14 - 20 October 1999
Issue No. 451
|Published in Cairo by AL-AHRAM established in 1875|
Egypt Region International Economy Opinion Culture Books Features Profile Travel Living Sports People Time Out Chronicles Cartoons Letters
Tapping the marketsBy Khaled Fouad Sherif *
Over the past decade, privatisation has become a common phenomenon in both developing and developed countries. The World Bank reports that over 75,000 formerly state-owned enterprises have been privatised in more than one hundred countries. In developing and transition economies, proceeds from the privatisation process increased from $2.6 billion in 1991 to $66.6 billion in 1997.
However, the privatisation experience has not been uniform over the whole of our region. Although none of the Middle Eastern and North African countries have gone as far as the most ardent privatisers in Latin America (such as Peru, or Argentina), Morocco has sold off about as much of its public sector as has Brazil and more than either Chile or Ecuador. Unlike other countries in the region, Morocco has also made considerable progress with privatising national infrastructure. Private sector enterprises are already involved in providing power for two cities, a private-sector company has a concession contract for water supply in Rabat, and the government has announced that it will auction a licence for a (second) GSM cellular network.
This is significant, because the lion's share -- 42 per cent -- of privatisation proceeds in developing and transition countries come from infrastructure investments, with industry and primary production (mining, oil and gas) contributing 19 per cent and 21 per cent respectively. Financial and other services make up the remaining 18 per cent. Infrastructure, in particular telecommunications, has been an important focus for privatisation efforts in developed countries, too. By the end of 1997, the ten largest privatisations, ranked by the funds raised, included eight public offerings of capital in telecommunication companies and one for a gas company.
In the Middle East and North Africa as a whole, however, infrastructure privatisation has so far played a far less prominent role than in other regions. The flotation of industrial enterprises account for over half of all the region's privatisation proceeds, while financial services make up an additional 23 per cent. In contrast, sales of infrastructure enterprises account for only two per cent of total proceeds. The relatively small number of infrastructure offerings over this period (1988-1997) might partly explain the generally low level of revenues produced by privatisation programmes in the region.
In the power sector, the two most common types of reform being undertaken are corporatisation, and allowing independent power producers (IPPs) to enter the market. Privatisation of existing distribution and generation enterprises is relatively less common. Corporatisation is often seen as the first step towards privatisation. It is therefore worthy of note that only two of the eight countries for which data is available in the Middle East and North Africa -- Jordan and Morocco -- had corporatised their power sector by the end of 1998 This is a much weaker showing than any other region in the world. In comparison, in Eastern Europe and Central Asia 63 per cent of countries have corporatised their power sectors, and even in Sub-Saharan Africa, 30 per cent of countries have already followed the same path.
Another popular reform is to allow independent power producers (IPPs) to produce power for sale to the national distribution utility, which often remains state-owned. Two benefits of this tactic is that it transfers risk to the private sector (for example, risks associated with construction and operating risks) while also helping to relieve power shortages. Further, it has been suggested that it may encourage privatisation of existing state-owned utilities by highlighting the inefficiencies that still dog incumbent producers. Between 1990 and 1997, investment through IPPs accounted for over half (56 per cent) of private investment in the power sector.
Yet of the eight countries in the Middle East and North Africa for which data is available, only Morocco had any completed IPP projects by mid-1998. This is again a much weaker showing than in any other region of the world, Sub-Saharan Africa included. In comparison, 83 per cent of countries in Latin America and the Caribbean have allowed entry by IPPs.
The final reform would of course be the privatisation of existing generation and distribution businesses. This is, to date, even less common than either corporatisation or entry by IPPs. Whereas 44 per cent of developing countries have corporatised their power utilities and 40 per cent have allowed IPPs to enter, only 21 per cent have privatised exiting generation utilities, and only 18 per cent have begun to disentangle themselves from the distribution sector. Morocco, which is the only country in the Middle East and North Africa to have "privatised" their water utility, has awarded management and operations contracts that cover power and water in Casablanca and Rabat to private producers. Although privatisation has not yet been commenced in Egypt, a law has been passed allowing privatisation of up to 49 per cent of seven regional power generation and distribution companies, as well as bids for several BOOT projects. Because of this, total investment in power projects with private participation was far lower in the Middle East and North Africa than in any other region of the world except for Sub-Saharan Africa between 1990 and 1997.
Although telecommunications has accounted for a significant portion of privatisation revenues worldwide, there has been relatively little private participation in the sector in the Middle East and North Africa. Fixed-line operators have been partially privatised in Bahrain and the United Arab Emirates. Other countries, including Jordan and Egypt, have also announced that they intend to partially privatise the state-owned telephone services.
Several countries, including Egypt, Jordan, Kuwait, Lebanon and Yemen, also have (partially) private cellular operators. In addition, Egypt and Lebanon have introduced competition in cellular telecommunications. As noted earlier, Morocco has announced the tender of a second GSM network, which is intended to take place in 1999. This relatively modest privatisation effort means that, between 1988 and 1997, the Middle East and North Africa accounted for less than one per cent of global privatisation proceeds in the telecoms sector. In comparison, Latin America alone produced 55 per cent of such revenues over this period.
Private sector participation in the water industry has, in general, proceeded even more slowly than in other areas. The World Bank database on private participation in urban water provision lists only 53 contracts in 27 developing countries between 1989 and 1998. Twenty-nine of these contracts were concessions, with most of the rest being management contracts or leases. Only four of the deals included sales of minority shares. Again, most of the contracts were in Latin America and the Caribbean (22). Only two countries in the Middle East and North Africa, namely Egypt and Morocco, signed contracts with private water operators over this period.
In August 1992, a joint venture between Biwater (UK) and ECD (Egypt) took over operation and maintenance of Greater Cairo's sewage treatment plant and wastewater collection system. The initial contract was for two years and was then extended for an additional 18 months. As of February 1996, Biwater was retained for an additional two years to provide technical assistance.
In June 1998, the government of Morocco awarded a 30-year concession to provide water, wastewater and electricity to Rabat to a consortium of Portuguese and Moroccan investors. In 1997, a similar concession was awarded in Casablanca to a consortium led by Suez-Lyonnaise des Eaux. In early 1999, it was announced that an additional concession contract for power, water and sewage would be tendered in Tangiers.
Although several countries, most notably Egypt and Morocco, have made significant headway with the privatisation of their economies, others have lagged far behind. In general, the region is still playing catch-up with other regions, especially in infrastructure, where the progress is almost painfully slow.
Stock market capitalisation as a percentage of GDP tells an interesting story in this respect. The statistics for all countries in the Middle East, North Africa and Latin America, provided in the International Finance Corporation's Emerging Stock Markets Review, show generally comparable figures across the two regions as a whole. However, the majority of countries are left far behind by the two undisputed leaders -- Chile and the United States.
One way that market capitalisation could be significantly increased in the Middle East and North African countries would be to push the process of privatising state-owned utilities yet further ahead. In many developing countries, when telecoms companies are listed on the stock market, they are often among the largest corporations to be found there. For example, they are the single largest companies by market cap on the stock markets of Chile, Brazil, the Czech Republic, Hungary and Mexico.
Utility privatisation could, therefore, provide a royal road to increasing the role played by the capital markets of the Middle East and North Africa. Since stock market development is positively correlated with long-run growth, this move could thereby indirectly help accelerate the development of the region.
* The writer is Knowledge Manager for the Eastern Europe & Central Asia Department of the World Bank.