Public Sector Reform

Reforming Public Sector The Reform of SOEs can cost a government its support base, because reforms almost invariably involve eliminating jobs and cutting long established subsidies. Not surprisingly, the politicians carefully weigh any change in SOE policies, naturally preferring policies that benefit their constituents and help them remain in power over policies that undermine support and may cause them to be turned out of office.

While some exceptional leaders may be able to change their support base and mobilize new constituents for reform, most are inherently responsive to the supporters who put them in office. • How have the countries that reformed successfully overcome the political obstacles to reform?

In considering the above question, we found that there are three necessary conditions for reform: 1. Reform must be politically desirable to the leadership and its constituencies. Reform becomes desirable to the leadership and its supporters when the political benefits outweigh the political costs.

This usually happens with a change in regime or coalition shift in which those favouring the status quo lose power. It may also happen when an economic crisis makes SOE subsidies so costly that reform becomes preferable to the status quo.

It is also important to note that if the groups opposing reform constitute an important part of the ruling politicians' support base, then privatisation or public enterprise reforms are bound to be stalled.

2. Public sector reform becomes politically feasible if the ruling politicians have the means to implement policy and to withstand opposition to reform. 3. Reform must be credible. A reform becomes politically credible only when the investors believe that government will not re-nationalise the already privatised firms.

• From nationalisation to privatisation—mode, dynamics and political economy of public sector reform in Bangladesh

The AL which formed the first government after independence in 1971, announced a nationalisation policy on 26 March, 1972. It nationalised all Pakistani-abandoned industrial units with assets above Tk. 1.5 million, all Bengali-owned units in jute, textile and sugar as well as banks, insurance companies, inland water transport and large sectors of trade.

Many argued that during the period of Pakistan, the industrial sector was essentially the monopoly capitalism of twenty two families who controlled the economy. Nationalisation of industries would enable the people to have access to the profits which were previously appropriated by a few capitalists

• The owners were, however, offered compensation on their industrial units, but they were surprisingly apathetic towards realising the compensation claims. The main reason was that an acceptance of compensation was seen as prejudicing their right to repossess the whole property. • The Bengali owners were also offered positions of chief executives in their respective industrial units. They saw their presence in their nationalised enterprises as an advantage in preserving the continuity of their role and promise for future demands for privatisation.

• It was argued that the decision to nationalise was Mujib’s considered response to the radical forces within and outside his party. • it was also argued that the decision was based upon Mujib’s judgement that conservative forces on the right were relatively weak and had no organised alternative leadership to fall back upon.

• The nationalisation of Bengali-owned industries, however, created deep resentment within the business community, particularly the severely affected Bengali industrialists. Many had ties with the AL, but had become disillusioned with Mujib and his party. Within the party, for instance, the Commerce Minister M. R. Siddiqui strongly objected to the concept of nationalisation of Bengali-owned industries (M. R. Siddiqui was a long standing supporter of Awami League and was married to the daughter of A. K. Khan, owner of the largest Bengali owned business group during the pre-liberation period. After his objection to the draft nationalisation policy it was then again sent to the cabinet for debate).

There existed little real consensus within the AL on basic issues like the type of broad economic model to be followed. The party was thus remarkably factionalised. The factionalism was reflected among Mujib's cabinet members. Some members supported private-sector development, some demanded socialist transformation, some were uncommitted centrists and many were simply opportunists.

• Maniruzzaman observed that the dominant members of the AL had been divided into two camps since the liberation over the issue of the introduction of “pure socialism” or a “mixed economy”. While one group led by the Finance Minister Tajuddin Ahmed argued for the introduction of “pure socialism”, the other group led by the Minister for Industries Syed Nazrul Islam advocated a “mixed strategy” of economic development.(Maniruzzaman, T., Bangladesh Revolution and its aftermath, p.162.)

• Significantly, the conservative elements in the party--consisting of the trading classes, aspiring industrialists and the ex-owners or shareholders of the nationalised enterprises-- were all pressing for a revision of the policy. On the other hand, the radical wing of the party, consisting of the militant factions of the students and trade unions, were pulling in the direction of a further extension of public ownership.

• A senior Minister in the government declared; “It shall not be permitted to help grow a capitalist class in Bangladesh.....The AL government is determined as pledged to establish socialism in the country.” However, there was a significant faction within the party which had been overtly criticising the government for nationalisation of industries

• E. Khan maintained that the AL was just responding to the pressure from the radical partymen. The vast majority of the middle class and the business interests within the AL leadership would have liked to grab the nationalised enterprises, if they could. • A senior Minister of the right wing stated that, ....The government should abstain from nationalising Bengali-owned industries, mill, factories. The party is already divided on the issue and the decision of whole-sale nationalisation will lead to further chaos within the party, and this will be politically suicidal for us.

• The economic situation of the country became critical from the beginning of 1974 due partly to the global inflation which hit the world in 1973 and partly to the sharp decline of production, and large scale smuggling of jute and food grains to India. The public sector significantly failed to contribute to the country's economic growth due to mismanagement, in fact, in most of the public enterprises the production went down and the cost went up. The prices of consumer goods rose by about 600 percent over the 1969-70 price level and there was a famine condition in the country.

The economy was on the verge of collapse. A group of radical elements in the party criticised the government for unlimited patronage provided to many of the party leaders and workers for political and private gains. A group of radicals decided to break away from the party as they thought the party was irrevocably committed to the pursuits of “bourgeois goals

• Mujib was beginning to become increasingly dependent on the rightist wing, as he was disillusioned with the dismal performance of the nationalised sector and the economic condition of the country as a whole. Under the circumstances, the government also desperately needed foreign aid.

Process of Private Capital Accumulation • An extended state sector meant access to control over imports made by the state sector through political patronage. • In this context, the emerging Bengali capitalist class in a new nation were not absolutely put out by nationalisation, they had opportunities for making money in trade and indenting.

• The new and rising trading class managed to get into indenting purely under the state patronage, as distinct from those of the established capitalist who were disillusioned and demoralised because of the pursuance of nationalisation policy. But soon they wanted a share of those economic activities within the public sector. In fact, the extension of the public distribution systems served the material interest of the new bourgeoisie in the first instance and they were later joined by the old and established business elite

• Most commodities imported or produced by public enterprises for sale to the public had to be marketed through the private sector. It thus became a major vested interest of the dominant groups to secure the entitlement to wholesale distribution of state produced or supplied goods at below their market price so that the premiums could be retained. A group of new rich people were created by the regime who had access to political power and utilised it to make their fortunes by working as middlemen between business and the government

Capital Accumulation and Lobbying for Privatisation Nationalisation of Industries • Capital accumulation through smuggling, blackmarketeering and other illegal means • Capital accumulation through business, trading and Indenting • Malpractices by party leaders and workers • Malpractices by trade unions’leaders • Malpractices by Political Appointees • Emergence of new groups of wealthy people • Old members of business groups • Strong Privatisation Lobby

• The old members of the business groups either covertly or overtly opposed the nationalisation policy. Those who were within the party or close to its leadership tried to get the Bengaliowned mills excluded from nationalisation. These elements within the party were always part of the lobby for privatisation and spared no occasion to denigrate the state sector. At no stage did they abandon hope or pressure on the leadership to privatise industries. These old business and industrial elites were joined by a new generation of wealthy people who accumulated considerable surplus through their links with and access to the ruling party.

• A campaign was mounted by the private sector lobby to discredit public sector enterprises so that a majority of them could be returned to private ownership. Once the militant radical elements had in effect left the party, the balance within the party tilted in the direction of the right wing elements. These elements in the ruling party, anxious to realise their material interests, were better positioned to exploit the state sector. However, in an earlier move the government decided to remove the owners from the management of the nationalised mills as many of them joined the groups engaged in surplus extraction

• As a result, the lobby for privatisation and increased opportunities for private sector began to raise its voice more frequently and in a more organised manner, particularly after the Bengali owners were removed from the management of the mills. The Chairman of the Bangladesh Jute Mills Entrepreneurs Society, an association of the previous owners of the nationalised mills stated that; Nationalisation had caused enormous losses and damage in most spheres of our economy......On the whole nationalised sector was performing dismally......Losses were piling up to the detriments of the national economy.... Privatisation would help capital formation......The only way to restore.....(entrepreneurs) confidence was by positive steps such as privatisation.

• The pressure for privatisation and raising the ceiling on private investment exerted by groups of new rich within Bangladesh was strongly and consistently supported by the foreign aid agencies. They also advocated a larger role for the private enterprise in the industrial sector. For example, the World Bank recommended raising the private investment ceiling to Tk. 10 million or removing it altogether. Within the government there was a strong group of bureaucrats in favour of an upward revision of the private investment ceiling

• A situation of unbridled plunder was created in the economy in general and that of industry in particular during the AL regime. In this respect, the large-scale nationalisation of industries was the chief instrument of the policy. It was a mechanism through which industrial capital rapidly began to melt away and accumulate in the hands of certain people who began to get organised as ‘a class of commercial capitalists’. According to Lawrence Lifschultz, since the accumulated resources represented illegal income, those who possessed it had been searching for ways to legitimise their new fortunes.

• It was obvious that those who had accumulated financial resources were pressing the government to commit itself to a more substantial and permanent role for the private enterprise in the economy of Bangladesh by raising the private investment ceiling. There was pressure not only for raising the ceiling on investment but also for declaring a moratorium on any action against money earned through illegal transactions such as smuggling, black marketeering and avoidance of taxation. All hidden wealth was to be exempted from penalties for past violations of foreign exchange and tax laws, provided these funds were invested in industrial ventures in the priority areas as prescribed by the government

Public Enterprise Reform between 1975-81

• The regime had inherited a major economic crisis from the earlier era. • Just after coming to power, Zia reversed the Awami League’s socialist approach because he considered that a radical socialist agenda would polarise society and sharply reduce desperately needed Western financial aid and support.

• In response, there was an explicit and clear policy statement from him in favour of a mixed economy with an emphasis on privatisation and private sector- led development. He immediately withdrew bans on private investment, and decided to privatise those industries which had been nationalised in 1972. • In that atmosphere of politico-economic crisis, the protagonists of the private sector made themselves visible. Zia came under pressure from the Bangladeshi business elite, the World Bank, and a section of senior members of the newly restored bureaucracy to expand opportunities for the private sector.

• This new industrial strategy received considerable support of the civil and military bureaucracy and the economic elite in general, because the vast bulk of those officers came from rich rural or urban family backgrounds. • Zia also realised that without the support from the civil bureaucracy he would not be able to implement any policy, let alone privatisation. Thus, he attempted to rehabilitate senior Bengali members of the old central superior services of Pakistan who had been dismissed by the AL government for maintaining intimate connections with the Pakistan government during the liberation war.

Zia relied on former army officers, and antiAwami League professionals and technocrats. One of his chief economic advisers was Shafiul Azam, a senior CSP officer who had been dismissed by the AL government. Azam was determined to rehabilitate the industrial sector and advised the government to privatise public enterprises, and restore private sector development. He convinced Zia in 1975 and Ershad in 1982 to institute their two major privatisation initiatives. The ceiling on investment in the private sector was raised from Tk. 30 million to 100 million and then finally abolished in September 1978.

• During the five years of Zia' rule, a total of 255 public sector industrial enterprises were privatised. • It was also declared that loss-making and nonmonopolistic industries would also be handed over. • The businessmen and industrialists were given all possible support; foreign exchange was provided at less than its market value through import licensing, and capital was provided at a cheaper rate of interest through nationalised commercial banks.

• In 1978, General Zia became politically ambitious and set out to civilianise his rule. He formed a political party called Bangladesh Nationalist Party (henceforth BNP). At this time, Zia needed to mobilise a civilian support base, having received active backing from the coalition of political factions opposed to the Awami League. His new party received support from a section of senior civil servants, the urban middle class, affluent traders, industrialists, ex-owners of nationalised industries, the rural rich and parties and groups opposing the AL's socialist policy.

• This was a very different support base from the AL’s lower middle class backers. These diverse interests were held together by political patronage from Zia in the form of bank loans, licenses, and permits and through selling the public enterprises at throw-away prices. Consequently, the private business extended substantial financial support to the BNP.

• Many businessmen formally joined the new political party formed by Zia. For instance, C. Tanvir Ahmed Siddiqui, former president of Bangladesh federation of chamber of commerce and industries became treasurer of the BNP and Minister for Commerce and Trade, Moyeedul Islam, owner of a big industrial house, became a minister and took charge of the financial management of the 1981 presidential election. Zahiruddin Khan, president of Chittagong chamber of commerce and industries, and A.K.M. Ziauddin president of Khulna chamber of commerce and industries, became MP’s

• PE Reform during the Ershad Era, 1982-90 • Having deposed an elected president in March, 1982, H.M. Ershad desperately needed to justify his regime. Muhit pointed out that the new rulers had to take dramatic action on the economic front to legitimise the take-over. Within months of taking office, he announced a New Industrial Policy (NIP) to spur economic growth. Ershad followed the path of Zia and extended the process of privatisation further.

During Ershad era a total of 186 industrial enterprises were privatised. The most dramatic element of the new policy was the decision to return former Bangladeshi-owned jute and textile mills to their old owners and the expansion of the free list of investments where no sanction was necessary. As reported in a national newspaper, “What Mujib had failed to do, what Zia could not dare to do, this regime is apparently doing that.” The businessmen openly supported the regime and its new economic policy, and in return the regime promised to extend all possible support needed by private entrepreneurs.

• During the Ershad era, the patronage distribution system to party cronies through privatisation was so deeply rooted that in some instances a buyer’s demand-driven approach was adopted by the government, instead of the government selecting the industrial units to be sold or transferred, purchasers were given unlimited flexibility to choose the units they wanted to buy

• The prices paid for those enterprises were surprisingly low. It is widely held that large-scale under-pricing occurred upon political considerations. One estimate suggests that the total sales price of fixed assets of 498 industrial enterprises until 1984 amounted to Tk. 1733 million. Sobhan and Ahsan estimated the net value of 162 privatised industrial enterprises they looked at to be Tk. 8500.5 million.

• During this period, senior civil and military bureaucrats distributed patronage to friends and relatives. Many helped business groups obtain industrial credit from DFIs. Much of this was not re-paid, and many debts were written off. As of June 1990, defaults on loans from the DFIs stood at Tk. 10.5 billion. 20 business houses owed Tk. 457.5 million to BSB and 24 houses, mostly with the same owners, owed about Tk. 670.4 million to BSRS.

PE Reform during the K. Zia Era, 1991-95 • The BNP formed the government in 1991 under the leadership of Begum Khaleda Zia. In 1991 election, out of country's 300 parliamentary seats, the businessmen and industrialists managed to capture about 177 seats which constituted approximately 59 percent of the total. The dominant presence of industrialists, businessmen and traders in the ruling party and parliament had given the private sector a stronger voice.

• Soon after forming the government, Khaleda Zia announced that her government was committed to free market economy, and as a part of that privatisation process would go on. While addressing country's businessmen and industrialist in 1991, she stated that privatisation was the only way to achieve rapid industrial and economic growth. • Interestingly, BNP won the 68% of the total urban constituencies in 1991 election and among the 300 elected members of the parliament 75% were permanently based either in the capital or in the other major cities of the country. A majority of the MPs came from business or industrial background, they all were in favour of privatisation in general. Similarly, the Finance Minister expressed his strong support to privatisation and private sector development.

• The Finance Minister disclosed that the amount of defaulting bank loans was Tk. 81.53 billion, representing about one third of the total outstanding bank loans. But the government actually did not take any adverse actions against bank loan defaulters. It instead of trying to recover the overdue loans, issued a notification to NCBs and DFIs to reschedule these loans further. Upon the government's order, NCBs and DFIs waived interest on outstanding industrial loans on 2632 “sick” industrial units.

Public Enterprise Reform Strategies a. Sales of Assets or Equity (Divestiture) Divestiture is the total or partial sale of public sector assets to the private sector. Divestiture involves an actual change of ownership from public to

Selling shares can be a better strategy to adopt for the developed countries where capital market is developed and people have buying power. For instance, Margaret Thatcher carried out this form of privatisation in Britain under which equities of British Aerospace, British National Oil, Jaguar, Amersham were sold.

However, the sale of equity in whole or in part, is a very tedious task and a very sensitive issue in the developing countries where capital markets either are non-existent or underdeveloped. Within the developing world Bangladesh, Chile, Zaire, Algeria, Brazil and Argentina have mainly privatised through both total and partial divestitures.

b. Denationalisation This form involves the return of nationalised enterprises to their original owner or shareholders. For instance, In Bangladesh, a number of public enterprises were returned to the original owners during 197595. This particular form often leads to severe economic and political tensions within the economy.

c. Liberalisation or Deregulation This form removes some or all restrictions on entering a particular market in order to increase competition, hence giving more choices to the consumer. This particular form has been adopted by many developed and developing countries.

However, in many developing countries, in practice government officials refuse to liberalise the economy fully, because this helps them, their friends, relatives and business associates to maintain their monopoly on these businesses. The cases of Bangladesh, Zaire, Mozambique, Tanzania, Kenya, Zambia, Peru, Indonesia, Benin, Angola constitute the good examples of this.

d. Contracting Out This is considered to be the simplest form of privatisation and is thus widely used. Under it, the private sector is involved in the provision of certain goods and services, but the government remains in charge of all major activities.

This is the principal form of privatisation in the United States. The advantage of this form of privatisation is that it allows entrepreneurs to compete in the market place. Contracting out creates jobs in the private sector. The disadvantage is that in developing countries, government officials and ruling politicians often tend to give the contracts to their business associates, friends and relatives.

e. Voucher Privatisation This form of privatisation is not commonly used in the developing countries. It has been used mainly by Russia and other East European countries. A voucher is just a way of transferring income to a citizen in order to increase that individual's ability to purchase a good or service. In other words, the consumer is authorised to purchase earmarked goods or services from the private market.

f. Subsidies

Subsidies are designed to provide profit opportunities to private enterprises by cutting the cost of some of their production inputs--those the governmental sector would like to see being used. The major drawback of this form of privatisation is that it drains scarce government funds adding to budget deficits. This form may invoke corruption in the form of bribery between the ruling politicians and private entrepreneurs. Bangladesh used this strategy on a limited scale during both Zia and Ershad era.

g. User Fees

Under this form, the government is still the provider of services. User fees are the means by which the partial or full cost of the service is paid by the general public. The major problem with private payment is that the public will wind up paying more for the service.

This strategy was never used in Bangladesh, while many developing countries such as Indonesia, Kenya, Zaire, Peru, Chile and Cote d'Ivoire, Ghana used this during 1980s and 1990s.

h. Load Shedding • Load-shedding involves the government abandoning some activity, which may or may not be picked up by the private sector, depending on the nature of the activity and the need in the community

The main pitfall of this form of privatisation is that it increases the inequalities in income and wealth in a society. It widens the gap between the haves and the have-nots in general. This is a popular form of privatisation in many Latin American countries, but in Bangladesh this form was never used.

i. Management Privatisation Under this arrangement, the private sector, with its expertise and know-how, is invited by the government to take over the management of a particular public enterprise.

However, under the agreement the government still retains complete ownership of the concerned stateowned enterprise. This form of privatisation is a popular one in Malaysia. Many other developing countries have also tried this form of privatisation. Recently, the Bangladesh government has contracted out the management of a few services of Bangladesh Railways to the private sector.

• The disadvantage is that conflicts between the government and the private sector may produce negative consequences. Besides, the private sector may also pay too little heed to the quality of the goods and services.

• While Public Enterprise Reform has different meanings and forms in the academic literature, in Bangladesh, it has mainly taken the form of disinvestment, denationalisation and liberalisation in terms of policy measures. Disinvestment generally means the sale of shares of a company with a view to the transfer of ownership. Denationalisation sees public property transferred to private ownership through open or negotiated sales. It entails the sale of shares to

• In the context of Bangladesh, however, disinvestment is used to designate the process whereby nationalised properties are divested, whereas denationalisation refers to return of enterprises nationalised after 1971 to their Bangladeshi owners.

It is to be noted here that in Bangladesh disinvestment has taken place in the form either of 100% transfer of ownership or partial transfer in the form of disposal of 49% of shares of ownership while majority (51%) shares remain with the government.