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The World Bank Program
During the eighties, the World Bank formulated a number of Structural Adjustment Loans based on “the Washington Consensus”. The main elements of the consensus are detailed below.
The reform process should normally start with measures to establish macroeconomic stability. This entails countries diminishing the deficit on the state budget and instigating a devaluation of the currency. The intentions of the structural reforms are to give the private sector greater scope in order to promote growth through increased efficiency in the production and in the use of economic resources. The state should thus intervene less directly in the production and the allocation of resources, and instead govern through a regulatory framework for the market and the economic policy. In the short term this entails that the state contracts and that it may only grow again through a growth in the market.
However the SALs of the early 80’s failed to produce the desired economic effects and were even found to produce some undesired social effects, specifically no poverty reduction (Schulpen and Gibbon 2001, 18). The analysis of the Bank (Degnbol-Martinussen 1999, 272) became profoundly influenced by the assessment of the “Asian Miracles” of the early nineties. The main lesson was related to the discovery that the success in the East Asian countries could be attributed to widespread state-intervention. Aid conditional ties in the early nineties aimed at policy reform as well as civil rights in a cluster of policies termed “good governance”.
It was recommended that the states should strengthen their capacity for market-oriented interventions to support the development of the private sector and to promote manufactured exports. This implied an increased role for the state in areas like physical and social infrastructure and strengthened technological capacities and industrial competitiveness. The importance of legal and institutional frameworks for the market and the private sector, including protection of property rights, was highlighted.
In 1997, the World Development Report was dedicated to the state. While highlighting such issues as the necessity for subjecting infrastructure monopolies to more competition, the report underlined the new role allocated to the state in economic development. Sustainable development was seen as the outcome of public and private initiatives. The World Bank conception is refined with elaboration of the importance of institutional development in the World Development Report for 2002. The benchmark for institutions is their ability to support market related processes.
Especially on the issue of privatisation, the justification for the World Bank’s approach is presented in the report: Privatising Africa’s Infrastructure (The World Bank 1986, ix). The principal source of benefits from privatising is the establishment of an arm’s length relationship between the infrastructure provider and short-term political pressures. While commercialisation and corporatisation initiatives promise this under public ownership, in practice it had proven virtually impossible to keep politics at bay while the government is the owner, regulator and operator. Managers of public enterprises have limited leverage to negotiate binding government commitments to tariff or other policies, in contrast potential private investors will withhold investment until they are satisfied that the government’s commitments are credible. Public enterprise managers are typically in a weak position to insist that governments comply with their undertakings, and in contrast private operators may sue or withdraw service or capital.
In the vocabulary of the World Bank, privatisation covers different forms of applying the four major ingredients mentioned below:
From To
Ownership Government Private
Management Procedural Autonomous and Performance Oriented
Finance Government Private Capital Markets
Markets Monopoly Competition
Government can introduce private sector management through management contracts without changing the ownership or financing of the enterprise, or the structure of the market. Divesture changes ownership and financing and invariably requires changes in management processes, but does not by itself change the structure of the market. In a market dominated by a monopoly supplier, government has the choice, whether or not to deregulate.
A public sector organization may pass through many stages on the path to divesture. For example, consider an activity initially conducted within a government department. Ownership is vested in government, whilst management and financing are conducted in accordance with government regulations along bureaucratic lines. In such instances the path has three or four stages:
Commercialisation – user charges are introduced, followed by full commercial accounting and the setting of commercial performance objectives.
Corporatisation – a wholly state-owned corporation is created often by statute.
Restructuring – this is an intermediate step, often needed where a state owned corporation has not previously operated in a commercial environment. The process of restructuring may serve to prepare the corporation for divesture, but may equally be used to improve the efficiency and performance of enterprises, which remain in state ownership.
Divesture – the sale, possible by stages, of part or all of the government’s shareholding in a state-owned company.
These elements were combined in other privatisation programs such as in the European Union (EU). The specifics of the World Bank approach were advocacy of liberalization and privatisation. During the nineties the Bank developed considerably its view of the state but kept a constant conception of the abilities of the market to provide durable solutions. For countries where regulatory preconditions were not in place, it still advocated instant liberalization based on the rationale that market competition could substitute for (some) regulation (e.g. Uganda, Ghana).
The Bank (as well as EU and ITU) advocates the establishment of “Independent Regulatory Entities” (IRE) for the elaboration of legal and regulatory frameworks. In the privatisation strategy, the IRE has a specific role regarding formulation of a license/concession for the main operator. This legal instrument has determining importance since it decides inter alia::
· whether or not to preserve the legal exclusivity of the main operator
· the network expansion plans
· the social obligation e.g. the rural service delivery or public telephones
For the mobile cellular sector the IRE decides license conditions and constructs duopoly or oligopoly for the competition amongst mobile cellular network operators. The basic legal models advocate a “level playing field” by giving the same license conditions to all mobile cellular operators.
Both the strategy of privatisation of the incumbent operator and the strategies for mobile telephony presuppose a number of preconditions contained in “good governance”: transparency of transactions, equal and fair treatment, accountability of regulatory entities and non-interference of firms and politicians in administrative procedures.