Why we can’t delay Privatization

On the eve of World War II, Churchill spoke of there having been enough “jaw, jaw”. Now was the time for “war, war”. He was talking about the failed policy of appeasement with Nazi Germany, but the same rule sentiment could be applied to Lebanon’s need to privatize key economic sectors, a topic on which there has been much “jawing”.

Since the Cedar Revolution and the election of a supposedly more pro-active  government, not a lot, apart from the “pre-revolutionary” sale of licences to two mobile phone operators, has been accomplished on this front. Meanwhile, the debt has remains at a cataclysmic level and the basic services provided by the public utilities – electricity, water, telecom et al – have slipped from mediocre to abysmal. And yet, the idea of privatisation, first mooted by the Hoss government in 1998, remains strangely taboo with many staunch opponents – mainly Hizbullah and Amal – who perceive public institutions as vital providers of jobs for a growing population, and other political factions who see utility coffers as a handy source of petty cash.

Others wrongly believe that state companies are too strategic (such as water and electricity generation) to be passed on to the private sector, while others very wrongly believe that, once privatised, public companies will cease to provide revenues to the government. Sadly, there are even those who are against privatisation simply because they don’t understand it.

What is indisputable however is that the proceeds from privatisation, would be extremely valuable in repaying and containing the debt, providing much needed cash in large amounts – $7-10 billion at a conservative estimate – and reduce government control of the economy (in Lebanon’s case this would be a good thing, as few governments over the past 25 years have been able to manage the economy efficiently), allow it to extricate itself from the heavy financial commitments and focus on allocating its scarce resources to more urgent issues that are not the responsibility of the private sector, such as education and social welfare.

Privatisation also would create a competitive environment by giving the private sector a strong chance to compete in specific economic areas. By eradicating subsidies and assistance to mostly loss-making public institutions such as EDL, and by providing all types of institutions access to government distribution channels, the private sector would be able to operate in a fairer environment and be given the opportunity to compete and thrive.

Another hugely important goal of privatisation would be to diversify the shareholding structure of privatised entities and allow the public to subscribe to newly offered shares. By buying privatised shares, the public would be able to participate in their own economy. A privatisation programme is most likely to provide savings alternatives to the public, allowing the development of a local secondary market, which would be principally characterised by liquidity, and increase the market capitalisation of a stagnant and low-turnover Beirut Stock Exchange (BSE). With privatisation, the 400 “ruling” business families in the country would no longer be the sole providers of the bulk of employment and fiscal revenues. The BSE would no more rely on the goodwill of these families to increase the number of listed stocks and market capitalisation, as privatisation stocks would then provide a more interesting alternative.

More specifically a privatisation program would attract foreign (especially Lebanese) capital. The BSE, and consequently, domestic capital markets, would be boosted, while, newly-privatised entities would become more profit oriented and more cost conscious.  The workforce would be better-trained and prepared to face competition and management would be of better quality. Opportunities for employment would increase substantially for graduates and jobs would be created for qualified rather than favoured personnel, thus increasing the general quality of the workforce, and attracting qualified Lebanese expatriates. It would guarantee the permanent evolution of the key economic sectors, within a competitive environment, force the modernisation of the legal system and allow for the ready availability of foreign expertise and technology. Corruption will be dealt a serious, if not fatal, blow.

Let’s take water. If the Lebanese government were to privatise the distribution sector in the form of a 40-50 year concession, the effects would be extremely positive. The concessionaire would pour in significant investments to develop the network, create jobs through the hiring of qualified personnel as well as blue-collar workers. It would resort to many financing alternatives on the local and regional markets in its efforts to develop the network, which may include a listing on the BSE and/or issuing bonds and other types of financial securities in the local and regional capital markets. Moreover, such a concession could easily generate $2-3 billion a year in concession management revenues to the government.

However, it will not be easy. Nobody should expect the government to be able to privatise any of its institutions within months of a decision being taken a couple of months and the Lebanese should also all be aware that the window of opportunity to privatise via international public offerings (IPOs) and/or selling large and controlling stakes to international strategic investors shut long ago.

It was open once, back in 1995-1998, when emerging markets were booming as a consequence of privatisation in the former Soviet Bloc and phenomenal growth in Asian and South American saw significant demand for emerging markets privatisation stock. Initial public offerings IPOs for state companies in emerging economies in Asia, South America, Eastern Europe and even Africa were all snatched up and oversubscribed by a diversity of international investors, who were then open to Lebanese privatisation stocks. However, Lebanon was unable to provide the supply and in 1998 the emerging market bubble burst. Today, such a scenario for Lebanese privatisation IPOs would be almost impossible.

In a much more risk-conscious investor world, Lebanon’s risk level and its subsequent low rating (B- by Standard & Poor’s, one of the world’s leading rating agencies) are too badly perceived, making Lebanese privatisation not particularly attractive to international strategic investors as they would be reluctant to commit financial and human resources to a country where political and economic instability is rife. Success however, particularly in today’s more challenging global environment, would mean Lebanon could finally take its place amongst the world’s reforming and advancing economies.

Lebanon is a late comer in the global privatisation process. A significant number of countries have already started, and in some cases completed, their own privatisation process. Each of these countries has carried out its privatisation programme for different purposes, although the end result and objective has always been more or less similar. Many governments, including some socialist ones, have privatised their state-owned and controlled institutions to improve the quality and cost of service to the individual consumer, reduce the financial and human resources burden imposed by the control and ownership of large public institutions, and use the proceeds of the sale to alleviate the debt burden, reduce the budget deficit, or to finance vital infrastructure and social projects.

Recent studies have shown that, in every country to have undergone a privatisation programme, private firms have outperformed public firms and that privatisation itself has increased the operating efficiency of the divested firms. Privatisation has indeed led to the effective restructuring of public enterprises, when the rights to both cash flow and control have passed from the government into private hands. Studies carried out in the UK, Chile, Malaysia and Mexico (all countries to have been strong advocates of privatisation) showed that net welfare gains have been recorded in more than 90% of recently privatised firms.

Source: The World Bank

The World Bank study (which was carried out in 18 countries, including six developing and twelve industrialised), as depicted in the table above, has shown that it tested for the results most governments expect: increased profitability, increased operating efficiency, increased capital investment spending, and increased output. Employment actually increased after privatisation, by an average of 6%, rising in almost two-thirds of the firms sampled.

Privatisation would allow Lebanon’s economic and social structure to change significantly in a positive way. It would not only help significantly towards repaying debt and re-establishing monetary equilibrium, but it would more importantly have long-term growth effects by transforming a struggling economy to a performing one in a matter of a few years. Time for cogitation is over, let’s get on with it.

Nicolas Photiades is a chronic sex addict and bond trader
BOX 1

Privatisation 101

As a general concept, privatisation is simply the process of transferring productive operations and assets from the control and the hands of government or the public to the hands of the private sector. Privatisation is mot merely the sale of a public institution to a private bidder offering the highest price. It also includes processes, such as the contracting out of specific public services to the private sector, the leasing of a publicly owned product or company, or the financing by the private sector of vital infrastructure projects, which the government is unable to finance on its own. Privatisation can also come in the form of liquidation of public property or can include the concept of mass privatisation, i.e. the sale of all institutions and services under state control.

The privatisation process varies from country to country, depending on the prevailing general political, economic, commercial and social atmosphere. Indeed, the privatisation path heavily depends on the goals set by a particular government, the individual circumstances facing the specific institution to be privatised, as well as the economic, political and social environment of the country in question. Privatisation should not be regarded as an alternative to government and an obstacle to government growth, but as the best possible way to create new kinds of market relations and to provide results, which are at least comparable and, most desirably, superior to conventional public programmes. The privatisation concept should never be regarded as traditional opposition to state intervention and expenditure, but more a process, which arises out of necessity.

An important aim of privatisation is to change the distribution of power within a society, and hence diminish the control of the economy by the government, as well as by government-appointed managers and executives. Employees of state-owned institutions, which are targeted for privatisation, would surely regard legitimately that the process is likely to threaten them directly. The aim, albeit a Utopian one, is to show that they can only benefit in the long-term, either by realising that private management is more likely to improve their personal welfare than an antiquated public system, or by being relocated elsewhere in a more efficient and performing private sector. This particular private sector can be created out of privatisation, such as the establishment of satellite companies, which would depend on the business flow provided by a newly privatised entity.

BOX 2

What is ripe for privatisation (in order of in order of priority and doability)

Fixed telecom

EDL

Water and waste water (concession)

Rail (concession)

Gas

Oil refineries

Ports and airports (some through concessions)

Intra companies (including Casino and Finance Bank)

MEA and BLC Bank (BDL companies)

Grain Silo

Concession of Container Terminals of ports

National Deposit Insurance Corporation

Concession to manage the pension fund system

Regie des Tabacs (and sort out a real social problem in the form of child labor)

Racetrack and stadia

Prisons

Other specialised banks (including development bank dormant licences)

Public hospitals (concession or full privatisation)

Technical and vocational schools (concession or full sale)

Management of archaeological sites (set up a national heritage company)

Municipal services (solid waste collection, slaughterhouse, etc.)