Divesting shares of state-owned enterprises

Dhaka,  Wed,  27 September 2017
Published : 19 May 2017, 21:43:57
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Divesting shares of state-owned enterprises

Saleh Akram
Offloading shares of state-owned enterprises (SoEs) generally refers to transferring of shares to private individuals or companies. It is privatisation of SoE either in part or whole depending on the number of shares offloaded. The government recently called upon the SoEs to offload a portion of their shares for public subscription. The enterprises concerned were not particularly amused at the proposal for reasons best known to them. But the reasons why the government desires so are far too many. 

In the first place, SoEs have often been accused of under performance and due only to their low performance they have been causing concerns for the government as they have turned out to be white elephants over the years with higher costs and diminishing profit. In fact, public enterprises around the world have proved to be highly inefficient, primarily because they pursue strategies, such as excess employment, that satisfy the political objectives of the politicians who control them. 

Secondly, in an era of fast expanding free market economy, it is difficult for public enterprises to operate under rigid government regulations. The World Bank and the IMF have long been advocating privatisation either partly or fully of these units in less developed countries (LDCs) to stimulate their growth and development. Proponents of privatisation, on the other hand, believe that private market actors can deliver goods or services more efficiently than the government due to free market operation and over time this will lead to lower price, better quality and quicker delivery. If we look at the list of benefits accrued from transfer of shares from public to private enterprises, it will be amply clear that position of both the enterprise(s) and its/their entrepreneur(s) change dramatically with privatisation.  

In the light of world experience, privatisation has enriched government finances by raising revenues and cutting costs. More importantly, it has spurred economic growth and improved services because privatised businesses have not only cut costs, but increased quality, and pursued innovation. Secondly, privatisation has been a very successful reform. An OECD report found that it (privatisation) brings about a significant increase in the profitability, real output and efficiency of the companies. A review in the Journal of Economic Literature concluded that privatisation "appears to improve performance measured in many different ways, in many different countries."

Thirdly, as global privatisation continues at a robust pace, there remains very little room for apprehension or doubts about the justification of doing so. Over the past four years, governments worldwide have sold an average $203 billion of state-owned businesses annually. China is now the largest among countries to privatise. The British government sold a majority stake in Royal Mail in 2013 and on the basis of results achieved unloaded the final block of shares in 2015. 

British consumers were benefited due to privatisation and resulting competition reduced prices and improved service quality. A British Treasury study found that real prices after a decade of privatisation had fallen by half for telecommunications and industrial gas, and 25 per cent for residential gas. A decade after electricity privatisation, real prices were down more than 25 per cent and the privatised electricity industry moved rapidly to adopt natural gas as fuel in place of coal which is being blamed as one of the major contributors to global warming. 

Experience of Bangladesh speaks eloquently in favour of privatising SOE shares. Dhaka Electric Supply Company (DESCO) was enlisted with the stock exchanges in 2006 floating its 25 per cent shares. With the current price of around Tk.55 per share, Bangladesh Power Development Board (BPDB) of which DESCO is an individual concern, is expected to net in more than taka one and a half billion by offloading the DESCO shares and thus expand its capital base by the same amount. The government is also considering offloading if 10 per cent more shares of Titas Gas Transmission and Distribution Company. 

Fourthly, modern development literatures have termed privatisation the gateway to growth and development. The economists and planners have also set out a series of remedial actions for the under-performing state owned companies of which privatisation has been buzzed around more than others. The government, therefore, wants and justifiably so, to float some of the shareholdings of SoEs in the capital market to help boost public finances.

Fifthly, as regularly under-performing SoEs are likely to be overburdened with bank debts and if a portion of their shares is disinvested it will reduce their liabilities and strengthen their financial status. Additionally, it can also help the government to raise funds for national budget. In this way, an expanded capital base can be created which can be gainfully utilised for various development purposes of the SoEs including expansion and modernisation of the plants. Privatisation also helps product diversification as it pursues open door policies. Only private firms in a country have greater productivity and profitability than SoEs because they pursue policy of profit maximisation and are competitive in nature. 

There are, however, quarters which are not entirely against privatisation, but slightly hesitant. Example of China may be cited to dispel all doubts and inhibitions from their minds. There are still areas where several sectors are fully owned by SoEs, e.g., fertilizer, paper, power etc., and these sectors  may be allowed to retain their status for the time being. 

Privatisation is an economic decision driven by political considerations. People will have to be taken into confidence so that decision to privatise does not cause an animated public debate. There are still around 200 SoEs in Bangladesh which operate in different manufacturing areas, e.g., fertilizer, paper, jute, textile, steel & engineering and in miscellaneous sectors, like sugar and food, chemical and others. SoEs are visible in other financial and non-financial sectors also, e.g., power sector, transport sector, port and container handling sector, natural gas and oil sector, fisheries and livestock sector, telecommunication sector, aviation & tourism sector, environment and forest sector. In most cases government owns 100 per cent or significant portion of the shares. 

The government now thinks it is the right time to offload shares of SoEs as the capital market has stabilised somewhat in recent times. However, indiscriminate and indiscreet privatisation of SoEs either in part or whole should be avoided. In recent years, the process of privatisation and results of post-privatised period have come under increasing scrutiny of both experts and civil society in Bangladesh. Conceptual framework of privatisation, efficacy of institutions to carry out privatisation related reforms and operational flexibility of privatisation policies have come to be questioned. These issues should not be bypassed and since our private sector is yet to mature, prudent and careful analysis of the underlying features should precede privatisation.  

saleh.akram26@gmail.com
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