BUSINESS WORLD Privatization of Public Enterprises in Sierra Leone and the Financial Crisis Posted by on Feb 27, 2009, 18:21

Many research studies have widely shown that privatization leads to enhancing the financial and operating performance of state-owned enterprises, public enterprises (PEs) following divestiture. As a policy, privatization could not only motivate privatized PEs but, equally important, it could also motivate public firms, including banks and utility providers, to readily face future changes in the economic system through its spillover effects. However, little is known about privatization around the country, even with the establishment of the National Commission for Privatization (NCP) in 2002.  . This commission is charged with the responsibility of overseeing the smooth transfer of ownership of public companies from government control to privately owned.

In the 1960s the Sierra Leone Government time made the achievement of economic growth a primary goal.  In line with development thoughts at the time, the Government placed so much emphasis on promoting industrialization, which was perceived as an integral part of the development process and was expected to facilitate the transformation of the predominantly agricultural economy to modern industrial economy.  The shave of industry in the economy was expected to rise, generate opportunities for employment, raise levels of productivity and raise the incomes and living standards of the majority of the populations.  As a result the government adopted or rather copied the Import Substitution Industrialization (ISI) strategy. Such a policy sort to increase the proportion of goods supplied to both the domestic market and foreign market

Public Enterprises

The adoption of the ISI policy led to the establishment of many domestic industries in the country.    These Public Enterprises (PEs) were set up by the government as statutory companies to perform specific functions, or carry out specified commercial activities.  They were expected to produce at home industrial goods that were imported with the view to dampen the effect of unfavourable terms of trade by reducing (or even eliminating) imports and by diversifying exports; and hence improve living standards of the people by increasing the rang of choices of food and other manufactured products in the domestic market. 

By the end of 1966 23 enterprises had already been established, which were engaged in the production of goods and services ranging from Iron Sheets through cement and nails to fish and paper. At the peak of things, there were 44 PEs established, involved in manufacturing, trading, mining, transportation, services, and the provision of utilities. Government established these industries behind high protective walls aimed at shielding them from competition from industries of the West. The reason for protecting these infant industries is because: Relative to the already establishments in the west, newly established industries initially have high cost incurred from the setting up of fixed capital and utilities; and as such they require time for them to become competitive.

The infant industry, if developed, would be economical enough to permit a reasonable rate of return on the initial investment. So, the infant requires a temporary period of protection or assistance during which its costs will fall by enough to permit it to survive international competition with out assistance and support. These public enterprises were established so that they can make substantial financial contributions to the government in the form of profit, royalties and taxes. They also created employment for the citizenry, especially in the 1960s. However, the strict control system put in place to protect these industries led to a situation were allocation of resources become Lopsided- interest rate on bank deposit become unattractive because they were not competitive in real terms – nominal interest rate being lower than then the rate of inflation. These industries became ‘revenue devourers’ rather that ‘revenue generators’, as their cost was far greater than their costs.

Private sector

A healthy private sector, able to attract and support foreign and local direct investment, is crucial to creating a favorable investment environment in any economy. Although it seems that no generally accepted model exists to describe the relationship between private sector development and economic growth, an increasing number of studies provide more corroboration that private sector development promotes economic growth. 

Moreover, the evidence suggests that investment undertakings yield larger benefits; and hence, contribute more to economic growth when their   activities are directed by the private sector. The transfer of ownership from public entities to the private sector increases competition in markets, which induces firms to be more efficient and profitable. On the other hand, an anemic and less developed private sector cannot allocate the needed capital resources effectively, which in the long-run adversely affects economic growth and makes financial markets less stable.

Taking a close look at the banking sector, for example, it is argued that banks could well identify profitable activities, exert corporate governance, mobilize resources, facilitate transactions, and manage risk by far better in liberalized system that under a financially repressed economy. However, in many developing countries like in Sierra Leone, where stake-owned banks are still are still playing a major role in the financial system, we see that the inefficient and often politically-motivated use of the banking sector eventually frustrates efforts toward achieving economic development. Of course, heavy state involvement in economic activities hinders economic growth because governments are usually inefficient and unsuccessful in the management of financial and other economic resources. The role of privatization in improving the private sector in the country is not yet clear and very little is known regarding this issue. Apart of the formation of the NCP, very little is being done to explain to the public the issue of privatization and its benefit to both present executives of PEs and their staff.

Two facts can be extrapolated from the Sierra Leone situation.  First, we know very little about the privatization process and the impact of privatization on the performance PEs in the post-privatization period, compared with what we already know about privatization in other countries.  Second, the little we know about privatization comes, mainly, from press releases and statement by the NCP and other government officials, and a result, research is extremely limited on this issue in the country.  As such, we believe that a study on privatization of PEs in a country like Sierra Leone is very important for both researchers and policy makers in this country.  

Like many developing countries, Public Enterprises (PEs) in Sierra Leone are the dominant institutions in many sectors, as they control most of the flows and possess most of the resources and infrastructure. Consequently, the issue of privatization is of valid concern to the Sierra Leone economy, in particular, since there has been an ongoing discussion about the ability of such enterprises to survive competition in the face of advancing globalization.

Definition of Privatization

Defined in the strictest of terms, privatization means the sale of public utilities to private concerns. But as many analysts have pointed out the definition that applies to most contemporary discussions is that, privatization is the contract operation of a public utility or service by a private entity. Privatization efforts in developing countries today are in large part a reaction to dissatisfaction with government performance and/or unhappiness with the level of taxation that is levied on individuals and businesses by municipal, state, and federal governments to pay for services. This trend has grassroots origins, with civil society movements and private sector development advocates taking the lead.

The purpose of privatization is to take advantage of the perceived cost efficiencies of private firms. Indeed, proponents of the practice say that privatization results in better performance of needed services at lesser cost. This is done when the firm is allowed to choose how it will satisfy the customers. For example, a contract may specify waste removal services for the area residents a certain number of times per week. The firm is normally allowed to choose the methods it will use to perform the requirements of the contract, the trash trucks, used, and the number of workers on each trash truck. The profit motive will encourage the firm to produce the services efficiently at the least cost, a motive absent in government provision of services. Even after privatization, however, government monitoring is necessary in order to ensure that satisfactory services are provided to residents.

Why privatize when the west is nationalizing their Industries?

It is a well-know fact that the motive of privatization varies from country to country. However, there are at least four reasons behind privatization in countries around world. The first reason is privatization occur as a part of the overall transitioning from a controlled economy to a more market oriented economic system. This is particularly true for countries like Sierra Leone that have been implementing the Import Substitution Industrialization (ISI) policy since the 1960s.

Secondly, in some countries there may be a program underway to denationalize the limited number of sectors and firms that are state-owned. Thirdly, in some countries there is an ongoing effort to deregulate the overall economic system and thus privatization is a necessary tool. Lastly, the government in some countries, Sierra Leone included, have the primary objective of raising funds for the government itself and privatization is a one of the revenue generation strategies.

Notwithstanding these purported benefits from privatization, the current financial crisis suggests that privatization might not be the solution to underdevelopment after all.  The collapse of banks and other private corporations points the fact that the government should continue to play a leading role in the allocation of resources in the economy; and hence the production of goods and service. It is therefore not surprising that the governments in the west are now taking the lead in nationalization of corporations in the face of deepening recession.

This is in bid to reverse the nose-diving trend of their economies. So, if western governments, which have been the champions of the free market ideology and by extrapolation privatization, are now the taking the lead in nationalization, the question is: why do we want to privatize our public enterprises at all cost? Do we want the fate of our economy to be determined by unscrupulous private investors, who care for nothing, but their for salaries, bonuses and profits?