304 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2006 35330 State Enterprises FEBRUARY Sunita Kikeri and What Remains? Aishetu Kolo After two decades of privatization, has government ownership and Sunita Kikeri control of enterprises declined substantially? A rigorous assessment (skikeri@worldbank.org) is an adviser in the Policy is difficult in the absence of systematic data on state enterprises. and Strategy Group of the But ongoing research suggests that while privatization has helped World Bank and International Finance reduce the state's role in some developing countries and regions, in Corporation's Private PRESIDENCY most others the stock of state enterprises remains relatively large. Sector Development Vice State enterprises continue to play a major role in many developing VICE Presidency. Aishetu Kolo (akolo@ifc.org) is an regions and, in some sectors, across more or less all of them. associate investment officer at the Privatization has helped reduce the govern- significantly lower. They burden fiscal budgets. International Finance ment's economic role in many countries and And they lack investment capital, leading to DEVELOPMENT Corporation. regions. In Mexico the share of state enterprises poor delivery of services that have wide eco- in GDP declined from nearly 15 percent in 1982 nomic impact. In South Asia and Sub-Saharan SECTOR to less than 5 percent in 2001 (OECD 2005). In Africa, for example, a large share of firms iden- Europe and Central Asia the private sector's tify poor electricity and telecommunications share of GDP had surpassed 50 percent in 22 services as major or very severe obstacles to their PRIVATE of the region's postcommunist countries by operation and growth. 2003--up from only 9 countries in 1994 (World Bank 2004a). In China the state share of GDP Regional roundup has dropped dramatically, from 80 percent in State enterprises continue to play important GROUP 1978 to less than 20 percent in 2003. economic roles in Sub-Saharan Africa, the Yet after more than two decades of privatiza- Middle East and North Africa, and South Asia. BANK tion, government ownership and control remains widespread in many regions--and in Sub-Saharan Africa many parts of the world still dominates certain In most Sub-Saharan African countries state sectors. enterprises still operate in virtually all sectors, WORLD Is this a problem? Yes. State enterprises typi- including manufacturing and service sectors cally achieve productivity levels that are only a long designated for privatization. Divestitures THE third to a half those of private firms and often have taken place in such countries as Côte S T A T E E N T E R P R I S E S W H A T R E M A I N S ? d'Ivoire, Ghana, Senegal, Tanzania, Uganda, Share of government revenues from public and Zambia. But in some 30 others there Figure enterprises in selected countries, 1999­2001 remained in 2003 more than 300 enterprises 1 Percent whose sale had been announced but not yet con- 0 20 40 60 80 cluded (OECD 2004). And in almost every Algeria African country the state still owns and operates Syrian Arab Republic most infrastructure enterprises. In aggregate, Lebanon state enterprises accounted for 17.3 percent of Jordan GDP in Sub-Saharan Africa in 1991; they still 2 Egypt, Arab Rep. of account for more than 15 percent today (Chong Tunisia and López-de-Silanes 2005). China Thailand Middle East and North Africa Turkey State enterprises continue to dominate many Slovak Republic economies in the region, accounting for more Morocco than 50 percent of GDP on average. State own- Poland ership is even more pervasive in such countries Hungary as Algeria, the Islamic Republic of Iran, and the Slovenia Syrian Arab Republic, where a very large share Czech Republic of the industrial sector is in state hands (80 per- cent in Syria, for example). In some of the Note: Revenues from public enterprises include mostly those from property and tax payments. Data are for the most recent year available during the period specified. region's countries state-owned banks still Source: ANIMA­Euromediterranean Network of Investment Promotion Agencies. account for more than 75 percent of banking assets, and in many a large share of government has been small relative to all public sector assets: in revenues comes from state enterprises (figure 2001 the state still owned more than 40 percent of 1). Critical services (water, transport, electricity, the country's capital stock (McKinsey Global finance) are still provided almost solely by the Institute 2001). public sector. Europe and Central Asia East and South Asia Privatization has substantially reduced state own- In China state enterprises remain a potent eco- ership in Central and Eastern Europe. But state nomic force despite the dramatic drop in the ownership is pervasive in Central Asia, accounting state's share in GDP. They still employ half of for more than 50 percent of GDP in such coun- China's 750 million workers, control 57 percent tries as Tajikistan, Turkmenistan, and Uzbekistan. of its industrial assets, and dominate such key Across the region, the state continues to own a industries as financial services, power, and large stock of electricity and water utilities, banks, telecommunications (Desvaux, Wang, and Xu and nonbank financial institutions. 2004). Partial government ownership and con- trol persists in firms that have been restructured Latin America or privatized through the stock market: non- Privatization has been big in Latin America, but tradable state shares account for about two- mainly in the region's largest economies thirds of equity in listed state-owned companies (Argentina, Brazil, Chile, Mexico) along with a (Financial Times 2005). few smaller ones (Bolivia, Nicaragua, Peru). In the 1990s India's disinvestment program State enterprise sectors in other Latin American involved selling minority shares to raise revenues. countries remain largely untouched. Starting in the late 1990s and early 2000s a few enterprises were sold to strategic investors. Yet Sector roundup between 1991 and 2004 only 28 percent of Many developing countries have privatized com- planned privatizations were completed (Oxford petitive firms (such as manufacturing and ser- Analytica2005).Moreover,theassetvaluedivested vices), in some cases almost all such enterprises. But in infrastructure and finance government assets in 2003 (figure 2). In the Middle East and ownership and operation remains widespread North Africa state-owned banks retained 40 per- despite the trends in recent years toward private cent of assets, with significantly larger shares in sector participation. some countries (in Algeria, 90 percent). And the state still controlled at least 30 percent of bank Infrastructure assets in Albania, Argentina, Belarus, Brazil, Power utilities in nearly 85 developing countries-- Costa Rica, Romania, the Russian Federation, 55 percent of those in the World Bank's Private Thailand, Turkmenistan, and Uruguay. Participation in Infrastructure (PPI) Project 3 Database--are still owned and operated by the Energy state.1 State power utilities are especially prevalent In the energy sector (oil and gas production in in Sub-Saharan Africa. Of the region's 47 coun- particular) political concerns about foreign tries, only 17 had some form of private participa- investment and the strategic nature of the sec- tion in power by 2003: 3 through divestiture, 7 tor are paramount. Reflecting this, many such through concessions, and another 7 through man- companies remain either fully or majority state agement contracts and leases (Gokgur 2004). owned. Africa is not alone. A recent survey of 19 low- income countries, including 9 outside Africa, Going forward shows that while many have corporatized their Despite the privatization push of the past 20 state-owned firms or brought in the private sector years, government's role remains prevalent in through new greenfield investments, by 2003 only almost all regions and sectors, with adverse impli- one (Mali) had private participation in distribu- cations for growth and productivity. tion and only 4 had it in generation (Bolivia, What should be done? Approaches need to Indonesia, Mali, and Uganda) (Briceno- vary by market structure and level of institu- Garmendia, Estache, and Shafik 2004). tional development. Enterprises operating in Telecommunications utilities are still state Share of bank assets held by private owned and operated in 60 percent of all devel- Figure commercial banks, 1985, 1995, and 2003 oping countries. In Sub-Saharan Africa the 2 1985 incumbent operator is still fully state owned and 1995 Percent operated in 60 percent of the region's countries 2003 0 20 40 60 80 100 (World Bank 2005). In the Middle East and North Africa the share is 65 percent, in South India Asia 60 percent, in Latin America 40 percent, and in Europe and Central Asia 30 percent. Transport and water remain untouched in Middle East and North Africa more than 70 percent of developing countries. In both sectors private participation has been East Asia concentrated in Latin America and East Asia, and Pacific with minimal activity in other regions. Europe and Finance Central Asia Privatization has reduced government owner- ship in the banking sector. In Europe and Latin America and Central Asia the share of bank assets in state- the Caribbean owned banks declined from almost half in 1995 to less than 20 percent in 2003. Industrial Yet government ownership in many countries countries remains high. In India, which represents half of South Asia's banking activity, public commercial Source: World Bank 2004b. banks still held more than 70 percent of bank S T A T E E N T E R P R I S E S W H A T R E M A I N S ? competitive markets can and should be priva- References tized quickly. Concerns about transparency and Briceno-Garmendia, Cecilia, Antonio Estache, and labor can be addressed through well-developed Nemat Shafik. 2004. "Infrastructure Services in Develop- valuation techniques, competitive bidding pro- ing Countries: Access, Quality, Costs, and Policy Reform." cedures, and severance and other programs. Policy Research Working Paper 3468. World Bank, Wash- viewpoint In infrastructure sectors, especially water and ington, D.C. electricity, the debate and the implementation Chong, Alberto, and Florencio López-de-Silanes. 2005. challenges are greater. Many governments, and Privatization in Latin America: Myths and Realities. Washington, is an open forum to the public at large, are not persuaded that pri- D.C.: Inter-American Development Bank. encourage dissemination of vatization is in their economic or political inter- Desvaux, Georges, Michael Wang, and David Xu. 2004. public policy innovations for est. And in poorer countries privatization has "Spurring Performance in China's State-Owned Enter- private sector­led and been difficult to implement, in some cases yield- prises." McKinsey Quarterly (October). market-based solutions for ing more modest benefits than expected. Yet the Financial Times. 2005. "China Banks Face IPO Glitch." development. The views urgent need to improve services and finance March 29. published are those of the their expansion means that the private sector Gokgur, Nilgun. 2004. "Assessing Trends and Out- authors and should not be will continue to play a major role. This requires comes of Private Participation in Infrastructure in Sub- attributed to the World that governments pay greater attention to Saharan Africa." Background paper. World Bank, Africa Bank or any other affiliated improving and sustaining sector performance Private Sector Group, Washington, D.C. organizations. Nor do any of through: McKinsey Global Institute. 2001. India: The Growth the conclusions represent I Policy action on pricing. Whether or not the Imperative. Mumbai. official policy of the World private sector is involved, pricing is the fun- OECD (Organisation for Economic Co-operation and Bank or of its Executive damental issue. Policymakers need to Development). 2004. Privatization in Sub-Saharan Africa: Directors or the countries acknowledge more openly the need to bring Where Do We Stand? Paris. they represent. tariffs in line with cost recovery, and manage ------. 2005. Regulating Market Activities by the Public the politics by phasing in tariff adjustments, Sector. Paris. To order additional copies creating regulatory bodies, and using out- Oxford Analytica. 2005. "India: Left Frustrates Singh's contact Suzanne Smith, put-based subsidy schemes for vulnerable Privatization Drive." Daily Brief. March 29. managing editor, groups. Room F 4K-206, World Bank. 2004a. Economies in Transition: An OED I Exposure to competition. Exposing state firms to The World Bank, Evaluation of World Bank Assistance. Washington, D.C. 1818 H Street, NW, market competition through new private ------. 2004b. World Development Report 2005: A Better Washington, DC 20433. entry, hard budget constraints, and tighter Investment Climate for Everyone. New York: Oxford University corporate governance standards should help Press. Telephone: insulate them from political interference, ------. 2005. "Connecting Sub-Saharan Africa: A 001 202 458 7281 improve performance, and enhance the World Bank Group Strategy for Information and Com- Fax: prospects for more effective private participa- munication Technology Sector Development." Global 001 202 522 3480 tion arrangements. Information and Communication Technology Depart- Email: I Systems to better measure and monitor results. ment, Washington, D.C. ssmith7@worldbank.org Developing performance indicators and capa- bilities to track progress and assess outcomes Produced by Grammarians, and impacts should help foster transparency Inc. and accountability, provide a feedback loop to correct course as needed, and restore public Printed on recycled paper support for reform. Note 1. The PPI Project Database tracks trends in private provision of services and investment in developing coun- tries. It can be accessed at http://ppi.worldbank.org/. T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l