

The general fit of both regressions was quite good with an adjusted R<sup>2</sup> of 0.89 in the per capita estimation and 0.67 in the share regression. Both estimations also show a better overall fit compared to Edwards estimations.30 This might partially be explained by the use of population as the variable weight rather than GDP which all too often is distorted through exchange rate fluctuations.

These results do, however, not yet take into account the existence of' privatization programs. In order to estimate the effect of privatizations on the foreign direct investment decision, two variables were added to the model. _Privatization revenues per capita_ indicate the relative size of the existing privatization program in each country. Furthermore, _the foreign exchange ratio,_ defined as foreign exchange from privatizations as percentage share of total privatization revenues, was added as a measure of the country's openness with respect to foreign investors. Both coefficients are, of course, expected to be positive. Note that the dependent variable changes in both regressions: Given that the goal is to estimate secondary, indirect effects on FDI resulting from privatizations, FDI per capita as well as FDI share were recalculated by subtracting FDI resulting from privatizations from total FDI flows for each country. Thus, the estimated equations are modified as follows:

> 27 Defined as gross fixed domestic capital formation in the IMF National Accounts.

> **28** Derived from the IMF National Accounts.

> 29 The Summers and Heston measure of the real exchange rate is defined as local currency per USS, while the IME measure is defined in the reverse. Thus, the sign on the coefficient is expected to be negative.

> 30Edwards reports the unadjusted R2only with _0.592_ for the regression on the FDI level and 0.618 on the share regression. The comparative values for the estimations here were 0.918 and 0.771 respectively.

27
<!-- Start of picture text --> (la) (I) (.FDI 1 pp -AFD1, ) )a+p ODp+X GDP E-XIM+ p pO+ INV, pp+XR+lI CON, E M PIV hcEXp +FR7ZX+Xi +<br>(2a) (2) (EDI, ( - PEDI,) lx) +p~o GDP, i +X EXYIM, pp - +6p INVI +0POp + CONI 9MY, + GDP,*d+ , ApRt + PRIv vp!I EX +e<br>X(FDI -PFDI) POP POP POP POP, POP, PRIV,<br><!-- End of picture text --> with PFDI representing FDI resulting from privatization sales, PRIV standing for total privatization revenues, and FEX being the foreign exchange obtained through privatizations (in the form of FDI as well as portfolio equity investments).

The estimation of these equations indicates that privatizations are a very important element in the foreign direct investment decision (see Table 5). On both variables, the coefficients are positive and, compared to the other regressors, quite large in both regressions. While they are only moderately significant in the share estimation, they show a high statistical significance in the per capita regression. Both variables also prove to be very robust, barely changing size or statistical significance in different specifications of the model. While such interpretations always have to be taken with a grain of salt, the coefficients indicate that each dollar it, privatization revenue generates an additional 38 cents in new FDI, and that a one percentage increase in foreign participation adds another 50 cents. Note also that the regression fit improves drastically in both cases, with the adjusted R<sup>2</sup> jumping to 0.97 in the per capita case and to 0.77 in the share estimation.

Table 5 Privatizations as a Determinant of FDI <!-- Start of picture text --> Dependent FDI pr aepita FDI stcr<br>Vetiab.<br>Constant -6.481 1.4084<br>(11,525) 1.406)<br>GDP per capita -7.73E-05 -0.002<br>1-0.025) 1 1.8818)<br>Trade 0.0283 -040005<br>(8.7059) (-0.4598)<br>Investment 0.0023 0.01f1<br>(0.0907) (2.9511)<br>Goveonment 0.013 -0.0128<br>Consumption (-0.5el) i-2.2473)<br>Exchange Rate 0.1238 0.0002<br>(2.5407) (0.014)<br>Roa GDP R 2.38E-05<br>(4.1269)<br>Foreign Exchango 0.497 0.0258<br>Ratio (7.125) (1.4107)<br>Privatization 0.3804 0.0854<br>Revenue (2.7324i 01.889)<br>Adj. R-Squared 0.9724 0.7878<br><!-- End of picture text -->

**t-statistioc** in **parenthaeee; indicates statistical** significance **at the** 98%-levol, **indicate** statistical significance **at the** 95 **%-level, indicates statistical** significanos **at the 90%-levol.**

28
Are these effects on **PDI** independent of the type of privatization carried out, or are there differences with respect to the particular economic sector in which the government privatizes? In case privatizations are perceived by foreign investors only as a signal indicating a general improvement in the investment climate through reduced governmnent intervention and restrictive regulations, only the relative size of the privatization program should matter. If, on the other hand, investors also expect an improved future profitability resulting from the privatization of particular entities that provide goods and services to the whole economy such as telecommunications, power generation, transportation or financial services, privatizations in individual sectors should have a different weight in the decisionmaking process.

In order to test these hypotheses, the general privatization revenues variable was substituted by sector-specific variables on privatization revenues, resulting in .he following regression equations: The results of the estimation are repozted in Table 6. For both the estimation on FDI per capita as well as FDI share, the coefficient on privatizations in the secondary sector (consisting of manufacturing, chemicals and heavy industry) as well as other privatizations (services) **_W?3_** not statistically significant, and in two cases it even had the wrong sign. Privatizations in the financial sector (insurance and banking) as well as in infrastructure (power, telecommunications, transportation, and water), on the other hand, showed a positive coefficient and were statistically significant in most cases. This implies that privatization of "public goods"-type SOEs has a strong effect on investor perception of the country and attracts additional FDI inflows. Privatizations in the other sectors usually do not have that effect. The only exception to this is the case of privatizations in the primary sector (agribusiness, hydrocarbons, and mining). While having no effect in the FDI share estimation, the variable primary sector privatizations showed a very large coefficient with a statistical significance at the 98 percent level. This initially unexpected result is explained by the substantial privatizations in the hydrocarbons sector, especially in Argentina and also in Brazil. The partial sei%off of state-owned oil companies plays a unique role in the privatization program of many developing countries. Having been the showcase for national self-sufficiency and self-determination for a long time in Latin American countries especially, most governments are hesitant to put their oil companies up for sale. While major oil producers such as Mexico and Venezuela did not yet seriously contemplate major privatizations in this sector, Argentina, in particular, sold numerous oil fields as well as gas distribution entities, and finally sold part of its oil 29
**company YPF during the** first **half of** 1993. **For foreign** investors, this move **might have indicated a major change** in **attitude towards private sector involvement, thus attracting substantial amounts of** additional FDI.

Table 6 Sector-Specific Privatizations as FDI Determinants

|,<br>,<br>Vkdb<br>**___**|I|..<br>**FD**|**I**per**capit**|P<br>**a**||||FDIsham|_||
|---|---|---|---|---|---|---|---|---|---|---|
|Constant|.5.6<br>(**1.2)**|***6.161**<br>**(A.001)**|3.41<br>(-0.36351|**-0.096**<br>**(l 6021**|**.6.61**<br>**(1.014)**|**1,4113**<br>O**1106)**|**1.4643**<br>**(1.1060**|**2.390**<br>**(2,16711**|**o0.024**<br>**(0.904)**|**1.4876**<br>**(1.1091(**|
|GDP W**.8up**|**0.0014**<br>(0.4121)|**0.0061**<br>**(1.4441**|**0.0066-**<br>**(2,41 76)**|**0.0012**<br>(0.3034)|**0.0091**<br>**(2.2930)**|**.0.000**<br>**(i0.39**|**0e0002**<br>**to0.1616)**|**0.0002**<br>0.2703)|**0.002**<br>**((.464)**|**0.0002**<br>**1O01601)**|
|_T,od_|**00317**..<br>**6.80121**|0.028.6..<br>**(4.64191**|0.03472 .<br>**(4.6733)**|**0.0(62**<br>**(2.1601)**|0.0302<br>**(3.4226)**|***0.000a**<br>**(.4O1 1)**|**00008**<br>**(-054671**|0.0009<br>**(0.7111)**|**0.002**<br>**(.1.69)**|**.0.001**<br>**4F l))**|
|**lhvat**|0.0121<br>**t0.6114)**|0.0264<br>**00.00646**|**0.0027**<br>(0.0726)|0.0317<br>**11.1132)**|0.0236<br>**(0.6404)**|**0,0193-..**<br>(2.93)9)|**0.0o00-(**-<br>**(2.56123**|0,0123<br>**(1.9166)**|0.0207-..<br>**(3.6567)**|0.0201...<br>(2.77471|
|**Gowownwi**<br>C<br>**p**|**4.021**<br>(-1.0321|**4.062**<br>*<br>**(*2.036)**|***0.06-**<br>**(-2.4.7.)**|**o00t**<br>**10.4st4)**|**4.0903**<br>(-1.041)|**4.019**<br> <br>(-2.464)|-0 4,022..<br>(-3.4823|4.023-.<br>**(-4.647)**|**4.006**<br>(4.016J|**4.022.**<br>**(-3.386)**|
|Exchanse**Sin**|**0.0621**<br>**(1.0148)**|**0.0(5**<br>**(0.2744)**|**0.0(30**<br>**10.2046)**|0.1406<br>(2.1668)|**0.0206**<br>(0.294)|**40.06**<br>**(0.6264)**|**4.011**<br>**(0.773)**|4.002<br>**(-1.064**|0.0032<br>**M0.24M61)**|**4.012**<br>**(0.60)**|
|**d**<br>t|**_.I-_**|**_4-._**|**_._**|**_.4._**|**_.1._**|2.06646<br>**(2.4406)**|1.70046<br>*<br>(2.4737m|**1.64(4-06,**<br>**(2.6006)**|**2.216-06**<br>**..**<br>**(3.t641)**|**7.646**<br>(2.4636)|
|**F_Edp(Ex.tg**<br>**Rweo**|**0.378**<br>**(6.001)**|**0.372**<br>**(3.641)**|**0.364***.<br>**.8SS)**|**0.514**<br>**(5**<br>**6.80M)**|0.408<br>**(3.66**|0.027<br>**(117)**<br>**l1.466)**|0.034|0.031<br>**(1.64)**|0.031<br>**(1a6"**|0.032<br>**n1.209**|
|**Pbw**<br>Boom<br>**Pivdo*a)wt**|1.328<br>(2.7992)|-/-.|**_I._**|**_--_**||**0.0602**<br>o1-<br>(0.3743)|**_./._**|**_/-4_**||**_._**|
|**_S.ccndwy_**<br>**Set**<br>**Pdv^adzt)on**|4.|.3703<br>**0071**|**_._**|**_./._**|**_4-_**|**_-_**|**4.0026**<br>t<br>(0.094)|**_41._**|/b|**_4._**|
|**(NW41 Seamor**<br>**PIvadi**|**_.4._**|**_.1._**|0,6684<br>(0.3851)|**_4_**||/|**_/_**|0<br>**0.1684**<br>(2.4206)|**_4_**|**_4_**|
|**lrfasUuW**<br>**Pdvwlrten **|**_4_**|**_/_**|/|**0.810**<br>(2.1442)|/|**_4_**|**_.1*_**|/-|0.1399<br>**(1.7906)**|**_4-_**|
|**o0.**<br>**P.dwh,**|||/2.416|**_-4-_**|(.4.364)|1|1|/|**_1._**|**00626**<br>to**0466)**|
|Ad). A-Sqwwod|0.9891|**04.46e**|09463|**0o662**|0e939|**0687**|**0.680)**|0 7792|0.7667|06737|

**t-UAdedc** In **pern_Ie; 6.)0g endst"** OW **an) ca** the **98%-lewvl, -nd)ae ekstdait Ugr8cAnooe i** the 956"bvl **lSdlCe_ etadto** **_WO%oa_ the 80%-eYW.**

In summary, the existence of a sizable privatization program that is relatively freely accessible to foreigners can be an important vehicle in attracting additional FDI inflows. In particular, privatizations that have the potential of improving the economic environment for investment projects by elimrinating existing bottlenecks in the availability of infrastructural services as well as local financing are important motivations for foreign investors to set up ventures in a developing country. In particular, in countries where infrastructural bottlenecks are a frequent complaint by foreign investors, such as Indonesia or the Philippines whose difficulties in providing a reliable energy and water supply made headlines in the international press, intensive privatization in these sectors might be capable of generating substantial amounts of additional FDI.

30
# VIT. Conclusion

After a disappointing performance of the vast majority of their SOEs, developing countries increasingly realize the need to restructure their economies, reducing the size of the public sector. During the last decade, many countries also were pressed to undertake measures to reduce their budget deficits, being caught in the debt crisis and the correspondingly severe foreign exchange constraints. Highly inefficient SOEs proved incapable of financing themselves, continuously requiring capital injections either through loans from private capital markets or directly out of the government budget. Thus, they contributed significantly to the ballooning external debt of many developing countries, forcing the governments to take over a substantial share of this publicly guaranteed debt in the wake of the crisis, while the need for transfers and subsidies remained.

In order to alleviate the already strained budget, many developing countries embarked upon extensive privatization programs by transferring state-owned assets into private hands. After a rather slow start due to political opposition by vested interests within the countries, privatizations expanded rapidly during the last five years. The auctioning off of a large number of SOEs generated substantial revenues for some developing countries and, in addition, significantly reduced pressures on the public budget, not being forced anymore to finance loss-making enterprises. Equally important, however, privatizations supported the renewed access to international capital markets for many developing nations. Foreign participation in privatizations was generally very strong, providing significant amounts of foreign exchange in the process through portfolio as well as direct investments. Furthermore, privatizations attracted additional investments by improving the profitability of the economic environment. An improved infrastructure combined with liberalized financial markets in developing countries reduces overhead costs for entrepreneurs and facilitates the successful management of any private venture. Overall, the benefits from a comprehensive, large-scale privatization program can be manifold, generating government revenues and needed foreign exchange, reducing government expenditures through the elimination of costly SOEs, providing incentives for domestic as well as foreign investors, and especially improve the competitiveness of developing country economies in the global markets.

Privatizations can be expected to continue strongly in the upcoming years. Countries that are already engaged in successful privatization programs such as Argentina, Brazil, Mexico, Peru, and Venezuela, are determined to continue their efforts by opening the program to other sectors which have as of yet been excluded. In addition, a large number of countries, which have not yet been successful in launching such a program, stress the importance of privatizations and plan to sell large numbers of SOEs in the near future. Just recently, Zambia announced a program to sell more than 150 companies over the next five years, while Uganda passed legislation for a privatization program, supported by a loan from the World Bank. Morocco announced that it expects to generate $1.3 billion through the sale of 112 companies, and Bangiadesh is determined to sell its loss-making power sector to foreign investors. The governments of Guyana and Romania plan to start an extensive privatization program during 1993, while China is apparently committed to 31
restructure the country's bloated state sector and to transform its economy into a more market-oriented system. The largest push in terms of privatizations can, however, be expected to come from Russia, where the privatization program has already started, but is caught in political controversies. In general, the prospects for privatizations in developing countries appear to be strong and a continued growth in number of transactions and sales volume is to be expected in the upcoming years.

32
## ANNEX: COUNTRY NOTES

# **A Latin America and the Caribbean**

# **Argentina**

The Argentine privatization program took off rapidly after the election of President Carlos Menem. Argentina's public sector was particu!arly bloated and unprofitable, showing a loss of about $4 billion in 1989.31 In order to limit budgetary pressures and reduce the country's extemal debt, President Menem pushed the State Reform Law through Congress, allowing the executive branch to totally or partially privatize SOEs. In order to reduce the foreign exchange control, Argentina was particularly keen to attract foreign investors, making its privatization program one of the most open ones with respect to foreign participation. From a total privatization revenue of $10.7 billion, $4.4 billion or about 41 percent came from foreign sources. Furthermore, in its attempt to alleviate the government's external debt burden, Argentina was the only country to make extensive use of debt-equity swaps. Between 1988 and end-1992, a total of about $13 billion in external debt obligations were elirninated that way.<sup>32</sup> While most countries begin their privatization efforts with rather minor assets, leaving the large ones for the end, Argentine's program started with a big bang in 1990. 60 percent of ENTEL, the nation's telephone company, which in 1989 accounted for about one third of the country's total SOE deficit,<sup>33</sup> was sold off to predominantly foreign interests for approximately $1.3 billion, involving a debt-equity swap of $5 billion face value, representing the largest swap in any privatization ever. This privatization in telecommunications was continued with the sale of 30 percent in Telef6nica de Argentina (the newly privatized company for the southern region) in 1991 for $830 million, involving a $364 million GDR issue, and in 1992, when the remaining 30 percent of Telecom Argentina (the newly privatized company of the northern region) were sold off in a public offer for $1.2 billion.

Another unique feature of the Argentine privatization program was the conscientious effort to auction off parts of the petroleum and gas industry. During 1990-92, privatized were almost 100 drilling areas, 10 gas distributors, and various refineries, amounting to a total revenue of around $3.7 billion. This was topped with the sell-off of a 45 stake in the state-owned oil company YPF (Yacimientos Petroliferos Fiscales) through an international public offer, valued at about $3 billion in June of 1993. By September 1, 1993, another 13 percent of YPF shares will have been placed with private investors.

During 1992, the Argentine government also put great emphasis on improving the country's transportation facilities with concessions sold for major railroads as well as port

> 31 Cluttctrbuck (1991), p.<sup>59</sup> .

> 32 Figures for debt-equity swaps in 1992 were only available in form of the cash equivalent (i.e., the discounted value), requiring the estimation of the face value by assuming a swap price of 50c/S. 33Clutterbuck (1991), p.59.

33
facilities such as grain elevators. Also starting in 1992, privatizations in the energy sector began to take off through the sale of 10 power utilities for another $1.4 billion. in June 1993, a consortium including three electric utilities from the U.K. and the U.S. won a 95year concession to own and operate Argentina's high voltage transmission system for $230 million.

# **Brazil**

During the military regime, Brazil established a large number of SOEs, reaching 700 in 1985.34 In March 1990, President Fernando Collor announced a sweeping privatization program, to be headed by the Social and Economic Development Bank (BNDES), and in August, 57 companies were earmarked for privatization despite strong political opposition. In 1991, the first five companies were sold off, among them the steel producer Usiminas, which with $1.5 billion at present represents the largest privatization transaction in Brazil. During the early part of 1992, the privatization program picked up pace and another 13 companies were auctioned off, with the largest transactions occurring in the steel and petroleum sector.

With the ouster of President Collor in late 1992, the program began to stall and not until recently has his successor President Itamar Franco decided to revive the proaram. In total, a revenue of $4.3 billion has been generated during 1988-92, but foreign participation was, at best, marginal. Currently, Brazil is not a very attractive option for international investors, given the general political and economic uncertainty, reflected in a high rate of inflation. This is exacerbated by the fact that the country still has not been able to conclude a Brady deal as well as the legal restriction that foreigners cannot acquire a share larger than 40 percent through privatizations, except through direct congressional authorization.

However, the privatization program might gain speed again with the announcement by President Franco to intensify privatization efforts. In early 1993, two major trarsactions have been concluded, involving the sale of 31.5 percent of Poliolefinas, a petrochemical company, for $86.1 million, as well as the country's largest steel producer, CSN, which was auctioned off for $1.06 billion.

# **Chile**

Chile certainly has the richest history in terms of privatization compared to all other developing countries, having privatized around 400 enterprises since 1973 for a total of about $2.5 billion. After Patricio Aylwin replaced General Pinochet as the first democratically elected president in March of 1990, however, the privatization process has been reduced significantly. Only six transactions were completed since then, with the largest ones in mining and energy. Besides the still state-owned copper producer CODELCO as well as CORFO, a major financial institution, most of the state-held assets

> 34 Privatization International, Yearbook 1991, p.138.

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**are** sold. Thus, Chile should not be expected to have any major privatization spurts in the near future, but the next government in early 1994 might initiate a new privatization program.

## Honduras

In Central America, only Honduras appears to have a privatization program of substantial size. The program was started in August of 1986 as response to the disappointing performance of SOEs which were created primarily during the mid-1970s. During the period 1988-92, a total of 29 companies was privatized for $61.5 million in revenues.<sup>35</sup> A debt-equity swap program is in place for privatization purposes, and, based on official government sources, the external debt has been reduced by about $30 million since the inception of the program. While the Callejas administration is a strong proponent of privatization, no major transactions in infrastructural sectors have been undertaken as of yet, but some are scheduled for 1993. The program is generally open to foreign investors, but the interest has not been particularly strong; only five transactions involving foreigners have been recorded, having generated $13 million in foreign exchange.

# .'eru

Over the past two decades, government intervention in the economy steadily increased, and in the last few years, the state's 130 companies ran losses of an accumulated annual $2 billion.<sup>36</sup> In late 1991, the Fujimori Government established the legaVlorganizational framework for a broad privatization program. It is the Government's objective to privatize all state holdings by mid-1995. The program commenced in 1992 with the sale of 10 holdings for US$207 million, including Hierro Peru which was sold to the Chinese Shougang Corporation for $120 million with an additional $140 million in investment ccwimitments. In January of 1993, the government continued its privatization efforts by selling 70 percent of its national airline Aeroperu to Aeromexico for $54 million.

In 1993-94, the Government expects to sell its major holdings in mining (Minero Perui and Centromin), petroleum (Petroperui and its subsidiaries), telecommunications, electricity, banking and manufacturing. It also expects to grant a concession to a private investor for operation of the Lima water supply. Proceeds are expected to be US$1.2 billion annually.

## Mexico

Mexico began its privatization program in 1983 under President Miguel de la Madrid, who disincorporated about 600 small SOEs until mid-1988. Most of these companies were, however, liquidated and only about 150 were actually sold for about $500 million.<sup>37</sup> Under President Salinas, who came to office in December 1988, the process of privatizing

> **35** Four additional privatizations were only small-scale with marginal asset value and were therefore not included in the data set.

> 36 LatinFinance Supplement (March 1993), p.95.

> **37** Clutterbuck (1991), p.<sup>64</sup> .

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large SOEs accelerated rapidly, and the number of SOEs was reduced to 227 as of end1992, compared to _1,155_ in 1982.38 Durini this second phase, a total revenue of $20.8 billion was generated, includinj $4.9 billion in foreign capital investments.

!988 already saw some major privatizations with the sale of Mexicana de Cobre for $1.4 billion and the country's largest airline Aerovias de Mexico for $340 million. But largescale privatizations really became effective starting in 1990, when the government sold the first part of its national telephone company TELMEX to domestic and foreign investors for almost $1.8 billion. The remaining 15 percent in share capital of TELMEX were auctioned off the following year through an ADR issue of $2.4 billion, plus an additional $500 million for 5 percent in Telefonos de Mexico which went to Southwestern Bell.

In 1991, Mexico started a massive privatization of its banking sector, which was largely nationalized in 1982 in response to the debt crisis. By end-1992, 18 banks were sold for a total $12 billion with Banamex for $3.2 billion and Bancomer for $2.5 billion as the largest two. But while restrictions governing foreign investment in financial institutions were relaxed, foreign investments were still limited to minority, non-voting share holdings, resulting in practically no foreign participation at all in the banking privatization. The only foreign exchange generated was through a $638 million GDR issue in the case of Bancomer. Such restrictions on foreign investment held the share of FDI through privatizations to only 5 percent, which is very small compared to other privatizing countries.

Despite the substantial size of its privatization program, Mexico does not engage in a careless sell-off of state assets, as the case of the banking industry indicates. Several sectors such as postal services, electricity, and, in particular, the oil industry are by constitutiona **l** aw part of the public sector, and no major initiatives have been undertaken to change this. But still, the government plans to repeat its privatization success of the two previous years during 1993 by selling SOEs worth about $5 billion. While no major transactions have, as of yet, occurred during 1993, the sale of a 70 percent stake in the state insurance group Asemex as well as the privatization of major TV networks are under preparation.

# Venezuela

Under the presidency of Carlos Andres Perez during 1974-79, state intervention grew rapidly with the nationalization of the oil, gas, and iron industry as well as the creation of a number of "strategic" enterprises. When Perez came back to office in February of 1989, the country owned 62 companies in a wide range of industries.<sup>39</sup> Starting in 1990, the privatization of SOEs began and by end-1992, 16 companies were sold for a total of $2.4 billion.

> 38 Barnes (1992), **p.**<sup>**6**</sup> **.**

> 39 Barnes (1992), **p. 158**

36
percent by a consortium including GTE, AT&T, and Telefonica 6e Espalia. While the privatization program is open to foreigners, their participation during 1990-92 of around 68 percent of total revenue is mainly reflected by the overwhelming weight of the CANTV deal. For 1993, another 45 companies are scheduled for privatization<sup>40</sup> .

# B **Europe and Central Asia**

# **Czechoslovakia**<sup>**41**</sup>

Until 1989, 98 percent of all Czechoslovakian assets, were in state hands, consisting of about 7,000 medium- and large-scale '!iterprises as well as 25,000-30,000 small-scale enterprises. In the process of transforming itself to a market-based economy, the country is engaged in one of the most radical privatization programs ever. During 1992, mass privatization of a vast number of small-scale enterprises through the voucher scheme yielded a revenue of about $1.6 billion. These funds were, however, used to finance the extensive voucher scheme, thus being budget neutral.

For the privatization of medium- and large-scale companies, a bidding process was used, starting in 1991, with a focus on foreign investors given the limited capital availability domestically. In 1991, the first 14 entities were sold, and another 41 in 1992 for a total revenue of about $1.9 billion. A wide variety of companies, predominantly in the manufacturing sector, were bought, usually by foreign investors. The largest transactions occurred in car manufacturing with Volkswagen buying the Skoda Auto Works plant in 1991 for $275 million plus a total investment commitment of $5.3 billion over the next ten years, and Renault's purchase of Karosa for $222 million in 1992. In general, the foreign participation in the privatization of medium- and large-scale firms was unusually strong with almost all of the revenue stemming from foreign sources.

The prospects of the privatization program in the Czech Republic, which in the last two years was substantially stronger than the one in the Slovak Republic, appear to be quite strong if foreign interest can be maintained. During 1993, the country therefore plans to tackle the problem of a low-standard infrastructure, starting with a planned sale of up to 25 percent of the national telecommunications company SPT Telecom to foreign investors. A second wave of mass privatization was started in May 1993 with the distribution of shares for 987 state en. rprises.

# **Hungary**

Of all Eastern European economies, Hungary has the longest and most extensive experience with privatizations. Prior to 1989, when the first privatizations were carried out, the state held 1,880 SOEs.<sup>42</sup> Since then, over 140 companies have been privatized

> 40 LatinFinance Supplement (March 1993), p. 107.

> 41 "Czechoslovakia" refers to the Federation between the Czech and the **Slovak** Rcpublic prior to Januarv 1, 1993.

> 42 International Financing L2w Review, Special Supplement, (September 1992), p.<sup>24</sup> .

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for a total revenue of close to $2.5 billion in by far the largest number of transactions in any country. Despite strong political opposition, especially during 1989 and 1990, the program continued to run strong over the last two years, with annual revenues averaging about $800 million. The progran, is also far more market-oriented compared to other privatization schemes in Eastern European countries, clearly avoiding any voucher mass privatizations and focusing on revenue generation. While Hungarians and foreigners have in principle equal access to privatization transactions, domestic investors often lack the capital, resulting in a high degree of foreign participation. Until end of 1992, about $2.3 billion in foreign exchange was paid in privatizations, accounting for over 90 percent of total revenues.

Transactions were generally medium-sized by global standards, not going beyond $150 **million.** The largest deals occurred relatively early in the process such as the manufacturing company Raba which was bought by General Motors for $150 million, or Tungsram, **which** went to General Electric for $110 million. One of the concems is that most valuable assets in the manufacturing sector are already sold, leaving the state with a relatively large number of less desirable assets. On the other hand, the government declared 1993 the year of the big projects and is pressing hard to extend the prDgram to banking, telecommunications and other public services which have as of yet been excluded from privatization. The privatization of the state banking sector is currently under preparation, but no major sale is expected before the end of 1993.

# **Poland**

The Polish government the Law on Privatization of State Enterprises in August of 1990, and has since privatized 67 medium- and large-scale enterprises for a total of about $714 in revenues. Compared to the former Czechoslovakia and Hungaiy, this is quite small, primarily due to the general political uncertainty surrounding the legal status and property rights of individual firms to be privatized. The largest transactions are actually joint ventures with future investment commitments, representing _defacto_ privatizations, as was the case with Fiat who went into a joint venture project with the car manufacturer FSM with a future investment commitment of $830 rnillion over 5 years. According to information from the Polish government, however, most of these commitmelits have not yet been realized.

1992 clearly was the strongest year of privatizations, but the political difficulties continue to haunt the state privatization zgency. In April of 1993, the government finally managed to push the intended mass privatization scheme through parliament after drawn-out political debates. The plan is on a voucher basis involving 600 SOEs. During this year, a privatization of parts of the oil industry as well as nine state-owned banks is planned with financial support from the World Bank and EBRD. In addition, a privatization of the state banking sector is intended and in April of 1993, the sale of WBK bank to foreign and domestic investors represented the first major bank privatization in all of Central and Eastern Europe.

38
## **Portugal**

With the 1974 revolution came along substantial nationalizations, especially in the financial sector. Starting in 1987, the Social Democrat governrent began to re-privatize a substantial number of these SOEs. During 1989-92, 20 entities worth $3.7 billion were privatized with **a** focus on the financial sector which contributed about 77 percent to total revenue. While the degree of foreign participation could not be clearly determined due to dat'4 limitations, the restrictions on foreign investment are quite stringent. Foreigners are only allowed to buy a limited number of shares.

# **Russia**

The privatization effort in Russia was progressing only slowly compared to other Eastern European countries, generally stifled by political uncertainty. During 1992 and early 1993, however, the privatization program picked up rapidly. By mid-1993, about 50-60,000 small entities had been privatized, representing about 30 percent of all small-scale SOEs. By March 1993, the distribution of vouchers worth 10,000 roubles per person was completed throughout Russia and some 220 auctions had been held. In addition, about 2,500 large SOEs, approximately 50 percent of the total, had been transformed into jointstock companies, and approximately 600 of them are essentially privatized.43 In particular, during 1993 three major companies were partially privatized, consisting of the two car manufacturers Zil and AvtoVaz as well as the machinery manufacturer Uralmash.

# **Turkey**

The Turkish privatization program started in 1984 with the privatization of two large projects, the Bosporus Bridge and the Keban Hydroelectric Dam. In the following years, the process slowed significantly due to strong political resistance. In recent years, privatizations activities became more active, while mostly in the sale of minority holdings only, resultih.g in the privatization of 59 companies during 1988-92 for $1.1 billion. While privatizations are carried out in a variety of sectors, the cement industry was particularly important in recent years with 18 firms being sold. Local investors dominate, but foreign participation is reasonably strong, having generated almost $400 million or about one third of total revenue. But despite the apparently impressive number of transactions, the Turkish privatization program is progressing only slowly and as of yet only a minor portion of the whole state sector has been privatized. The new Prime Minister Tansu Ciller is currently formulating a program to speed up privatization in order to reduce the public deficit and to raise economic efficiency.

# C East **Asia** and **Pacific**

# **Malaysia**

While the Malaysian economy is known for its inherently private structure, the government still owns about 900 SOEs.<sup>44</sup> A privatization program was started in 1985,

> 43 For more detail see Im, Jalali, and Saghir (June 1993). 44 Clutterbuck (1991), p.<sup>72</sup> .

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but has not progressed very far since then. During 1990-92, 12 sizable companies were sold for a total $3.9 billion in revenue. The focus has been on infrastructural projects in energy, telecommunications, and transport. The largest projects were the sale of the Tenaga Nasional Berhad power plant for $1.2 billion and the National Airline for $689 million, both privatized in 1992. Two telecommunications companies (Syarikat and Telekom) were also sold since 1990, generating a combined $1.1 billion. Again, the participation by foreign investors was difficult to determine because of data constraints. Butt while the importance of foreign investment is generally recognized, foreign participation is .estricted to 25 percent and any acquisition exceeding M$5 million also requires a cumbersome approval process by the Foreign Investment Committee.<sup>45</sup>

# Philippines

Under President Marcos, the public sector expanded rapidly frem 71 SOEs in 1972 to 301 in 1986, absorbing almost a quarter of the public budget.<sup>46</sup> With the ad,lition of transferred assets of government financial institutions, government-owned entities swelled to 700 companies in 1987. The Aquino Administration's privatization program intended to rationalize this large and diverse group of government assets, through sales to the private sector and through abolishing, consolidating, and merging with existing line agencies. The program has been quite successful in accomplishing the sale of transferred assets: by end-1992, 293 out of 399 transferred assets had been sold, yielding almost US$1.5 billion with foreign participation providing slightly over one quarter of total revenues. Steady progress is also being made on the privatization program's targets on public enterprises. As of mid-1993, 96 government corporations, representing 70 percent of government-owned assets, have been offered for sale. Of these, 78 had resulted in actual sales yielding another US$1 billion.

# China

In line with a rapidly expanding economy and growing inflows of foreign investment, the Chinese government began a process of incorporating major enterprises. While the word "privatization" is not officially used, shares of a small number of companies were offered in the stock markets of Shanghai and Shenzhen. Foreigners participated in this process through the purchase of non-voting "B"-shares in 12 companies since 1992. Given that China is expected to be the next growth pole in East Asia, foreign interest is strong and likely to increase rapidly. In June 1993, for example, the U.S. beer producer AnheuserBusch bought a 5 percent share in the well-known Tsingtao Brewery for $115 million.

## D **South Asia**

## **Sri Lanka**

Among South Asian countries, the nation with the strongest privatization efforts in recent years is Sfi Lanka. Starting in the 1950s, and accelerating in the 1970s, SOEs increased

> 45 International Financing Law Review, Special Supplement (September 1992), p.34. 46 Forbes (1993), p.<sup>1</sup> .

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rapidly in terms of size as well as numbers, reaching 160 in the late 1980s with a control of about 40 percent of manufacturing output, 66 percent in tea production, 33 pcrcent in rubber production, and 10 percent in coconut production.<sup>47</sup> In 1987, legislatioi' was passed allowing the conversion of SOEs into limited liability companies, setting the framework for the pri-atization program.

Starting in 1989, 16 companies have been privatized for at least $125 million, a sum that appears small but is quite .ubstantial given the size of the country. Several textile mills, manufacturing enterprises, and hotels were sold, in some cases also to foreign investors, who paid a total of almost $24 mnillion.

# **Pakistan**

Privatizations took off slowly in Pakistan, when the national airline was sold through **a** public share issue for $11 million in 1990. 1991 saw the privatization of two major banks for about $48 million. A virtual explosion in privatization transactions occurred in 1992. 49 companies were sold during the year for a total of $163 million. Most of these SOEs were rice mills and bread factories with only small asset values. But small major cement plants were also privatized with the largest transaction of the year being Gharibwal Cement for $44 million. Foreign participation in the privatization program is, however, only marginal. During 1990-92, only about $15 million was generated by attracting foreign investors, amounting to only 6 percent of total privatization revenue.

# **E Sub-Saharan Africa**

# Benin

Following a rapid expansion of government intervention in the late 1970s, Benin had by 1985 investments in 57 public enterprises, accounting for 75 percent of the nation's industrial production. Facing the rapid decline of the profitability of its SOEs, the government opened all non-vital sectors to domestic and foreign private interests. During the period 1988-92, 8 major SOEs were sold for a total of $53 million with an unusually strong foreign participation, contributing almost 83 percent of total revenues. The two largest transactions were the beverage producer Beninoise, bought by the French BGI Castel for $26.2 million, and the cement company Sonaci, which went to a Norwegian investor for $13.3 million.

# **Ghana**

After a long period of economic decline during the 1970s and early 1980s, the Government of Ghana initiated the Economic Recover Program in consultation with the World Bank in 1983. In line with this program, the Government also started a public enterprise reform program. Not until 1987, however, was concrete action undertaken with respect to restructuring these country's large public sector, comprising about 345 SOEs. From 1989 to March 1993, 60 enterprises have been divested, of which 26 were

**47** 206 Privatisation Intemational, Yeaibook 1991, p. .

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liquidated and 34 sold.<sup>48</sup> Overall, the progress in privatizations in Ghana has been slow. While the number of companies advertised for sale is usually large, most of them are unattractive to investors because of their bad performance. Some large privatization transactions were, however, completed such as Lever Brothers, Continental Hotel, Achimota Brewery, Ghacem, and West African Mills, often with foreign participation. In total, Government of Ghana earned about US$37.5 million from these sales with about US$21.2 million in foreign exchange.

# Nigeria

Prior to 1988, when it launched its privatization program, Nigeria had around 140 SOEs, which accounted for 30-3 5 percent of GDP and 20 percent of f-rmal sector employment. During the period 1988-92, Nigeria became the strongest privatizer in sub-Saharan Africa, having sold 29 major entities for a total of $1 10 million. The largest transaction was the sale of the Lagos Federal Palace Hotel for 50 million, but numerous entities in agribusiness, cement production, and even the petroleum industry were sold. In order to encourage wider share ownership, individual share values were held extremely small, while no single investor was allowed to hold more than one percent of the shares on offer. This might explain the virtually complete absence of any foreign investors in the privatization process.

# Togo

In 1975, the government engaged in a strong expansion of its SOEs. But after an unsatisfactory performance of these companies, Togo became one of the first African nations to privatize its public sector. Between 1984 and 1987, the government sold 11 **rni9jor ROPqRn cnndiicted** hv the Miniktry of State Enterprises. Durinz the period 1988-92, another 6 large SOEs were sold, primarily manufacturing enterprises, for a total of $28 rillion. All of these transactions irnvolved foreign participation, rendering this privatization program the most open one to foreign investors in the region.

# **F North Africa and the Middle East**

## Tunisia

During the 1960s and 1970s, the Tunisian government created a sizable public sector that accounted for about one fourth of the country's national product and employed about one tenth of the working population in the early 1980s. Privatization was first announced as an economic policy with the development of the VI, social and economic development plan at the beginning of the 1980s. After passing the necessary legislation and an initial restructuring of the enterprises listed for privatization, the first substantial sales occurred in 1988. Since then, a total of about 65 enterprises have been liquidated or partially or totally privatized. Of these, 33 enterprises amounted to sales of significant size, generating about US$100 million in government revenue. Foreign participation, however, is not particularly strong with only three transactions listed involving foreign investors.

> 48 The Government claims that a total of 48 companies were sold during the period, but the status of 14 pi-ojecis is wucicair ui;cause of differenceb bcwecri investors and the government.

42