EURODAD

European Network on Debt and Development

Private Sector Development

– Pro-poor, or merely Poor, Service Delivery?

A Reaction to the World Bank Group’s Strategy for Private Sector

Development & the Link to PRSPs

April 2002

Address: Rue Dejoncker 46, 1060 Brussels, Belgium Tel: +32-2 543 90 60 - Fax: +32-2 544 05 59 E-mail: info@eurodad.org Web site: www.eurodad.org

Eurodad has members in Austria, Belgium, DFinland, France, Germany, Ireland, Italy, Luxthe Netherlands, Norway, Spain, Sweden, Swand the United Kingdom.

enmark, embourg, itzerland,

Table of Contents

1. Introduction ___________________________________________________________ 2

Why now?___________________________________________________________ 2

2. What is the WBG Proposing? ____________________________________________ 3

…And what are the main criticisms? ______________________________________ 3

A. Extending the Reach of Markets________________________________________ 4

A.1. Enhancing the Investment Climate ____________________________________ 4

But - enhancing the investment climate for whom? ___________________________ 5

A.2. Direct Support to Private Firms _______________________________________ 6

But - aren’t these roles of the IFC conflicting? _______________________________ 7

B. Improving Basic Service Delivery_______________________________________ 8

B.1 Private Participation in Infrastructure __________________________________ 8

But - what does experience say? _________________________________________ 9

B.2. Private Provision of Social Services __________________________________ 10

But - is this decreasing accessibility for the poor? ___________________________ 10

B.3. Output-based Aid – Tapping Private Initiative for Public Services__________ 12

But - doesn’t this rely on a well-functioning market? _________________________ 13

3. Private Sector Development and PRSPs __________________________________ 14

4. Conclusions and Recommendations _____________________________________ 16

In conclusion: The lack of debate on differing policy options suggests an immature policy development process and the silence on controversial issues is deafening. _ 18

Appendix 1. Should the Ghanaian urban water supply system be privatised? _____ 19

Appendix 2. Private Sector Development Strategies in the 10 PRSPs_____________ 20

Appendix 3. Privatisation Policies and Results under SAPs: SAPRIN Study _______ 25

List of Figures Figure 1. Factors affecting the Private Sector

Figure 2. Illustration of the Traditional Approach versus the Output-based Approach

List of Boxes Box 1. The PSD Program

Box 2. IFC’s role and its cost of capital

Box 3. Ambiguous role of the IFC

Box 4. Bechtel, US-Based Multinational, seeking compensation from the Bolivian government

Box 5. Challenges with Output-based schemes for the provision of basic services

Box 6. Output-based aid: design issues and options

List of Tables Table 1. Examples of Private Sector Development Strategies from the 10 PRSPs

Acronyms

BOT - Build-Operate-Transfer

CAS - Country Assistance Strategy

CDF - Comprehensive Development Framework

CS - Civil Society

CSO - Civil Society Organisation

ESW - Economic Sector Work

FDI - Foreign Direct Investment

FIAS - Foreign Investment Advisory Services

GATS - General Agreement on Trade in Services

IBRD - International Bank for Reconstruction and Development

IDA - International Development Association

IFC - International Finance Corporation

IFIs - International Financial Institutions

IFUR - International Forum for Utility Regulation

IMS - Investment Marketing Services

IPP - Independent Power Producer

JSA - Joint Staff Assessment

LICs - Low-income countries

MDGs - Millennium Development Goals

MIGA - Multilateral Investment Guarantee Agency

MNCs - Multi-National Corporations

OBA - Output-Based Aid

PRGF - Poverty Reduction and Growth Facility

PPA - Power Purchase Agreement

PPI - Private Participation in Infrastructure

PPIAF - Private-Public Infrastructure Advisory Facility

(I)PRSP - (Interim) Poverty Reduction Strategy Paper

PSAS - Private Sector Advisory Services Department

PSD - Private Sector Development

PSIA - Poverty and Social Impact Analysis

PSIRU - Public Services International Research Unit

SAPs - Structural Adjustment Programmes

SIA - Social Impact Analysis

SME - Small and Medium sized Enterprises

SOEs - State-Owned Enterprises

WBG - World Bank Group

WTO - World Trade Organisation

1

1. Introduction In previous Eurodad policy papers we have discussed the poverty reduction strategy (PRS) process and how the core principles of participation and ownership are unfolding in practice, and in relation to this, studied the changing roles of external donors and creditors. In the last paper, “Many Dollars, Any Change?”1, we also looked at the impact of Structural Adjustment Programmes (SAPs) on poverty, in particular trade liberalisation and the reform of the domestic financial sector. One aim was to draw some general conclusions from the weaknesses in, and negative effects of, these externally imposed reform programmes. Furthermore, we made a number of recommendations on how to avoid repeating the same mistakes under the Poverty Reduction Strategy Paper (PRSP) approach, the ‘new’ wrapper for IFI operations and processes in low-income countries (LICs). Privatisation was another key reform under the SAPs, the impacts of which has been subject to extensive debate. In this paper, we look at the World Bank Group’s (WBG) newly developed proposal for Private Sector Development (PSD) to see how the document deals with the challenges of pro-poor development and whether it takes into account lessons learnt from previous experiences with private sector development, especially with privatisation operations, in particular as regards the impact on poverty reduction – in other words, whether the voices of the poor are heard. The structure is such that under each heading, we give a summary of what the WBG is proposing before, in the following section, commenting on it. In an additional section we review the content in a number of interim PRSPs and PRSPs in terms of policies for PSD. Furthermore, we review the processes by which these strategies were, or are, currently being developed based on reports from civil society involved in the PRS processes. Finally, based on the preceding sections we conclude by listing a number of important points or recommendations that we believe are important in order to make PSD strategies more pro-poor, with an emphasis on the role of the various stakeholders in the process of reducing poverty.

Why now? One of the reasons the WBG is now putting forward a strategy for PSD is to respond to the criticisms of the Advisory Commission to the US Congress, known as the Meltzer Commission, which in March 2000 declared that the WB was not in practice focusing on low-income countries, but rather on countries with access to private capital markets.2 The Commission therefore recommended that the WBG should be transformed into a grant-making institution implementing output-based aid schemes. The criticisms contributed to the already-questioned legitimacy of the World Bank in its current setting. As a reply to the criticism, and in an attempt to justify the design of the WBG, the Bank’s Board of Executive Directors commissioned an institutional strategy to set forth a new vision and purpose of the WBG, as well as a Private Sector Development Strategy to help realise the vision.3 The new institutional strategy was approved in March 2001.4 The World Bank Group’s proposal for private sector development was discussed by the Board on February 26 2002, and the final version is to be published in a couple of weeks from the time of the writing of this paper. The draft version of December 35 is an extensive document, discussing the role of the private sector in development and poverty reduction, summarising the past and present policies and activities of the WBG regarding PSD, and outlining the proposal for future strategies and the coordination within the WBG6. The Bank’s 1 See: http://www.eurodad.org/2poverty/analyses/general/many_dollars_executive_summary.htm 2 The Commission, known as the Meltzer Commission after its chair Alan Meltzer, was formally called the International Financial Institutions Advisory Commission and was formed by US statute during the Asian crisis to advise the US Congress on the future of the IMF and World Bank. 3 Growing Dangers of Service Apartheid: How the World Bank Group’s Private Sector (PSD) Strategy Threatens Infrastructure and Basic Service Provision, News and Notices for IMF and World Bank Watchers, Volume 2, Number 5, Winter 2002, by Globalization Challenge Initiative, p. 3, 6 4 The new institutional strategy for fiscal years 2002-2004 was approved in March 2001. The Bank approved a “Strategic Framework Paper” and a “Strategic Directions Paper: Implementing the World Bank’s Strategic Framework” (29/3-2001) which defined the two corporate pillars of purposes: 1. To build the climate for investment, jobs and sustainable growth through the engine of the private sector and 2. To empower poor people to participate in development and invest in them. 5 Private Sector Development Strategy – Directions for the World Bank Group, WBG December 3, 2001 6 Including the division of labour between four of the five WBG institutions notably: IBRD, IDA, IFC and MIGA 2

management has asked the Board for the mandate to begin implementing the PSD strategy in Africa, South Asia, and East Asia and the Pacific during the current fiscal year and in the remaining regions thereafter.

2. What is the WBG Proposing? The strategy requires closer links and stronger coordination between the WBG’s private sector affiliate, the International Finance Corporation (IFC), and the Bank’s soft loan arm, the International Development Association (IDA). The PSD proposal is based on two pillars, notably extending the reach of markets and improving basic service delivery (see box 1 below).

As stated in the proposal, “the fundamental thrust of the PSD strategy is to bring the benefits of markets to help poor people”.8 Furthermore, it is said that “central to the new proposals are measures to shift performance risk further from domestic taxpayers in developing countries to private parties, where these parties, be they small or large for-profit or not-for-profit organizations, appear better able to bear or manage risk”.9

…And what are the main criticisms? Some of the criticisms to these two statements are that: •

•

First of all, there is no clarification given in the document on what the WBG means by the ‘market’, nor is there any specification of how the ‘poor’ would benefit from the strategy. Moreover, ‘poor’ is often referred to as a relatively homogeneous group, with some exceptions in a number of sections where a distinction is made between poor men and women. This is somewhat remarkable considering the ongoing debate of the multidimensionality of poverty.10 Secondly, studying experiences of ‘shifting risk’ policies, it is clear that at least ‘for profit organizations’ are fairly risk-averse and are not interested in taking on risks without certainty of payments and government guarantees. Thus, the scope for shifting risk is marginal.

As it will be noted throughout this paper, the proposal has been subject to extensive criticism by various stakeholders. A Professor at the London School of Economics comments for example that the strategy is merely “a continuation of previous Bank policies to reduce the state to a coordination and regulation role, leaving private companies to organise production and service delivery”.11 The Bank has hitherto sought to achieve this through structural adjustment programmes combined with private sector investment and guarantees from its IFC and Multilateral Investment Guarantee Agency (MIGA) arms. Others go further in their critique by saying that the strategy is nothing but a “new and expanded generation of structural adjustment programmes (SAPs) with policy conditions intended to adjust the investment climate by, for instance, facilitating private sector by means such as lowering taxes and labor costs.”12

7 Another PSIRU critique of another version of the World Bank private sector development strategy, Kate Bayliss and David Hall, PSIRU January 2002, p. 2 8 Private Sector Development Strategy, op cit, p. 45, para. 115 9 ibid, p. 45, para. 112 10 The multidimensional poverty approach is adopted by a number of donors, in particular bilateral development agencies, such as Sida, Swedish International Development Cooperation Agency, and DFID, Department for International Development, UK. 11 Professor Robert Wade in Bank plans private sector shake-up, Bretton Woods Update, January/February 2002 12 Growing Dangers of Service Apartheid, op cit, p. 4

Box 1. The PSD Program7 A. Extending the reach of markets by:

- Fostering a sound investment climate - Direct support to private firms

B. Improving Basic Service Delivery by: - Private participation in infrastructure

- Private provision of social services - Output-based aid – tapping private initiative for public services

3

A. Extending the Reach of Markets The rationale given for the first proposal or main pillar of the strategy is based on the fairly ‘well-used’ argument by a number of free markets advocates, notably the positive correlation between PSD and poverty reduction in that: i) private markets are the engine for productivity growth and hence contribute to the creation of more productive jobs and higher incomes, and ii) private markets are complementary to the government’s roles in regulation, funding, and provision, so private initiative can help provide basic services that empower the poor by improving infrastructure, health and education. In short, the Bank stresses that extending the reach of markets, and thus the creation of productive jobs and of entrepreneurial opportunity, is key measures in helping poor people realise their potential. Therefore, extending the reach of markets generates, according to the WBG, opportunities for poor people that otherwise would not have been created.

A.1. Enhancing the Investment Climate There are a number of factors affecting the investment climate in general and the private business sector in particular.13 Some of the crucial conditions for PSD according to the WBG’s proposal are: reasonable governance systems promoting adequate property rights and security of contract, well-developed infrastructure, competition, existing and well-functioning regulatory frameworks, sound financial sector, stable macro-economic environment and economy and an openness to trade.14 Overall, enhancing the investment climate is about better public policy for the private sector, including the required supporting institutions. For an illustration of factors affecting the Private Business Sector, see figure 1.15 The external environment, including factors, such as global FDI flows and international agreements, has an indirect impact on the private sector, as do macro-, meso-, and micro-level factors. If not a comprehensive picture, the illustration gives nevertheless an indication of the vast number of components that need to be assessed before putting trust in a well-functioning and effective development of the private sector. Figure 1. Factors affecting the Private Sector

• • •

• • •

• • •

• •

• •

• • • •

•

•

•

External Environment

International markets Influence Macro: Institutions – the

Rules of the Game Economic System/Policies

Opportunity Macroeconomic Environment Economic Reward

Global FDI Flows

Political Relations

Meso: Transactions – Access to Markets Political

System/Governance

Business Legislation Markets Regulating Rule of Law

Infrastructure Physical Social Business

Social Capital Bonding Capital Bridging Capital Linking Capital

Social Cultural Context

Social Networks Enterprise

Public

Bodies

Business org. Micro: Actors – Competence, Capability

Capital Market Access Business Services

Know-How

Markets Factor Markets Product Markets

Supervisory Bodies

International Agreements

Global Environment Conditions

Source: Based on Approach and organisation of Sida Support to Private Sector Development, Evaluation Report 01/14, p. 20

4 4

13 Here, we use the definition of Private Business Sector and Private Sector Development: PSD is the process by which the PBS moves along the path to becoming well functioning from the Sida evaluation report 01/14 of the Approach and Organisation of Sida support to Private Sector Development, op cit, p. 18. 14 Private Sector Development Strategy, op cit, p. ii, 7 15 Approach and Organisation of Sida support to Private Sector Development, op cit, p. 20-29

To improve the investment climate, the WBG suggests continued deployment of policy-based lending operations as well as capacity-building efforts, particularly to reduce ‘unjustified’ obstacles to private businesses, particularly small and medium-sized, and to establish secure property rights for poor people. Furthermore the strategy states that, “privatization operations should be continued for competitive sectors, such as agriculture, manufacturing or mining and focus on the establishment of a surrounding policy framework that allows effective entry and establishes hard budget constraints.”16 It goes on to say that environmental issues should be considered in a pro-active way when privatisation and deregulation processes are designed and implemented. The WBG states that it will continue assisting countries to carry out legal and judicial reform, including “assistance to amend a country’s law to improve the business environment and increase investment, harmonize law for internal consistency, or adapt law to contemporary conditions.”17 It will also pursue its support for strengthening “existing legal institutions by rehabilitating or building court buildings, training judges or funding the publication of judicial decisions.”18 In order to focus these efforts and achieve better results, it is proposed to conduct systematic investment climate surveys and assessments that allow i) better identification of the features of the investment climate that matter most for productivity, and hence income growth, especially for poor women and men, ii) tracking of changes in the investment climate within a country, and iii) comparison of countries, or regions within countries. It is said that “consultative country-driven processes such as the PRSP and CDF should routinely cover the investment climate and elicit views from the private sector.”19 As further mentioned, these surveys will only serve their purpose if they inform policy and capacity-building operations and if the results are integrated into the so-called Economic Sector Work (ESW).20 The considerations stemming from the surveys are said to be crucial to the analysis underpinning country assistance strategies (CASs), and “given heightened attention to WBG support for, and assessment of, CDF exercises and PRSPs.”21 Summarising, the WBG’s major vehicle for enhancing the investment climate and for advancing investment reforms is policy-based lending. The reforms suggested include programme lending or financial intermediary operations that focus on policy development and institution-building. The WBG stresses that “equally important are efforts to build institutions and capacity via technical assistance operations and free-standing advisory services, for example by the SME department, the Foreign Investment Advisory Service and MIGA’s Investment Marketing Services.”22 A new joint investment climate unit of the Development Research Department and the Private Sector Advisory Services Department (PSAS) has been set up, to coordinate investment climate activities across the WBG and to spearhead an effort to develop a minimum standard investment climate survey methodology and to help implement it.

But - enhancing the investment climate for whom? While the rhetoric of enhancing the investment climate and making it more conducive to entrepreneurial growth is not in itself bad, it is not a panacea for poverty reduction, and the WBG proposal reveals a number of weaknesses. One of the flaws in the analysis is the exclusive focus on what is good for investors, i.e. the failure to take into account the different priorities of various stakeholders within an economy. These priorities are often conflicting and, as David Ellerman, a senior World Bank researcher, puts it, “improving the investment climate for one group may make it worse for some other groups.”23 The WBG is neglecting to address the main concerns of the poor, particularly as regards equity issues, and focuses exclusively on the needs of private firms: “The Bank tends to favour labour market flexibility over job stability and human capital investment, and stock market liquidity over long-term, predictable investment flows.”24 Thus, the argument that one of the objectives with the proposal is to create an opportunity for poor people to take part in the economy and in the expanding market and thereby ‘realise their potential’ is not translated into an actual strategy on how to make the investment climate conducive for all stakeholders in the economy, including 16 Private Sector Development Strategy, op cit, p. 45, para. 118 17 ibid, p. 47, para. 120 18 ibid 19 ibid, p. 47, para. 120 20 such as: country economic memoranda, development policy reviews and programs supported by the WBI. 21 Private Sector Development Strategy, op cit, para. 124 22 ibid, p. 49, para. 126 23 David Ellerman, quote in Bank plans private sector shake-up, Bretton Woods Update, January/February 2002, p. 1 24 ibid 5

employees, consumers and tax payers. This gap between rhetoric and practice is a recurring theme in IFI activities. Furthermore, the proposal is built on a ‘trickle-down’ theory, meaning that as long as there is an understanding and consideration of how policy changes firm performance and hence growth, the poverty reducing impact will come automatically. In other words, the growth and income increase of some actors within the economy will in turn ‘trickle-down’ to other layers of society and indirectly lead to an improved situation for the whole population. However, numerous studies have shown that such ‘trickle-down’ effects have in many cases been very weak and that the overall impact depends on a number of factors including the distributional mechanisms in place within the country, and the share of the increase going to ‘nationals’, and hence remaining within the country, and the share going to foreign investors, bringing the money back to their countries.25 Depending on all these factors, privatising entities could “either lead to the concentration of ownership in the hands of a small economic elite, or to the capture of ownership by foreign economic actors.”26 Therefore, several measures need to be taken in order for a large share of a population to benefit from the ‘larger cake’ obtained through growth. In other words, ‘pro-poor’ growth is not an issue sufficiently addressed in the WBG proposal and, instead of relying on trickling-down, “…it may be far better perhaps to consider the wider social interest at an earlier stage and to build the poverty impact assessment in at the survey stage”.27 As regards policy-lending and using conditionalities in order to push governments to establish a ‘sound’ investment climate, the proposal is informed by the World Bank study from 1998: Assessing Aid: What Works, What Doesn’t and Why28, where one of the conclusions was that “financial assistance should be directed towards countries with what are considered to be good policies”29 and that countries with a more sound economic management should receive more financing than equally poor countries with a not as sound management. A paragraph in the PSD strategy, cited also by the Public Services International Research Unit (PSIRU), makes this rather clear:

“….it is expected that policy-based lending would be a major vehicle for advancing investment climate reforms. Policy-based lending may happen in various forms including programmatic lending or financial intermediary operations that focus on policy development and institution-building.”30

PSIRU also points at the actions cited in the implementation matrix of the WBG proposal where measures such as simplification of business procedures and removal of barriers to foreign investment are listed. Further, in the subject area of ‘privatization’ it says that one action should be policy-based lending to promote privatisation.31 In brief, Bank conditionality will be steered towards ensuring that governments open their utilities to private investors and remove what they call ’unjustified’ barriers for firms. This is somewhat contradictory to what a large group of national and international stakeholders is calling for, notably less conditionality and non-external imposition of privatisation policies on developing countries.32

A.2. Direct Support to Private Firms Continued support to entrepreneurs, including rural credit and micro-finance is often suggested within the document with a focus on small and medium firms and farms. Based on, as is claimed, the WBG’s experience in helping improve the performance of public financial and advisory support for private entrepreneurs and for firms of all sizes, the PSD strategy proposes that the WBG should be disciplined in ensuring that the financial terms of credit are not subsidised and that credit is preferably provided via the IFC, so as to limit the exposure of domestic taxpayers in poor countries to credit risk. Subsidies to stimulate supply response by

25 see e.g. Redistribution does matter: growth and redistribution for poverty reduction, by Dagdeviren, H.; v. d. Hoeven, R.; Weeks. J. / World Institute for Development Economics Research (UNU/WIDER) , 2000 26 Structural Adjustment in the Name of the Poor: The PRSP Experience in the Lao PDR, Cambodia and Vietnam, Jenina Joy Chavez Malaluan and Shalmali Guttal, Focus on the Global South, January 2002. p. 12 27 Another PSIRU critique of another version of the World Bank private sector development strategy, op cit, p. 6 28 World Bank policy research report, written by David Dollar et al, 1998, Oxford University Press 29 Another PSIRU critique of another version of the World Bank private sector development strategy, op cit, p. 6 30 Private Sector Development Strategy, op cit, p. 49, para. 125 31 ibid, p. 74 and 76 32 PSIRU mentions e.g. the final declaration of the December 2001 meeting of the International Conference of Freshwater in Bonn, which stated unequivocally that “Private sector participation should not be imposed on developing countries as a conditionality for funding”. See: http://www.water-2001.de/outcome/BonnRecommendations/Bonn_Recommendations.pdf 6

private firms should be targeted transparently in ways that are performance-based, and to purposes that ‘truly justify’ a subsidy. As stated in the document, “In the context of providing direct support to private firms, poverty alleviation would be best pursued by providing well-targeted, time-bound subsidies that help create effective access to credit, via institution- and capacity-building, while allowing financial terms, including interest rates, at market terms.”33 To this end, it is proposed that the operational policy that governs the financial intermediary operations of IBRD and IDA be redrafted and administered so as to cover intermediary operations for rural credit and social development/social funds, which previously escaped such discipline. For IFC it is proposed to explicitly “unbundle subsidies from IFC financial products that support private firms and to allocate such subsidies more transparently to purposes that merit being supported with subsidies.”34 The advantages of the IFC are put forward in the PSD proposal as two-fold, (see box 2 below).

TolecawIFinu(isoaco Inpsc

BToitssure Fsuu

33

34

35

in36

ad37

38

39

40

Box 2. IFC’s role and its cost of capital • Development institutions such as the IFC have special relationships with governments, which allows them

to reduce political risks (mainly expropriation risks including currency transfer and breach of contract) associated with investing in a country – given a particular policy environment. Private co-financers benefit from such risk mitigation ability of development institutions;

• IFC may also help improve the policy environment itself. The government may be willing to adjust

policies, when the IFC is involved as an investor in a particular project. In this case policy reform can be shown to translate immediately into additional investments. The government can use this approach to enhance the credibility of its policy announcements.

IFC, through its special relationship with the government, has a lower risk-adjusted cost of capital than

private firms that cannot reduce the political risk. Source: Private Sector Development Strategy, op cit, p. 52, box 12.

7 7

he specific scheme for IFC distinguishes between the portfolio of so called commercial perations, where the Corporation should require a minimum target rate of return on its nding, and investment business that reflects its full risk-adjusted weighted average cost of pital and the subsidised operations, as is already the case for capacity-building for SMEs,

hich should be funded from net income. This scheme would, according to the WBG, allow C to focus its subsidies on low-income countries and continue to play the risk-mitigation role middle-income countries.35 As stated in the PSD proposal, the IFC would thus operate nder three basic principles, notably (i) to continue to avoid crowding out the private sector, i) to seek additionality in its projects (e.g. positive economic rate of return, compliance with cial and environmental safeguards as well as minimum corporate governance standards,

nd finally (iii) to earn at least the full risk-adjusted cost of capital on its portfolio of mmercial operations36.37

brief, this would mean that the “IFC will increasingly take the lead in expanding private rovision of services, while IDA will work with governments to design subsidy and other hemes to offset the costs of private provision to low-income consumers.”38

ut - aren’t these roles of the IFC conflicting? he discussion on using IFC financing in infrastructure projects indirectly means privatisation f infrastructure given that the IFC’s remit is to invest in the private sector. The WBG points in proposal at the recent growth of the roles of both IFC and MIGA, maybe to make its ggestion of expanding their roles look more like a logical evolution than an expansion of the mit of these affiliations?39

urthermore, the proposal to create an accounting separation of the commercial and bsidised operations of the IFC reveals that “the practices of the IFC may be

nconstitutional, in the sense that they violate the IFC’s own articles of association.”40 The

Private Sector Development Strategy, op cit, p. 50, para. 128 ibid, p. 51, para. 131 In the IFC’s 2001 paper, the strategic decisions target five areas for business expansion, including; social sectors, frastructure, SMEs, domestic financial institutions, and information technology and information. This would according to the WBG prevent the IFC from pursuing substandard projects, and would at the same time dress the critique made that the IFC is interested in enhancing corporate welfare rather than to reduce poverty.

Private Sector Development Strategy, op cit, p. 53, para. 135 Growing Dangers of Service Apartheid, op cit, p. 6 Another PSIRU critique of another version of the World Bank private sector development strategy, op cit, p. 7 ibid, p. 8

PSD proposal says that the ability of the IFC to finance a subsidy stems from the fact that it has a lower cost of capital than other private sector finance sources (see box 2 above). However, although the IFC has a mandate to operate in the interests of private firms, it does not have the mandate in its Articles of Agreement41 to interfere in politics, presumably to counter the criticism that the IFC might use its influence to determine political outcomes in favour of private enterprise.42 Thus, the argument in the PSD proposal of IFC being able to ‘help improve the policy environment itself’ through its special relationship with the government raises a number of concerns, summarised in box 3 below:

8 8

Box 3. Ambiguous role of the IFC The IFC is operating outside its Articles of Agreements if it’s influencing governments on political matters.

Although the line between economics and politics is thin, privatisation is a fairly political issue; Pressure on governments from the IFC - wielding the power of the resources of the WBG, but fundamentally

concerned with the interests of private enterprise and answerable to its shareholders - undermines the fundamentals of democratic accountability to local people;

Such ‘special relationships’ can present a conflict of interest given that the WBG is involved in developing

countries on the one hand as a lender and adviser to government, and on the other hand as a lender to the private sector, through the IFC. It is possible that the combination of these roles may compromise the objectivity of policy advice.

Source: Another PSIRU critique of another version of the World Bank private sector development strategy, Kate Bayliss and David Hall, PSIRU January 2002, p. 8 & 9

B. Improving Basic Service Delivery

B.1 Private Participation in Infrastructure The strategy proposes continued support for private participation in infrastructure (telecommunications, energy, transport, water and sanitation) focusing on establishing a framework under which private provision is likely to make a positive social contribution, and on improving regulatory regimes and building institutions and capacity to ‘effectively’ supervise the private sector. The WBG highlights the importance of effective competition, whether ‘in the market’ or ‘for the market’, the need for sound contracts and regulatory arrangements, and the need to shift performance risk to private shareholders instead of to taxpayers.43 As appropriate, such support for private participation in infrastructure will supplement government programs, which will continue to be supported by the WBG, and this last principle of shifting the risk should in particular guide the use of IDA guarantees. One of the key components of the WBG’s PSD proposal is thus the development of ‘sound’ regulatory systems, including rules, agencies and processes, in order to achieve a sustainable and effective delivery of infrastructure services and successful private participation in infrastructure (PPI). It notes that “to support the investment required to expand infrastructure services, regimes need to be credible to investors while being accepted as legitimate by the population.”44 Furthermore, they conclude that there is no such thing as a ‘cookie-cutter’ model but that the regimes need to be adjusted to the country context. The WBG strategy is to provide best practice information and capacity-building support to developing countries. There would further be complementary activities such as ongoing support to partnerships to help governments take advantage of private participation in infrastructure.45 Another component of the PSD proposal, in addition to the development of regulatory regimes for infrastructure, is direct support to investors. With that, the WBG refers to the political risk-guarantee programs of the IBRD/IDA and MIGA and the financing activities of the IFC. It states that “such direct support of private firms should focus on demonstration projects that establish the credibility of sound regulatory regimes” and that “care should be taken to

41 “The Corporation and its officers shall not interfere in the political affairs of any member, nor shall they be influenced in their decisions by the political character of the member or members concerned. Only economic considerations shall be relevant to their decisions and these considerations shall be weighed impartially.” Article III: Operations , Section 9 42 Another PSIRU critique of another version of the World Bank private sector development strategy, op cit, p. 8 43 Private Sector Development Strategy, op cit, p. 54, para. 137 44 Private Sector Development Strategy, op cit, p. 54, para. 138 45 Such as the Public-Private Infrastructure Advisory Facility (PPIAF), and the International Forum for Utility Regulation (IFUR). The PPIAF was founded in 1999 as a joint initiative between the UK and Japan to support developing countries in their aim to reduce poverty through private participation in infrastructure. Currently, the membership has increased and now counts 9 countries in addition to the Asian Development Bank and the UNDP.

foster competitive approaches and to shift commercial risks (construction, operation and market risk) from taxpayers to private shareholders as much as possible.”46

But - what does experience say? In practice, private participation in infrastructure reveals a number of risks and problems. One is that even though the WBG argues in its document that risk would be shifted to the private sector, the state, and thereby the taxpayers, seem to bear the ultimate risk anyway. The reason for this is that private investors are, as mentioned above, not keen on investing in a high-risk project without any guarantees. When operating under contracts based on OBA, the investors seek to acquire guarantee payments for the outputs. This is to a certain extent acknowledged in the proposal; however the examples given are merely considering how to tackle the monitoring arrangements for OBA and how to establish appropriate incentives for small scale, domestically owned private sector investors. Hence, the challenges of doing likewise with large Multinational Corporations (MNCs) with important economic clout are not discussed, although these are almost exclusively those involved in OBA-style infrastructure concessions in water and energy. Such arrangements have been very problematic in a number of cases. An example of how MNCs seek to protect the payments for the outputs is to negotiate so-called power purchase agreements including a guarantee in foreign currency, normally US dollars. This protects the Independent Power Producer (IPP) from currency risk. In case of devaluation, several governments have either been unwilling or unable to pay such guarantees, as in some cases with power projects in India, Indonesia, the Philippines and Pakistan. In order to avoid a demand risk, power purchase agreements (PPAs) also include a guaranteed level of output that will be paid for, regardless of actual demand from consumers. An example of such a case is Enron’s Dabhol power station in Maharashtra, India, where the state has been unable to pay, as the output was not needed.47 Similar devices can be seen in water concessions and leases. An example is the case of EMOS, Santiago de Chile’s water utility which, when it was privatised in 1999 with a controlling share passing to Suez, was given a guaranteed profit margin.48 Another example is the case of Guinea where a water lease “allowed the MNC to protect itself against cost increases by passing them on, with the government regulator unable to force the MNC to disclose enough information to judge the reasonableness of the requests.”49 An example where privatisation of water system has led to a worsening situation for poor people is illustrated in Box 4 below. Another example is discussed in Appendix 1, where the proposal to privatise the urban water supply system in Ghana is looked at.

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Box 4. Bechtel, US-Based Multinational, seeking compensation from the Bolivian government In February 2002 a case was accepted by the International Centre for the Settlement of Investment Disputes (ICSID), WBG arm, where Bechtel was seeking a compensation of US$25 million from the Bolivian government for breach of contract. In January 2000, in Cochabamba there was a general strike provoked by the opposition to the World Bank’s push for privatisation of water. The unrest targeted Aguas Del Tunaru, a subsidiary of Bechtel that had been awarded the contract to provide water in Cochabamba, Bolivia’s third largest city. In 1999, following years of pressure, the Bolivian Government agreed to privatise the Cochabamba water system. A subsidiary of utilities was given a 40-year lease. Within weeks of taking over the water supply, the company tripled water rates. Families suddenly faced monthly bills of more than US$20 to be paid from earnings less than $100 a month. A range of organisations mobilised against the privatisation, forcing the Bolivian government to declare martial law in April 2000. Then, following the death of a protestor, the government agreed to re-nationalise the water system and reduce water rates. By the end of that year, the Government of Bolivia formally cancelled Aguas Del Tunari’s 40-year contract. Bolivian organisations are looking for international support as they prepare to campaign against the role of the ICSID, which is being asked to rule that the government of one of the poorest countries in the world must pay compensation to one of the richest multinational companies. Source: Bretton Woods Project, Update 27

46 Private Sector Development Strategy, op cit, p. 56, para. 142 47 Another PSIRU critique of another version of the World Bank private sector development strategy, op cit, p. 4 48 ibid, p. 4 taken from article in the Financial Times 15 June 1999 Franco-Spanish group wins bid for EMOS 49 The Welfare Effects of Private Sector Participation in Urban Water Supply in Guinea, Claude Menard, George Clarke and Ana Maria Zuluaga, World Bank 2000

B.2. Private Provision of Social Services The WBG recognises in the strategy that its knowledge on how to use private initiative to improve health and education strategies is embryonic and that the challenge lies in strengthening the analysis and finding ways “to broaden the options for engaging with private firms of provision in a way that is consistent with overall social sector policies.”50 The WBG employs a broad concept when using the term ‘private’ and it includes religious, NGO-run, community-financed, and for-profit institutions. It notes that “particularly in the social sectors, not-for-profit organizations, that may command special trust among clients, can and are making a substantial contribution to service delivery.”51 The WBG sees its role in assisting client governments assessing the potential role of involvement of the private sector and also to help to create enabling environments. More specifically, the WBG claims to be willing to clarify the strengths and weaknesses in (i) alternative forms of private involvement, (ii) market structural arrangements, (iii) regulatory approaches, (iv) strategies for promoting universal service, and (v) financing approaches.52 Moreover, the strategy notes the role that private parties, be they for-profit or not-for-profit, can play in providing service, and that several countries have shown interest in tapping private initiative for the provision of social services. The PSD strategy proposes to complement the Bank Group’s work on policy and institution-building with more assessment of options for private drawing, where appropriate, and on the experience of private participation in infrastructure. Practically, the WBG envisages the support in the form of programme lending or technical assistance work, or in some cases to support private forms of participation directly. It plans to continue with IFC’s investments in private health and education projects that were introduced in April 2000. Parallel to the above, the Bank Group will continue to provide “unabated support to public services in health and education, in particular in pursuit of free access to basic health care and primary education.”53

But - is this decreasing accessibility for the poor? The main objective is to achieve universal provision of basic services, i.e. services accessible to everybody. The quality of these services is of course also crucial. These are arguments used to promote private provision of social services and it is a valid point in a number of countries where the private sector is more or less the single provider, without which there would not be any access to basic services at all. In other cases, the private sector is complementary to the public sector in its service provision.54 Then what are the main concerns with private provision of social services and the WBG’s proposal? First of all, the argument that state provision is in many cases inadequate, and therefore that the private sector is the single solution for the provision of services, does not consider the alternative of improving the state provision or/and expanding access to publicly provided services to cover bigger geographical areas. As many citizens in developing countries emphasise: the developed world wants to impose and promote private solutions in our countries when the public provision in their own countries seems to work fine as regards basic services such as health and education?55 This is a legitimate question, in particular when developing countries are not near the same level of development that the Western world had attained when beginning in the 1970s to explore private alternatives in basic services on a larger scale. More so, one of the main criticisms with output-based approaches in health and education, e.g. in the UK, is that “…it is merely an expensive means of finance for public services.”56 Secondly, the incentive for private providers is normally to make a profit.57 This implies that somebody has to pay and that there will be some kind of user fee attached to the provision of service. What the WBG is suggesting is that there is a rationale for subsidising such services to poor people, meaning that the user fees will not be charged to the user, but that the private provider will receive this money from other sources, be it from donors or from the government. Fair enough, this is not bad per se although the user free stage is then one 50 Private Sector Development Strategy, op cit, p. 57, para. 143 51 ibid, p. 57, para. 144 52 ibid, p. 57, para. 145 53 ibid, p. 58, para. 147 54 Growing Dangers of Service Apartheid, op cit, p. 7 and Private Sector Development Strategy,op cit, p. iii 55 ibid, p. 7 56 A PSIRU response to the World Bank’s ‘Private Sector Development Strategy; Issues and Options’, Kate Baylss and David Hall, PSIRU, October 2001, p. 6 57 The word ‘normally’ and not ‘always’ is employed because as pointed out in the WBG document, there are a number of not-for-profit organisations operating in developing countries providing services for other reasons than money. 10

institution further away from the user than had the service been publicly provided. Thus, the bureaucratic aspect of such a proposal, and the impact that it may have on poor people, must also be taken into account. Briefly, the risk of not having an inclusive system is overhanging, even though it is based on the OBA principle and hence payment upon delivery of services, and the controlling measures may be fairly demanding both in terms of time and money for the controlling body. More so, given that there is always the risk of private providers tapping the system for their own benefit, as well as there is scope for corruption in the concession of contracts. Furthermore, as with the private participation in infrastructure (see above), the same risk prevails in that private sector involvement in basic services weakens the democratic accountability of universal access. The WBG recognises the role of the state in the provision of basic services, while at the same time acknowledging that the understanding of how to use private provision to improve services in health and education to render it more accessible to poor people is incipient. However, looking at the example mentioned above in the UK, and listening to the voices of numerous citizens in developing countries, might still give an idea of the main concerns. For example, in Save the Children’s review of the Bank’s PSD strategy the ways in which WB-financed privatisation of health care systems has jeopardised children’s health are described.58 In a UNICEF study called Basic Services for All, four main arguments are put forward supporting state provision of universal basic social services, services that should be provided regardless of circumstances, notably:59

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Moral – universal access to basic services that have intrinsic value since they generate such benefits as learning and good health; Instrumental – the provision of basic social services supports other human development goals; Consensual – access to basic services should be universal; Historical – originates in the 1800s when governments in the industrialising countries realised that industrial growth required national communities that were both economically and socially viable.

Box 5 below summarises some of the main concerns with OBA and the provision of basic services. Box 5. Challenges with Output-based schemes for the provision of basic services

The difficulty of targeting subsidies and “leakage”, or capture, of subsidies by well-to-do groups: The PSD strategy does not question the assumption that subsidies can offset the costs of user fees for poor populations;

The difficulty of identifying all people in order to properly target subsidies;

The incentives for private providers to pocket subsidies;

The lack of regulatory mechanisms, which can oversee and enforce OBA contracts and ensure that services are delivered in acceptable ways;

The lack of judicial mechanisms that permit poor users to appeal or seek recourse when a contractor fails to deliver services in the specified manner;

The fiscal liabilities assumed by the public sector when OBA schemes fail;

The potential problems such as: cultural conflicts, accessibility, affordability and accountability problems that arise when increasingly the contractors in OBA schemes are from international or foreign service providers.

Source: Growing Dangers of Service Apartheid, Globalization Challenge Initiative, p. 15 & 16

Finally, there is another concern which is related to the WTO agenda, notably the issue of the relation between the PSD strategy and the WTO negotiations. Whereas it may be a step taken in all good conscience by the WBG when outlining the proposal - “It is possible that some of the proposed reforms, such as making the IFC justify its activities according to commercial norms, may be motivated mainly by a desire to bring Bank activities in line with the General Agreement on Trade in Services currently being negotiated at the World Trade Organisation”60 - one danger highlighted by a number of civil society organisations and NGOs

58 The World Bank’s private sector review: Does the Private Sector Development strategy threaten children’s right to health?, Save the Children UK, 2001 59 Basic Services for All, Santosh Mehrotra, Jan Vandemoortele, and Enrique Delamonica, UNICEF, 2000 60 Bank plans private sector shake-up, Bretton op cit, p. 1

is that the WBG proposal for PSD could expedite the application of trade rules to basic services through the General Agreement on Trade in Services (GATS), which in that case is believed to jeopardize access to such services, especially by poor and vulnerable populations. This is because key provisions of GATS, particularly domestic regulation, market access and national treatment, risk undermining the ability of governments in developing countries to develop their internal capacity to regulate or provide basic services. As a result, the trade rules shift power away from the domestic process of developing countries.61 It is thus a question of ownership and country control of its development process.

B.3. Output-based Aid – Tapping Private Initiative for Public Services The PSD strategy proposes special efforts and claims to focus interventions on development results, particularly improved access to services, and on improved targeting of government funding schemes. The strategy proposes to pilot programs and/or projects that disburse public funds backed by donors under schemes that have been termed ‘output-based aid’. Essentially, public funds would be disbursed when results are achieved rather than when, for example, infrastructure is under construction. Public funding would be justified where externalities or redistribution objectives exist. It is suggested that development institutions could help “governments finance their expenditure obligations and render government promises of future payment credible, where needed.”62 It is said that essentially the development agencies would thus help enhance the purchasing power of consumers. The WBG comments that services could be free to poor users or available at reduced cost depending on the type of service, availability of resources and ability to pay. Providers of services, including both for-profit and not-for-profit organisations, would then, as argued in the document, take more of the risk of performance under a variety of contract structures. It is stated that public providers may also compete under such schemes, however with the consequence being that taxpayers bear the ultimate risk of failure. An illustration of the difference between the traditional approach and the output-based aid approach is given in figure 2 below. Figure 2. Illustration of the Traditional Approach versus the Output-based Approach63

The WBG recognisesregulatory challengeschallenge of approprimeasurable outcome of impact indicators thThe WBG claims howto OBA, but that the that “ways to enhancesome functions, or trthey are to other efforhowever that the adv

61 Signed letter sent to Mr Y62 Private Sector Developm63 ibid, p. 59, fig. 17. Noteproposal. 64 ibid, p. 59, para. 151

Service Provider (Schools)

Private financing mobilised by service provider

Inputs (Material)

Public funding linked to service delivery

Public Private

Service (Education)

Recipients (Students)

Traditional Approach Output-Based Approach

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that output-based aid approaches pose much as private participation in infrastructure. Furthate monitoring arrangements and the challengeindicators. The remedy to this would be accordat would need to be complemented with intermever that these challenges in measuring and msame efforts are required for all measuring an capacity, for example, by involving NGOs in maining officials, are just as applicable to outpts to track results and to reward on the basis ofantage with OBA is to be able to use contractu

uzo Harada, Executive Director at the WB Board for Japanent Strategy, op cit, p. 58, para. 149 : the illustration here looks somewhat different but is in

Public

the same contracting and ermore that it poses the of finding adequate and ing to the strategy, a mix ediate output indicators. onitoring are not specific d assessment. It argues onitoring, contracting out ut-based approaches as performance”64, claiming al discipline and to have

, February 20, 2002

principle reflecting the WBG’s

the scope for competition for service provision. The WBG cites a number of examples where these types of schemes, i.e. private infrastructure arrangements, are being implemented. One is the case with rural telecommunications schemes in Peru where a special telecommunications fund subsidises public pay phones for low income rural communities. Other examples with output-based aid mentioned in the document are: road maintenance in Argentina; basic health services in Haiti; public health services in Nicaragua; and education services in Chile.65 Many of these examples involve small domestic service providers. The experience shows according to the WBG that the “attempts to introduce private participation in infrastructure (PPI) in IDA countries during the 1990s suggest that there is considerable scope for successful implementation of contracting and regulatory schemes for private providers.”66 As an example, the WBG refers to the recently finished evaluation, where the results showed that in PPI projects under IDA, 10-12 were ranked highest among all forms of project intervention, at a par with micro-finance. In cases where the local financial markets are not capable of funding such projects, the WBG notes in its proposal that, particularly in IDA countries, it would be important to credibly guarantee that subsidies will actually be paid when due in order for the incentives to perform for private providers. It is thus suggested that IDA could “support output funding through loans, grants or guarantees, while IFC could help fund private providers without government guarantees, leading to a better and new division of labor between the Bank and IFC.”67 The WBG stresses that OBA is a good instrument to finance projects since it gives the opportunity to better address affordability concerns. It is suggested that all forms of subsidy schemes could be supported and that “any combination of user fees or tax financing can be supported to establish the necessary cash flow for a project or a whole program of investment as output-based schemes separate decisions on provision and funding of services,”68 and further, that subsidies should go to consumers rather than providers. Furthermore, the WBG insists on the importance of not using subsidies in a way that distorts the playing field in favour of particular types of providers. The box below lists some of the key issues identified by the WBG in designing any output-based scheme.

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Box 6. Output-based aid: design issues and options

What services should attract public funding or subsidies?

Who will be eligible to receive services that attract public funding, and how will they be targeted?

Who will be eligible to provide the services?

Will services be provided in a competitive or monopolistic market?

How will key performance standards be defined?

How will payment be tied to performance and structured?

How should the scheme’s administrative arrangements be structured?

Source: Private Sector Development Strategy, op cit, p.62: box 16

In short, the WBG’s proposal for OBA and its support may be summarised as follows69: • IDA/IBRD – provide the financing for the subsidy payments in the form of loans or grants;

assist governments in designing effective schemes; and help to identify and disseminate emerging lessons of experience within and across sectors and regions.

• IFC – provide financing to private service providers and, when required, various parts of the WBG might offer guarantees and other risk-mitigation products.

But - doesn’t this rely on a well-functioning market? As noted above, the challenges and dangers of output-based aid are multiple, in particular those related to the poor. Rhetorically, OBA might seem an appropriate solution to various inefficiencies. In reality however, the conditions for such an approach to be effective are so numerous, and so distant from what systems and environments look like in most developing countries, that it is relatively unlikely that it would have successful outcomes. This refers to

65 ibid. p. 60 66 ibid. p. 60, para. 153 67 ibid. p. 61, para. 154 68 ibid. p. 61, para. 155 69 ibid. p. 63, para. 158

the enabling conditions of a well-functioning market, characterised by transparency and fair competition, appropriate and well-institutionalised regulatory mechanisms, equitable investment… the list is long. As Sarah Anderson from the Institute for Policy Studies writes as regards OBA and the possibilities of domestic firms competing with firms in developed countries:

“How realistic is this for an NGO in an impoverished country? Say, for example, a community organization in Togo was the lowest bidder for a grant to do literacy training for girls in their village. Can we really expect them to be able to waltz into Citicorp and come out with a loan to tide them over until the World Bank is satisfied with the girls’ reading levels? Instead, it seems clear that global firms that already enjoy advantages… are likely to cut out local NGOs or public sector entities. As with the services agreements being negotiated in the World Trade Organization (the General Agreement on Trade in Services) and the Free Trade Area of the Americas, the point is to ensure that governments treat private global corporations no less favourably than domestic ones.” 70

Or, as former Chief Economist for the WB puts it, “Allowing competition is easy…Generating and sustaining competition is more difficult.”71 And finally, once again, if the income stream from projects is secured in order to minimise risk for the investor, then the supposed efficiency gain and advantage of OBA is nothing but an illusion. The investor has no particular advantage in delivering output more efficiently and effectively since the income depends almost exclusively on negotiation skills, not on market forces.72 As David Ellerman, a senior WB researcher comments as regards output-based contracts, they “don’t work too well”.73 This has been the experience with private sector delivery of public services in the US and in Europe, so what implies it would be easier to apply such an approach in developing countries?

3. Private Sector Development and PRSPs The WBG mentions the CDF and PRSP on a number of occasions in the PSD proposal. As mentioned in the introduction, since the PRSP is the ‘new’ wrapper for IFI operations and processes, the PSD strategies are supposed to be integrated into this framework. We here attempt to give a number of examples of the experience with PSD within the PRSP framework to date, to see what kind of policies have been adopted and further to see whether the ‘case-by-case approach’ is visible, i.e. whether the policies vary between the different countries or whether a ‘cookie-cutting approach’ seems to dominate. The reason for this is that many civil society organisations in the North and in the South, together with various other stakeholders, have expressed their concern that the policies in the PRSPs do very much look like the policies and reforms promoted under the SAPs. (There is a summary of the Structural Adjustment Participatory Review International Network’s (SAPRIN) study on privatisation and its economic and social impacts in Appendix 3, along with some of the general conclusions of the WB and CS). The WBG’s PSD proposal is encouraging in a sense, underlining the necessity for policies to be adapted to the specific country context. However, one is less optimistic after having studied the policy actions put forward in the proposal’s policy matrix and even more so when looking at the policies in the PRSP documents since these are also supposed to be based on the specificities of the country, and developed by the country. In a recent study by the World Development Movement74 from April 2001 on the macroeconomic content of twelve interim and four full PRSPs, it is shown that the core policies across the studied country-cases are remarkably similar: “The consistency of policies put forward in the PRSPs and I-PRSPs is remarkable, given the different histories, characteristics and drafting processes of the sixteen countries surveyed. The general thrust of the macro-economic policies found in the PRSPs

70 Sarah Anderson quoted in Growing Dangers of Service Apartheid, op cit, p. 11, from the debate on grants versus loans. 71 Joseph Stiglitz in Principles of Macroeconomics 2nd edition, quoted in Structural Adjustment in the Name of the Poor: The PRSP Experience in the Lao PDR, Cambodia and Vietnam, op cit, p. 12 72 Another PSIRU critique of another version of the World Bank private sector development strategy, op. cit. p. 5 73 David Ellerman quoted in Bank plans private sector shake-up, op cit, p. 1 74 Policies to Roll-back the State and Privatise?, World Development Movement, 2001 14

and I-PRSPs seems very similar to that of standard SAPs in the past.”75 Hence, although the WB has acknowledged a number of flaws with past reforms, the policies they are promoting under the PRSP approach are not that different, showing that the social impact analyses of the reforms over the last two decades have either not been carried out, or have failed to inform current policy-making. Therefore, the policies within the PRSP framework risk inducing the same kind of negative externalities for poor people as SAPs. We have looked at the ten76 PRSPs that have been finalised to date (see appendix 1) and we find that the core policies across all the countries are fairly similar and that they also comply with the main findings of the above-mentioned study conducted in April 2001, notably that the different country documents seem to include policies on: • Privatisation (e.g. privatising telecommunications, energy, public enterprises, railways, ports, airports, electricity, oil, gas, water, banking, factories, pension systems, transport – including air and water); • Withdrawal of the state from productive activities and marketing; • Expansion of the role of the private sector/making the private sector the engine for growth • Stimulation of private investment (e.g. in infrastructure/utilities, production, marketing, agriculture, tourism); • Efficient delivery of services to the private sector/removal of constraints on the private sector. The emphasis in the ten PRSPs lies in particular on privatisation, stimulation of private investment, be it foreign or domestic, and on the removal of constraints on the private sector. The ‘one-size-fits-all’ tendency in policy-formulation is further commented on by a civil society organisation in Tanzania who notes that “Specific reform measures such as trade liberalisation, privatisation, fiscal austerity, retrenchment and cost-sharing have been adopted as universal formulæ in all African countries, without taking into account specific differences and the probable impact on the poor, women, and youth. They have been imposed without proper preparation and formulated in an undemocratic fashion, without full participation of all segments of society.”77 And as put by another CSO in Tanzania: “Key economic reform and structural adjustment policies were negotiated outside the PRSP process and without the knowledge and participation of citizens’ groups.”78 As regards policies to encourage fast economic growth and low inflation put forward in the I-PRSPs and PRSPs, they are mostly the same as the ones that were at the centre of SAPs, without much discussion of how they were decided upon, or the trade-offs involved. In a desk study on six full and seventeen interim PRSPs it is noted that “While the depth of poverty analysis varies considerably, in all cases, the dimensions and distributions of poverty within a country were described in more detail than policies to tackle these issues…Surprisingly, only a quarter of these PRSPs and I-PRSPs use the term “pro-poor growth” or contain a statement about ensuring growth is equitably distributed, suggesting continuing faith in the power of growth alone to reduce poverty, without significant attention to equity.”79 Another concern relates to social policies and the use of cost recovery/user fee schemes that are, according to the study, continuously used in the PRSP framework, although there is evidence that these fees are damaging to the poor. DFID has for example carried out studies showing the negative impact of such schemes on the poor.80 Moreover, one of the replies from CSOs to the increasing involvement of the private sector in the provision of basic services, that is referred to in a number of PRSPs, is that “The public investment programme proposed by the government focuses on health, basic sanitation, housing, education, rural

75 Policies to Roll-back the State and Privatise?, op cit, p. 13. The 16 countries studied are: Benin, Bolivia, Burkina Faso, Central African Republic, Chad, Ethiopia, Guyana, Kenya, Madagascar, Mali, Malawi, Mauritania, Nicaragua, Tanzania, Uganda and Zambia 76 the ten countries with a finalised PRSP, April 2002, are: Albania, Bolivia, Burkina Faso, Honduras, Mauritania, Mozambique, Nicaragua, Niger, Tanzania and Uganda 77 Tanzania Coalition on Debt and Development, quoted in Policies to Roll-back the State and Privatise?, op cit, p. 17 78 Tanzanian Gender Networking Project, quoted in Policies to Roll-back the State and Privatise?, op cit, p. 17 79 Whose Poverty matters? Vulnerability, Social Protection and PRSPs, by Rachel Marcus and John Wilkinson, Save the Children Fund UK, November 2001 80 Planning and Financing Sustainable Education Systems in Sub-Saharan Africa; also Cost Sharing in Education, section C, DFID 15

development and infrastructure that cannot be carried out by the private sector due to the low economic return, despite its high social return.”81 Experiences with the PRSP and private sector development policies in the Lao PDR, Cambodia and Vietnam show the same kind of deception and worries as mentioned above. As regards the privatisation policies and the actions to privatise a number of state-owned enterprises (SOEs), only in Vietnam’s policy matrices are mitigation measures for the people affected by such reforms mentioned, although they are framed as an incentive rather than as actual socio-economic support.82 Another core PSD policy in the three countries’ I-PRSPs is private sector deregulation and establishment of more open foreign investment laws. As stated in the study, ‘Creating a level playing field’ is the buzz-phrase for the PSD part of the policy matrix: “For the Lao PDR, Cambodia and Vietnam, the target is to either enact, revise or implement a code of commerce….substantial changes to Foreign Investment Laws are also targeted in all three countries.”83 This also underlines an additional concern with privatisation programmes, since the form of ownership is not solely a question of efficiency, but also a question of “community and collective rights to natural resources…, sovereign right to manage and control natural resources…, and the concentration of production and distribution capacity for essential goods and services in the hands of external corporate entities.”84 Furthermore, it is noted that all three countries are in the process of finalising their so called Build-Operate-Transfer (BOT) laws which permit private participation in large infrastructure projects, and it is commented that even “though the mobilisation of private capital for infrastructure is important for cash-strapped countries…unlike industrialised countries …Vietnam, the Lao PDR and Cambodia do not yet have strong functioning regulatory mechanisms, and lack the capacity to monitor and enforce commitments of private concessionaires.”85 In brief, CSOs are concerned with, as mentioned in so many CS reports, the lack of country ownership of PRSPs86 and the strong influence of the World Bank and the IMF in the policy-making, promoting the same type of macroeconomic policies as before, based on a close-to-dogmatic trust in the market. One such comment on this is from Uganda where, “while the Ugandan PRSP contains a strong emphasis on trade liberalisation and privatisation, this contrasts sharply with a recent public assertion by President Museveni, who has argued that trade liberalisation has done little to benefit Uganda and has called for strong public intervention in the export sector. It also contrasts with the views of elected parliamentarians, who recently threatened to censure the minister of finance over privatisation of the Uganda Commercial Bank. If PRSPs do not reflect the views of political leaders, whose views can they claim to represent?”87

4. Conclusions and Recommendations What then are the conclusions from this discussion on the WBG’s proposed strategy for private sector development? First of all, it is widely recognised and we do acknowledge that the private sector has a role to play in countries’ strategies for sustainable development, and further that it is important to consider and in many ways support the development of the private sector. Thus, what we question is not the rationale for private participation in developing economies as such, but rather the ‘design’ and the role of some of the influential ‘designers’ of such PSD policies, in particular the IFIs. More so since there has not been a proper ‘auto-assessment’ by the WBG as the initiator of the proposal, of the impact of previous policies encouraging private sector development. There are a number of acknowledgements made in the document however, where the WBG recognises the role of the state in the provision of basic services and its role in improving the regulatory and correcting functions in order to be more transparent and adapted to the market. This is also seen in the discussion of how the WBG will support, or is already 81 Quote from Bolivia’s I-PRSP 2000:3 in Policies to Roll-back the State and Privatise?, op cit, p. 19 82 Structural Adjustment in the Name of the Poor, op cit, p. 11 83 ibid, p. 11 84 ibid, p. 13 85 ibid, p. 11 86 For more on ownership see: http://www.eurodad.org/2poverty/analyses/general/many_dollars_executive_summary.htm 87 Masters of their own development?: PRSPs and the Prospects for the Poor, Alan Whaites et al., World Vision, March 02, p. 6 16

supporting, the PSD; “to provide technical assistance for institution- and capacity-building”; “contribute to the development of sound regulatory systems, including rules, agencies and processes, to achieve a sustainable and effective delivery of infrastructure”; “assist in assessing options for private drawing and conducting systematic investment climate surveys”; “assist countries in carrying out legal and judicial reform” (quotes from the WBG’s proposal). This all sounds good, but when posing the question – in whose interest? – the answer is less clear and the strategies less convincing in terms of attempts to meet the Millennium Development Goals (MDGs)88 or the WBG’s overarching goal: “Our Dream is a World Free of Poverty”. It is always easy to be critical though and less so to be critical in a constructive way. Nevertheless, in an attempt to summarise the suggestions made by a number of stakeholders in developing countries and their supporters, we would like to give a number of recommendations on how to make private sector development more pro-poor and hence, how to render countries’ strategies to reduce poverty more conducive to actual poverty reduction. One general remark is however, that the sequencing of policies is crucial and that a number of variables need to be thoroughly considered in order to embark upon pro-poor development strategies adapted to the particular country-context, such as: the institutional capacity of the country; the design and efficiency of the country’s regulatory framework; and the distributional mechanisms and safety nets in place to mitigate and minimise negative impacts of reforms on poor people, and ensure maximum benefits. Some recommendations:

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The IFIs should be supportive, not deterministic: The IFIs have an important influence on policy-making and on ‘policy-makers’ that must not be used in a deterministic way. The guiding principle should be to respect the national programmes, and country-ownership of development strategies which is also one of the core principles under the PRSP approach in particular. Thus the main role of the IFIs should be to support the partner country in analysing policy impact and policy alternatives and support the partner country in its efforts to create a more enabling environment for the development of the private sector, not neglecting the importance of the public sector and the role of the state. This should not be externally imposed as in the WBG’s proposal on the country via policy-based lending and conditionalities, or else one might pose the question: PSD - in whose interest?

Optimal mix of different ownership forms (private, cooperative, state) that can best serve the development needs of a given country in a given period: Ultimately, it should be the governments and their citizens who should determine the forms of ownership that are best adapted to the current state of the economy and, in particular regarding basic service provision, that are most likely to provide universal access to these services at ‘affordable’ costs. If universal access is not guaranteed by private providers, essential utilities in developing countries (energy, water supply) and key social services (health care, education and pension schemes) should remain under state or local government ownership or at least control in order to ensure democratic accountability.

Rethink the granting of guarantees for independent power producers (IPPs): The increase of private providers in infrastructure should not be based on a number of guarantees agreed upon in PPAs or in other agreements, the degree and forms of which ultimately depend on the negotiation skills of the contractor and the degree of corruption of the tender agency (in this case, the government). Only if there is really scope to shift the performance risk to a private provider without compromising access to services of any group in society, is private participation in infrastructure a suitable alternative.

Prioritisation of domestic industry and local entrepreneurs: Positive discrimination, with the aim of ‘fostering’ domestic investment to establish ‘locally’ based economic growth and development, may be justified when it comes to developing countries where the main objective should be to reduce poverty and to create incentives and possibilities for poor people to get out of poverty. Tools that could be used are e.g. tax exemptions and/or subsidies to local entrepreneurs.

Avoid complete ‘take-over’ by MNCs: Controls need to be established within privatisation processes in order to place limits on the increasing role of foreign ownership in particularly in smaller countries. While foreign investment can bring in new technology and stimulate economic growth, however relying on government interventions, this growth

88 For a description of the eight MDGs, see: http://www.undp.org/mdg/Millennium%20Development%20Goals.pdf 17

may tend to be limited to specific sectors that only benefit a small minority and do not stimulate the broader domestic economy. Furthermore, in a number of developing countries, the growth in foreign ownership has been accompanied by a decline of local industries. Historical experience has shown that without strong local industries, less-developed countries will never ‘catch up’ with the developed ones, which supports the above mentioned point. Furthermore, a high level of foreign ownership may cause substantial fluctuations in capital flows. This means permanent uncertainties in the balance of payments, raising obstacles to sound economic growth.89

•

•

•

Making Governments more accountable through enhanced civil society participation in policy-making and monitoring: It is necessary to create and ensure well-functioning mechanisms of citizen participation, including elected representatives, and oversight that would permit a transparent flow of information, giving greater voice and influence to the public in economic decision-making and decreasing the room for corruption. In particular, active civil society involvement is required to ensure full accounting of privatisation finances to guarantee that revenues generated are allocated to social needs.

Donors should play a more pro-active role: First of all, donors should thoroughly consider the terms and forms for funding and not support the WBG group’s proposal of output-based aid without considering the main risks of such an approach and without having consulted country stakeholders. Furthermore, there are three important donor roles that we would like to emphasise, notably that: i) Donors should assist the countries in assessing and developing country-specific strategies for private sector development, and for improving the efficiency of the public sector, based on thorough social impact analyses (SIAs), be it within the PRSP framework or not. This could be done either through providing funds to the country in question to undertake such analyses independently, or through providing technical assistance in the form of tools and/or human resources; ii) Donors also have an important role to play, along with CS efforts, in the monitoring of public expenditure management in order to ameliorate transparency and improve government efficiency in allocating funds. This would also be a means to fight corruption; iii) In terms of the international context that can constrain the range of policy options available (e.g. GATS under WTO), donors need to become advocates to improve pro-poor orientation of external factors and international obligations.

And finally, as regards the PRSP framework in general - Expanding range of policy options within the ‘PRSP’ framework: with an emphasis on country ownership and pro-poor policies based on thorough social impact assessment of previous policies. It is important to avoid the dangers of theoretical policymaking and to have an open discussion of policy options, and trade-offs between them, since in order to achieve successful outcomes it is key to develop strategies better-tailored to the country context. Eurodad suggested a number of ways in which the IFIs could assist developing countries in this work at the International Conference for the PRSP review in Washington in January and we would like to insist on these points:

- To institutionalise expectation of policy choice trade-offs, Joint Staff Assessments (JSAs) should describe the range of policy options considered, and the rationale for final choice, as well as describing what has changed;

- Interim role for IFIs/donors to propose different reform paths, and assess their poverty reduction implications; over the longer-term, it is important to develop country capacity;

- New tools are needed both to generate and evaluate policy choices – e.g. participation and Poverty and Social Impact Analysis (PSIA);

- Catalyse greater cross-country learning; - Ensure that IFI operations do not close down policy choices e.g. PRGF; - Expect policy change if governments change: PRSP cycle should follow the political cycle

In conclusion: The lack of debate on differing policy options suggests an immature policy development process and the silence on controversial issues is deafening.

89 see e.g. the SAPRIN study on privatisation op cit. 18

Appendix 1. Should the Ghanaian urban water supply system be privatised?

In Ghana, organisations have for months been mobilised to prevent the privatisation of the Ghanaian urban water supply system. They are afraid that the right of all to potable water will most likely be neglected if the privatisation is carried through: “This formula is lethal to the poor and potentially pits the poor against these companies and the state. We are concerned that such a development is a threat to democracy, for it removes the State from its core responsibility of protecting the basic rights of the weakest in society.”90 The official plan is to divide Ghana’s urban water systems into two large concessions to be leased to two different companies. The Coalition founded to protest against this proposal, Coalition against the Privatisation of Water in Ghana, argues that the current system, where regional water systems combine urban and rural areas, are more efficient. They suggest that wealthier households should pay higher tariffs, which in turn could cross-subsidise systems in poor areas. There have been complaints that an important part of the current reform process has been imposed by IFIs and bilateral donors, and that conditionalities are attached to this process that force the country to undertake the reforms in order to be given further loans. The conditionalities include “the implementation of full cost recovery in public utilities and the introduction of an automatic price-raising formula for electricity and water.”91 Furthermore, protestors stress that the potential benefits with foreign investors are eaten up by the negative aspects, notably that the Government of Ghana still has the responsibility of raising funds for renewal and expansion investments, if that is not done by the investors, which is unlikely. In addition, the Ghanaian Government would still be responsible for subsidising the water companies if they raise prices to levels that poorer consumers cannot afford.92

90 Why We are Opposed to the Privatization of Water, Ghana’s National Coalition Against Privatization, 2001 91 Ghanaians contest Bank-backed water privatisation, Bretton Woods Project, Update 27 92 ibid 19

Appendix 2. Private Sector Development Strategies in the 10 PRSPs Table 1. Examples of Private Sector Development Strategies from the 10 PRSPs COUNTRY Objectives/ polices Strategies and measures

Albania

Private Sector Promotion. VI appendix 1, p. 109 of PRSP

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•

•

Promotion of free enterprise.

Strengthening the institutionalization and formalization of market

• Facilitation of procedures for business access. - Reformation of institutions issuing building licenses and permits; - Increasing transparency of the tax and customs administration authorities through publication of orders and instructions, establishment of public information offices in every ministry, and installation of telephone lines for registration of complaints.

Establishment of a public information office in each Ministry

Encouraging credit and improvement of conditions for financing private entrepreneurship - establishment of Credit Information Bureau; - improvement of transparency and market information through the improvement of legislation on accounting and auditing and the control and auditing institutions; - improved enforcement of legislation on collateral; - improvement of commercial legislation, especially bringing the new law on bankruptcy into effect;

Institutional and legal improvement to promote free competition in the market.

- strengthening of Competition Department and Competition Commission and the adoption of necessary legal framework; - strengthening of Regulatory Bodies; - establishment and strengthening of business information bodies;

Improvement of relations of businesses with tax and customs administration. - improvement of tax reimbursement procedures; - computerization of local tax offices; - training of tax and customs administration; - establishment of Independent commission for Taxpayers’ Complaints.

Increasing land security and access. - completing chartering of remaining cadastral zones

Bolivia

Promoting the development of micro-and small industries. Matrix 5.1, p. 72 of PRSP

• Create a competitive environment for performance of MSE's.

- Revision and adoption of regulatory frame work to the characteristics of MSE,s. - Expansion of productive, commercial and services infrastructure.

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Developing Micro-finance. Matrix 5.1, p. 75 of PRSP

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•

•

Promote the development of a non-financial services market. • Develop public and private sector capacity to provide support to MSE's.

Strengthen the institutional and regulatory framework.

Improve the quality of micro-finance supply.

-Provision of technical assistance services, training in business management, information, and marketing. Coordinate incentives for artisanal production through programs for craftsmen and small industry. -Promote coordination between the government, MSE's and international cooperation agencies. -Promote the institutional strengthening of the financial institutions serving urban and rural MSE's. -Promote regulations enabling unregulated institutions to make information transparent. - Agree on and manage a regulatory framework and standards, which ensure the development of micro finance. -Promote coordination between the public sector, private sector, and international cooperation agencies at the departmental and local levels. -Support the development of financial technologies, products and services adapted to the requirements of MSE's. -Promote and support the development of financial services for rural areas. -Promote the institutional strengthening of financial entities serving urban and rural MSE;s -Improve the information within the micro finance system.

Burkina Faso

• Private sector development. p. 31 of PRSP •

•

•

• p. 32 of PRSP

Maintaining a stable macroeconomic framework.

Improving the competitiveness of the economy and reducing transaction costs.

Supporting productive sectors.

-Maintaining a prudent budgetary policy and targeting the development of economic infrastructure and basic social services. -Implementing a more incentive- oriented tax policy aimed at sharpening the country's competitive advantages and reducing the tax burden on economic operators in the formal sector. -Encouraging private sector investment, attracting foreign capital, facilitating technology transfer and reinforcing the ability of enterprises to compete in a rapidly changing world market. The sustainability of a high level of growth can only be guaranteed if there are ongoing improvements in labour qualifications. -To eliminate these constraints, the government has decided to carry out the following reforms: Trade liberalization, privatization of existing state interests in order to facilitate the entry of new firms, resources and technology into various segments of the market and the establishment or strengthening of the government's regulatory capacity in the public service sector. -Macroeconomic projections assume steady growth of 8 percent per annum as of 2002.These projections are based on a set of assumptions that anticipate an increase in public

21

investment resulting from increased official development assistance and greater direct foreign and national private investment. -The government will continue to disengage it self from production and marketing activities while strengthening it support and advisory role vis-à-vis private operators, developing the support infrastructure needed by the sector and upgrading human resources.

Honduras

Strengthening investment and generating employment. Annex A, p (I) of PRSP Improving competitive access to international markets. Annex A (i) of PRSP Develop high productive potential sectors and employment. Annex A (ii) of PRSP Accelerating equitable and sustainable economic growth. Annex A 1 p (I) of PRSP

• Strengthen investment levels and improve their efficiency, as the foundation for increasing employment opportunities and improve their quality. • Promote greater access to national products in export markets, both traditional and new under competitive conditions. •

• •

Create conditions that will allow development of high productive sectors, without forgetting support to traditional economic sectors.

Have a stable macroeconomic framework that allows a greater sustainable public investment in programs and projects directed towards poverty reduction, and that generates confidence and assurance for private investment.

-Reduce costs for new investments being established. -Create conditions to allow increasing employment quality, substantial increases for productivity and real income for workers. -Promote greater participation of private capital in public service provision. -Promote and protect market competition law. -Strengthen Honduran participation in the central American integration scheme. -Create conditions to allow a wider Honduran competitive participation in new export markets. -Implement the free trade area with Mexico and the Dominican republic and finalize negotiations with Panama, Chile and Canada. -Create national competitiveness council with public and private sector participation. -Define a productive strategy to develop clusters, including small and medium entrepreneurs, at both vertical as well as horizontal levels. -Support the development of clusters with resources both at medium and long term. -Define and implement a strategy in order to achieve greater development in light assembly.

Implement laws on - Stock markets. -Insurance and reinsurance. -Deposit insurance and pension Funds.

Mauritania

Private Sector Promotion. Annex 2 p. 48 of PRSP

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Create an environment favourable to private sector development.

Improve the economy's attractiveness to foreign investment.

Application of revised codes regarding business laws.

Reduction and Simplification of direct and indirect (VAT) tax system applicable to companies.

Suppression of obstacles to competition (in transport) and progressive expansion of the jurisdiction of the regulatory authority.

Continuation of the Privatization of programs electricity, and telecommunications.

Mozambique

Private Sector Promotion. • Promote efficiency of • Transform and strengthen

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p. 12 of operational matrix Institutions. business licensing and inspection bodies at central, provincial and local level (including revision of legislation, recycling, recruitment, training of personal and their placement).

Nicaragua

Maintain the transformation towards a market economy. Annex v p. 117 of PRSP

•

•

Continue the transformation towards a market economy.

Develop and regulate the private financing of housing.

-offer the remaining shares for sale , following the sale of 40% -Complete privatization of hydroelectric generating plant. -Foster public- private partnerships through management contract for regional water and sewage systems. -Offer long term concession to private investors for operation of major public port facilities. -Award contracts to private pension fund managers. -Establish and make operational the supervision agency of private pension fund managers. -Promote the development of private mortgage. -Consolidate legal frame work for development of a private mortgage market.

Niger

Private Sector Promotion. Time frame, 2000-2004. p. 62, of PRSP

• Ensuring that the private sector pays a decisive role in economic development and in the fight against poverty.

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•

•

Promoting exports. Giving fresh drive to

financial institutions. Making the most of human

and local resources. Speeding up the privatization

program. Creating a suitable

institution and legal environment, and establishment for healthy competition.

Strengthening the private sector's organizational independence.

Supporting the creation and development of private firms, for which purpose the Niger Entrepreneurship project has been set up as a mechanism to foster the creation of micro-enterprises and small businesses.

Strengthening managerial and technical capacities.

Making the most of opportunities arising as a result of regional integration. • Consolidating the banking and financial sector.

Tanzania.

Financial reforms and monetary policy. Appendix iii, p. 18.

• Deepen Markets •

•

Financial Institutions.

Restructure and promote private sector participation.

-Support private sector establishment of a credit information bureau. -Review the development of the secondary market for government securities. -Complete study of options for restructuring Tanzania post bank and privatizing investment bank. -Rationalize civil service employment based on needs for quality, service delivery, efficiency reviews, and wage bill targets. - Implement quick wins service improvements in all MDAs. -Commence privatization of low

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Investment policy and private sector development. Appendix iii, p. 21 Petroleum Appendix iii, p. 21 Agriculture. Appendix iii, p. 22

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•

•

Promote efficient private sector investment by providing a level playing field with sustainable tax incentives.

Enhance the capacity and efficiency of the petroleum industry, increase private sector participation and encourage oil and gas exploration.

Improve the incentive framework for private sector participation. • Provide a regulatory frame -work conductive for private sector involvement.

priority functions. -Stream line regulatory environment and ensure effective application of the private sector investment. -Strengthen the facilitation of investment. -Promulgate new legal and regulatory frame work. -End support for TDPC through earmarking of petroleum revenues and decide on the future role of TPDC. -Review and decide on the future role of the state mining corporation. -Rationalize levies, fees and taxes that farmers and traders pay. -Avoid multiple taxation and ensure that uniform fiscal treatment comply with set ceilings. -Encourage the formation of industry association and create forums for private public sector dialogue. -Review and publish rules that promote private sector participation. -Involve all exports crop industry in all research activities. -Develop regulatory framework for urban water supply and sewerage services.

Uganda93 Pg 13 & 14 of PRSP assessment report. One of the central tasks of the government is to provide an enabling environment for private sector in order to increase private investment. In 1999/2000, the Government prepared a comprehensive Medium-term competitive strategy for the private sector (2000-2005) to deal with major constraints to private sector development. Work on improving the regulatory environment, including strengthening bankruptcy law is on going. Other reforms aim at improving access to credit by Micro and small enterprises (including preparation of a new Micro Finance bill and putting in place a light regulatory framework) and implementing pension reform. A well functioning commercial justice system with impartial contract enforcement is said to be essential for private sector development. Government is planning to increase the number of commercial judges, and in the interim hire experts with the necessary experience to handle complex commercial cases. It plans to integrate the recruitment authorities of all judicial staff, change the civil procedural rules to reflect international best practice, divest the commercial registries and promote private sector mechanisms for resolving commercial disputes.

93 These are examples of PSD strategies taken from the Ugandan PRSP version posted on the WB website. 24

Appendix 3. Privatisation Policies and Results under SAPs: SAPRIN Study94

Methods used: various methods used, but primary means have been: the sale of assets, the sale of government shares, auction, management contracts, and repossession. Some countries attempts to use employment preference schemes.

Economic results of privatisation: - Experience of small businesses: Efficiency in some cases. However small

businesses have had to compete on an uneven playing field with the arrival of large, foreign-owned shopping centres (Hungary).

- Privatisation of industrial enterprises: mixed results. Bangladesh: The main problem didn’t lie in the ownership form but in the policy regime and management. Uganda: capacity utilisation, sales revenue, tax contribution to government, profitability, and product quality and diversification have all . Hungary: Privatisation led to FDI, but production and employment levels fell. Productivity but because multinational firms established in the country. Privatisation accompanied by R&D.

- Privatisation of public utilities: The results of the research in El Salvador and Hungary illustrate that in many cases, the increase in efficiency (the ratio of revenue to expenses) resulted only from the increase in prices following privatisation. State subsidies were maintained in order to ensure supply to the poor and to those living in remote areas. With the market opening and the reform in rate structures, large consumers benefited most, while rate increases for those who consume the least were much higher than the average. For these reasons, the overall impact of the privatisation of public utilities has been an exacerbation of inequality and a failure to contribute to macroeconomic efficiency.

- Privatisation of pension systems: Hungary: From the perspective of CSOs, the new pension system (WB proposed three-pillar system) primarily benefited higher-income groups. Aware of these problems, the new government that took office in 98 changed the system, giving much more emphasis to the compulsory public pillar. The Hungarian example shows that the privatisation of a social-security system can generate little savings for public finances while generating high social costs.

- Efficiency, ownership and macroeconomic considerations: Microeconomic level: no evidence that the form of ownership determines the level of efficiency or that privatisation itself leads to greater efficiency. Macroeconomic level: a review of the real rate of GDP growth in the countries studied

shows no sign of any general acceleration of growth following the period of privatisation that began in the 1980s.

Fiscal objectives of privatisation: in some cases there is evidence that privatisation reduced govt subsidies to public enterprises. At the same time, in several cases it appears that governments did not realise their objective of raising funds from the sale of public enterprises because a number of these companies were undervalued when sold.

Dominance of foreign capital: often obstructs the development of local industries or crowds out existing ones. Foreign firms are volatile, seeking profits from lower labour costs, and might decide to relocate, laying off employees and causing serious problems at the local level. At the macroeconomic level, the repatriation of profits or the withdrawal of capital can cause current account problems, and in the worst of cases, destabilise the local currency. The general problem with the dominance of foreign ownership is that decisions affecting the lives of local populations are in the hands of foreigners.

Social results of privatisation: - Employment effects: demand for specialised skills, employment levels for

unskilled. wages of some of those who were able to keep their jobs, i.e. not all employees have benefited. The move towards rationalisation of privatised firms worsened income distribution, since the most vulnerable groups were in fact retrenched in the process of privatisation.

- Impact on women: In most cases, privatisation was costly for women. Also indirectly affected by the loss of jobs by male household members and the reduction in family earnings. Also, privatisation led to increase in domestic workload in order to compensate for reduced family consumption of electricity.

94 Privatization and Its Economic and Social Impacts, Karoly Lorant, SAPRIN, March 2002 25

- Family welfare: While those who retained their jobs and maintained an adequate income stream were provided with a wider range of consumer choice as a result of privatisation, a broad range of households were adversely affected by this process due to lay-offs and higher utility rates and service fees. - Distribution of Wealth: The objective of creating a strong property-owning middle-class through the privatisation process was not achieved in the countries examined.

Transparency: It is a general perception of CSOs and experts consulted that privatisation has been accompanied by corruption and lack of transparency. Conclusions:

As seen by the WB: Acknowledges that there have been lots of problems associated with privatisation, however they evaluate the process, and particularly its economic results, as positive. From their point of view, privatisation led to increased efficiency, capacity utilisation, productivity and profitability, and has had a positive overall impact on national economies. There have been improvements in the quality and quantity of products produced, as well as increases in tax contributions and greater employment opportunities.

As seen by CSOs: Accept that there have been some limited economic results at the enterprise level (though not at the macroeconomic level) and emphasise the negative social impacts of privatisation. Focus in particular on serious consequences of the privatisation of public utilities for poor communities and families. Dissatisfaction with the results of privatisation because of its impact on the distribution of wealth – according to opinions and analyses, privatisation has not improved the socio-economic welfare of the majority population. Retrenchment, which usually accompanies the privatisation process, has worsened the national employment situation: not all privatised companies have increased productivity; social costs have been very high; inequalities have been exacerbated and the poor are left generally worse off. Local civil society groups express dissatisfaction with governments since they have poorly managed the privatisation process and the methods used were normally top-down approaches to setting rules. Approval processes did not involve wider segments of society, thus creating uncertainty in the eyes of the public, and ordinary people thus excluded felt robbed of their own national assets that were created through taxpayers’ contributions. CSOs have also emphasised that the process has led to displacement of domestic owners by foreigners.

26