eBusiness Weekly
Economy Uncensored with Tapiwanashe Mangwiro
Past couple of weeks we have been furnished with news of the possible privatisation through an initial public offering of the People’s Own Savings Bank (POSB) in what will be the first success story of privatisation of State Owned Enterprises (SOEs) since the plan in 2018.
The country has been seeking to privatise a number of organisations as a way of unlocking value in the enterprises and reducing the burden of bailouts from the central government.
With the rumours in the corridors, the government is opting for partial privatisation through listing the entities in what we call Share Issued Privatisation (SIPs), which is what we will discuss today and its benefits over asset sale privatization.
History of privatisation in Zimbabwe
The country is not new to SIPs as it has done it before from the beginning of the 1990 decade after most of its SOEs were running losses.
It came after international donor pressure led by the International Monetary Fund (IMF), largely forced the Government to join the bandwagon of economic reforms.
The Government adopted the Economic Structural Adjustment Programme (ESAP), a five year revival programme whose goal was to rejuvenate the economy, stimulate foreign direct investment, and generate economic growth through the liberalisation of trade in the previously closed economy.
As part of the analysis of the economic problems, the Government critically re-examined the performance of state owned enterprises and established that they were loss making and heavily draining the fiscus.
Experiences elsewhere (in Asia, Britain and Latin America) tend to suggest that privatisation often leads to the creation of competitive and dynamic enterprises which will grow over time through their success in the market place. As part of the ESAP package, the government decided to privatise its parastatals as one of the turnaround strategies.
Between 1978 and 1990, the operational deficit for the Dairy Marketing Board grew from local dollars $2 million to $60 million. The government then realised that it could no longer afford these huge losses and it decided to do an SIP which resulted in them owning 25 percent in the newly listed Dairibord Zimbabwe Limited.
Dairibord was not the only parastatal to face this issue as the government also decided to also do away with the Cotton Marketing Board, to the now Cotton Company of Zimbabwe through another SIP.
Government also privatised ZIMRe through issuing 49 percent of its shareholding to the public as part of reforms.
Even while governments typically sell an average of around 35 percent of their ownership stake through SIPs, compared to at least twice that proportion through asset sales, SIPs raise far more money.
Benefits of SIPs
According to a World Bank study, share ownership privatization had the following effects on businesses: higher profitability, better labour productivity and efficiency, higher output, and easier access to finance.
These are unmistakable signs of these businesses’ increased possibilities of long-term success and their potential economic impact.
In accordance with a UNDP research titled “Lessons in Privatisation,” share issue privatisations are more likely to be effective if they are intended to produce widespread ownership, contribute to human development, expand people’s options, and help eradicate poverty.
Share issue privatisations of state-owned businesses have given capital markets the financial clout they need to grow and prosper everywhere, but especially in developing nations.
Improved responsibility and heightened incentives among management, as well as more vigilant oversight by shareholders who are interested in making a profit, are frequently the driving forces behind increased profitability in privatized organisations.
The Government is encouraged to implement or to strengthen capital market reforms to ensure: increased transparency, increased protection of minority shareholder rights through updated legislation, and strengthened financial regulatory authorities as a result of share issue privatisation.
Perhaps more importantly, share issue privatisations have demonstrated that they can facilitate public-private sector partnerships that work.
Global phenomenon of the 1990s
Privatisation had been the main option for commercial SOEs in various regions in the 1990s and 2000s.
The 2008 financial crisis, however, led to a gradual transition away from straight privatization to mixed ownership arrangements, especially in larger and more complex SOEs, and to the deepening of capital markets through initial public offerings of SOEs.
Enhancing the corporate governance of large SOEs in infrastructure and other sectors also became a priority to attract private investment.
The newfound faith in privatization spread to become known as the global economic phenomenon of the 1990s.
Developing countries have been quick to jump on the privatization bandwagon, sometimes as a matter of political and economic ideology, other times simply to raise revenue.
Argentina, for example, launched a major privatisation program that included the sale of its telephone monopoly, national airline, and petrochemical company for more than US$2,1 billion. Mexico’s aggressive efforts to reduce the size and operating cost of the public sector have resulted in proceeds of US$2,4 billion.
Conclusion
This growth of privatisation has not, of course, gone uncontested as critics of widespread privatisation contend that private ownership does not necessarily translate into improved efficiency.
More importantly, they argue, private sector managers may have no compunction about adopting profit-making strategies or corporate practices that make essential services unaffordable or unavailable to large segments of the population.
A profit-seeking operation may not, for example, choose to provide health care to the indigent or extend education to poor or learning-disabled children.
Efforts to make such activities profitable would quite likely mean the reintroduction of government intervention, after the fact.
The result may be less appealing than if the government had simply continued to provide the services in the first place.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn.
