Evaluating Privatization in the Middle East and North Africa: The Case of Algeria - Olga Guerrero Horas

8/9/2019 Evaluating Privatization in the Middle East and North Africa: The Case of Algeria - Olga Guerrero Horas

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Olga Guerrero HorasMA International Studies and Diplomacy

Student number: 261969Word Count: 3100 approx.

Economic Development of the Middle East: 15PECC341Lecturer: Dr. Randa AlamiTutor: Dr. Randa Alami

Evaluating privatization in the Middle East and North Africa: The

case of Algeria

Introduction


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Over the past few decades, privatization has become one of the most important political

and economic phenomena in the world. A main component of the Washington

consensus, it is considered as the main tool for reinforcement and improvement in

private sector performance and often a policy condition for obtaining foreign finance1

.Thus, developing countries turn to privatization to improve the productivity of their

State Owned Enterprises (SOEs), to access capital and improve service delivery and to

reduce the fiscal burden SOEs losses represent2.

MENA countries have also undertaken measures towards a more market-oriented

economic system, although their progress has been slower than in other regions such as

Latin American and Asia3.

In order to discuss more in detail the process of privatisation in the MENA region, I will

begin by defining privatization, its methodology and the potential positive impact on

efficiency and private sector development its reforms can entail. This will bring us to

consider the circumstances in the Middle East that motivated undertaking privatisation

measures since the early 1980s. I will then consider the case of a latecomer to

privatisation in the region, Algeria: the characteristics of its economy, the initial phases

of the Algerian open door policy (infitah) followed by IMF/WB reforms and the

outcome of such a process. Assessing the outcome of the Algerian privatization will

lead us to consider the reasons for its failure, which are not exclusive to this particular

country. Finally, I will briefly discuss the prospects for privatization in MENA.

Throughout this essay, I will attempt to highlight the difficulty of privatization policies

as well as the importance of considering initial conditions in each country and

introducing parallel measures such as a stable business environment and regulation,

financial and infrastructural reforms.

Privatization

1 Randa Alami, Privatization in the MENA (Lecture, SOAS, London, 2 nd February 2009)2 Ben Naceur, Samir Ghazouani and Mohammed Omran, The Performance of Newly Privatized Firms inSelected MENA Countries: The Role of Ownership Structure, Governance and Liberalization Policies,(March 2006), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=8893276, 6.3 Ben Naceur, et al, The Performance of Newly Privatized Firms, 3.


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Privatization can be defined as a policy process whereby a government reduces its role

as an owner and manager of business enterprises in the interest of other actors such as

individuals and corporations4. It includes all types of transactions involving a sale of

assets or a transfer of management control, thus giving rise to nine methods of

privatisation.

Privatization can then take place through:sales of shares and assets through

competitive bidding or direct negotiation, the sale of shares to individuals or institutions

throughpublic flotation, sales of businesses to its managers and employees as a

management buyout, liquidations,joint ventures of public and private owners, transfers

of shares of a public enterprise to a trustee for onward sale, appointing a private firm to

provide managerial services for a fee through management contract, a lease contract

which grants temporary property to a private firm and concessions where thegovernment sets the rules5. These different types of privatisation range from

managerial/commercialisation approaches to more capitalist or populist approaches6.

Countries turn to privatization due to the problematic nature of SOEs. By definition,

state-owned enterprises are properties collectively owned by all the citizens, where

professional managers on fixed salaries are hired to run the enterprise7. SOEs are said to

be inefficient in social, political, incentives, human capital, competition and financial

ways. From asocialview, SOEs are inefficient because they set prices taking into

account social marginal costs8.Politics plays a great role in SOEs, which results in

overstaffing, bureaucratic and regulatory frameworks as well as political pressure to the

government to keep established rents such as high wages/low effort and secure

employment9. Managers also tend to have lowerincentives, having no self-interest in

maximising gains10 and it is hard to control his behaviour, causing the principal-agent

problem.11 Moreover, these managers are often given the job according to their

4 Iliya Harik Privatization: The issue, the prospects, and the fears, in Privatisation and Liberalisation inthe Middle East, eds. L. Harik and D. Sullivan, (Indiana: Indiana University Press, 1992), 1.5 Celine Kauffmann andLucia Wegner, Privatisation in the MEDA region: where do we stand?, OECDDevelopment Centre, Working Paper no.261, 12-13.6 Randa Alami, Privatization in the MENA (Lecture, SOAS, London, February 2009)7 Ha-Joon Chang,Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism(London: Bloomsbury Press, 2007), 105.8 Ben Naceur et al, The Performance of Newly Privatized Firms in Selected MENA Countries,15.9 Ibid 16.10 Ibid.11 Ha-Joon Chang,Bad Samaritans, 105.


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political affiliation and not necessarily because they have the right skills for the post,

which also lowers efficiency and increases agency costs due to low human capital12.

The presence of extensive and poorly-performing public companies is also said to hinge

on the growth of the private sector, lowering competition and preventing private firms

from entering the market. Finally, the subsidies they receive from the state as well thelow interest rate on loans allows SOEs to operate under soft budget constraints and

become afinancial burden to the state13. As a result from these failures, the main

purpose of privatization is thus to enhance the efficiency of SOEs and to decrease the

budgetary burden on the state14.

Privatization has also been undertaken as part of a broader liberalization of the economy

in a neo-liberalist agenda. This process results in a partial withdrawal of the state from

its hegemonic role as an entrepreneur and as a provider of welfare and other services15.

This neo-liberalist ideology bases their actions on the claim that privatization improves

firm performance and that this contributes to economic growth16.Neo-liberalists argue

that in the case of developing and transition economies there is no trade off between

equity and efficiency when it comes to privatisation17. These economies produce inside

the perfectly competitive production possibility frontier and thus there is no such an

opportunity cost18.The economy will move to a more efficient and more equitable

position19.

However, the actual evidence of these claims is far from clear. A study by Birdsall &

Nellis finds that the positive distributional effects cannot be predicted and that actually

the impact of privatisation on equity will depend on the countrys initial condition, the

sale event and the post privatization political and economic environments20. Numerous

other studies attempt to account for the impact of privatization and the results are very

12Ben Naceur et al, The Performance of Newly Privatized Firms in Selected MENA Countries, 15. 13 Ibid, 17.14 Ibid, 15.15 Iliya Harik Privatization: The issue, the prospects, and the fears, 1.16 Ben Naceur et al., The Performance of Newly Privatized Firms in Selected MENA Countries: The Role ofOwnership Structure, Governance and Liberalization Policies, 4.17 John Nellis and Nancy Birdsall (eds) , Privatization Reality Check: Distributional Effects in DevelopingCountries in Reality Check: The Distributional Impact of Privatization in Developing Countries (Washington, DC:Center for Global Development, 2005), www.cgdev.org/doc/Privatization/ch%201.pdf, 5.18 Ibid, 4.19 Ibid, 5.20 Ibid, 10.


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mixed. This has given rise to a growing resentment against privatisation, arguing that

privatization in developing countries is by far not the best approach and does not

overcome the deficiencies of the market21. Moreover, it is also claimed that

privatization in most developing countries simply reflects the interests of advanced

industrial states through foreign agencies such as the IMF and WB and business classesand elites22.

In order to assess the impact of privatisation in MENA it is necessary to have a brief

look at the regions general characteristics and trends. This helps us understand the

underling factors which have motivated privatization domestically.

Privatization in MENA

MENA countries are characterised by a high state involvement in their national

economies and SOEs owned most of the regions economic activity23. In the case of

Algeria, between 1978 and 1985, the SOEs made up almost 70% of GDP24This is partly

due to the nature of the economies of the region, which needed for the state to fill in the

gap for a very small industrial sector and to make up for market failures such as lack of

investment, capital and sectoral imbalances25. The state was also good at central

planning and raising capital for sophisticated industries, which the economies lacked26.There was also an ideological root to the emergence of the patron state: the aim for self-

sufficiency and de-linking from developing nations shortly after independence27.

In fact, the dominance of the patron state intensified the dependence on industrialized

countries28. Governments became increasingly dependent on external aid to bear the

21Iliya Harik Privatization: The issue, the prospects, and the fears, 5.22 Ibid,13.23 Ibid, 5.24 OECD Development Centre, Privatization in the MEDA Region: Where do we Stand?,WorkingPaper (2007), 21. www.oecd.org/dataoecd/23/62/39145511.pdf(Accessed 1st April 2010)25 Iliya Harik, Privatization: The issue, the prospects, and the fears, 5.26 Ibid,5.27 Ibid, 2.28 Ibid.


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cost of their SOEs and maintain a welfare system29. All in all, economies became

trapped in less productive sectors which produced fewer and worse services30.

In this context, MENA governments undertook privatization with the purpose of:

benefiting from short term fiscal gains, the positive economic and social impact ofprivatisation on competition, the development of financial markets and the broadening

of local participation, as obtaining financial assistance from the World Bank and IMF

which was conditional on privatisation.

Compared to other regions, MENA countries are quite heterogeneous and have taken to

different approaches with respect to privatisation. I will focus from now on the process

of privatisation in Algeria, illustrating with examples from other countries for

comparisons.

The case of Algeria

Background

The Algerian economy is dominated by oil and gas. These make up approximately 97%

of the countrys exports and two thirds of the government income31. After Algerias

independence in 1962, president Boumedine came to power through a military coup in

196532. Since then, he adopted socialist principles, financed through oil and gas export

revenues and foreign borrowing. He institutionalized social planning and established

large state enterprises called the socits nationales. This included SONATRACH in

the field of hydrocarbons, SONALGAZ for domestic gas and electricity supplies among

others33. As president Chadli Ben Jadid came to power in 1979 the financial burdens

caused by the socitts nationales caused increasing pressure on the government and a

10 year period of political and economic reforms began.

29 Iliya Harik, Privatization: The issue, the prospects, and the fears, 2. 30 Ibid, 2.31 African Economic Outlook, Algeria Country profile, 2003.http://www.africaneconomicoutlook.org/en/countries/north-africa/algeria/#/overview (Accessed 6th April2010)32 Nazih Ayubi, tatiste versus Privatization: The Changing Economic Role of the State in Nine ArabCountries, inEconomic Transition in the Middle Easted. Heba Ahmad Handoussa, (Cairo: TheAmerican University in Cairo Press, 1997), 148.33 Ibid, 148.


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Phases of Privatization

The reforms initiated in Algeria in the 1970s had three main purposes. The main goal

was to achieve greater efficiency in the economy34

. Privatization was expected to limitbureaucracy through the decentralization of certain enterprises35. A reformed banking

system and pricing policies as well as new commercial and investment codes were also

expected make the economy more profitable36. Another goal was to lower the impact of

a projected loss income in the 1980s, for which an austerity plan would be

implemented37. Finally, the reforms sought to create additional sources of income

through the exports of non-carbohydrates and making agriculture more productive38.

The Algerian infitah carried out by the Algerian government began in 1980 and thereforms are said to have four phases until the IMF/WB stepped in.

The first and second phases of the infitah (1980-85) included very limited reforms.

These were launched from a subcommittee of the political Front Nationale de

Liberation and had a minimal impact39. The number of workers for each company was

restricted, thus breaking up some companies, and managers were given limited authority

over prices and production40. Later in 1983, The Investment code outlines financial and

fiscal incentives for activities in different private sectors. The lack of improvement in

the economy led the government to announce an austerity plan to keep the IMF and WB

from intervening and to prevent rescheduling of foreign debt. This programmes

measures consisted of a deregulation of domestic prizes and interest rates, modified

laws to attract foreign investment, export-oriented growth and it ended guaranteed

employment41. Despite this apparently extensive programme, the first and second

phases of the Algerian infitah were incomplete. Algeria did not implement a coherent

macroeconomic program along with the privatizing measures and the problematic issues

34 Dirk Vandevalle, Breaking with Socialism: Economic liberalization and Privatization in Algeria,Privatisation and Liberalisation in the Middle East, eds. L. Harik and D. Sullivan, (Indiana: IndianaUniversity Press, 1992), 194.35 Ibid36 Ibid37 Ibid38 Ibid39 Ibid, 194.40 Ibid, 194.41 Dik Vanderwalle, Privatization and Liberalization in the Middle East, 195.


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in the country such as inflation, unemployment and an extensive black market,

persisted42. The situation was worsened by a fall of the dollar, which lowered revenues

from exports, and a growing political opposition43.

The 1986 National Charter and Investment Codes initiated the third phase of the infitahwhich focused on additional institutional reforms44. The agriculture and banking sectors

were given greater autonomy as subsidies, wages regulations and the link between the

central bank and the treasury were broken45. Laws were introduced to favour foreign

investment and the participation of foreign enterprises and bank in Algeria46. However,

the large devaluation in 1988, the escalating inflation and employment resulted in the

October 1988 riots. Strikes, demonstrations, riots and a growing domestic opposition to

the regime made the government act change their domestic and international policies47 .

The 1989 Constitution acknowledged pluralism, Algeria then joined the new ArabMaghreb Union (UMA) and initiated reforms in the form of structural adjustment

programs in cooperation with the World Bank and the IMF48.

The following years were a very unstable phase in the Algerian history. Politically, the

country was immersed in controversial elections, the rise of Islamist parties and the

repression of these49. Economically, the Algerian economy was struggling with rising

unemployment, malaise in private sector areas of agriculture, construction and industry,

declining export oil prices and an high inflation which reached 32% in 1993. In a way,

the concession of help through IMF/WB programmes is said to be have been a reward

to the Algerian government for the oppression of Islamist parties and the interruption of

diplomatic relations with other Islamist countries such as Iran and Sudan50. Following

the standard guidelines for Structural Adjustment Programmes, the programme

42 Dik Vanderwalle, Breaking with Socialism: Economic liberalization and Privatization in Algeria, 196.43 Ibid.44 Ibid, 197.45 Ibid, 198.46 Ibid, 199.47 Jane Harrigan, H. El-Said and C. Wang, The Economic and Political Determinants of IMF and WorldBank Lending in the Middle East and North Africa, World Development, 34 (2006), 25748 Ibid.49 Ibid, 258.50 Ibid, 258.


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provided guidelines for monetary and financial policy, international trade and the

various economic sectors51.

Algeria continued its anti-terrorist commitment throughout the 1990s52. The election of

a pro-western and anti-Islamist president, Mr. Bouteflika, in 1999 increased violentconflicts within the country but also loans and support from the IMF through the

Compensatory and Contingency Financing Facility53.

Since the early 2000s the Algerian economy has taken off54. Economic programmes

have been accompanied by social programs such as Economic Revival seeking to

preserve the gains from SAPs55. Foreign currency reserves rose and foreign debt have

fallen, although this is mainly due to favourable oil revenue56. Among the initiatives,

privatization of public institutions and encouraging the private sector have accountedfor 70% of non-oil economic growth in 2006-200757.

Outcome

Before the IMF and World Bank intervention, the Algerian government had carried out

ten years of an infitah policy. Existing barriers in the Algerian economies had been

removed and bureaucratic and political resistance had partly been overcome. It had the

potential of becoming one of the most far-reaching reform efforts in the Arab world58.

Although the privatisation process was launched in 1995, it started at a very slow pace.

In 2000, still 60% of government revenues originated in SOEs 59. Thus the WB noted

that Algerias privatization has not yet resulted in a single complete divestiture of

shares of corporatized public enterprises to outside private interests60. The World Bank

explained these poor results as a consequence of a lack of a well defined strategy and

51 Mohamed Ratoul, Economic Reform & Political Openings: Lessons from Algeria, Arab InsightArticles (2008). www.arabinsight.org/aiarticles/195.pdf, 78. (Accessed 5th April)52Ibid.53 Ibid.54 Ibid,8455 Ibid, 85.56 Ibid, 8557 Ibid, 85.58 Dik Vanderwalle,Breaking with Socialism: Economic liberalization and Privatization in Algeria, , 201.59OECD Development Centre, Privatization in the MEDA Region: Where do we Stand?, 21.60 Isabelle Werenfels, Obstacles to Privatisation of State -Owned Industries in Algeria: The Political Economy of aDistributive Conflict, The Journal of North African Studies (2002), 1.


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time bound objectives, lack of sufficient financial and human resources and the

inadequate legal and institutional arrangements61.

Despite this claims, it is hard to measure the actual impact due to the lack of

information. Although the Algerian authorities claim that 500 privatization took placeup to 2006, creating $740million, there is not much information regarding these

operations and only 22 transactions are recorded in the database62. Moreover, the

government still controls the national oil company SONATRACH and most of the

energy sector63. In 2005 the Euro Mediterranean Network of Investment Promotion

Agencies (ANIMA) was reporting 785 privatization projects in Algeria64. Most of these

concern medium sized companies in manufacturing, construction, agriculture and

tourism sectors65.

Overall the privatization process in Algeria has been slow and lacking transparency.

The initial impediments to privatization highlighted by neo-liberal institutions such as

the lack of well-defined strategies, the lack of financial, human resources and legal and

institutional arrangements are true66. However, the countrys complex interplay of

economic, social, political and cultural forces have hindered privatization throughout

time. SOEs in Algeria represented the cornerstone of state-building67, they had an

important place in the ideological post-colonial framework and were used to represent

national sovereignty and collective efforts as part of the populist imaginerie68. Also,

the monopoly of trade SOEs enjoyed had given rise to a complex system of rent-

seeking intermediary firms that benefited from this monopoly.69Finally, the SOEs

played a very important role in state bureaucracy. The French colonial power had

created an extensive bureaucracy with tribal alliances. There was a lack of a unified

government and instead several competing elites, including the military, which

benefited from important monopolies. It is the lack of a legitimate ruling class, political

61 Ibid, 3.62OECD Development Centre, Privatization in the MEDA Region: Where do we Stand?, 21.63 Ibid.64 Ibid.65 Ibid.66 Isabelle Werenfels, Obstacles to Privatisation of State -Owned Industries in Algeria: The Political Economy of aDistributive Conflict, 3-467 Ibid 11.68 Ibid, 12.69 Ibid,13.


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stability and failure to address the problematic structures of society that held back

privatization.

General Lessons from Privatization

From the evidence in Algeria as well as in other countries in the region, we learn that

privatisation cannot be undertaken as a stand-alone measure. It is more likely to be

successful when it is implemented within a regulatory and policy framework and as a

part of a more general package of measures promoting efficiency, private sector

development, improvement of the business climate and liberalisation of the financial

market70. Countries like Egypt and Tunisia, which succeeded in privatisation showed

clear commitment to the reform, ensuring credibility and carried out transactions in the

key sectors71.

This is consistent with the successful privatisation of OECD countries, documented by

the OECD 2003 report. Lessons from these experiences highlighted the need for

political support 72. It also called for prior measures to sale such as addressing

competition and regulatory issues and communication to address stakeholder

concerns73. It called for concern regarding the sequencing of sales and post-privatization

control devices to discipline stakeholders and provide incentives for investments74.

Only recently has the Algerian privatization has really taken off and this has not been

arbitrary. Privatization measures are now framed within a more coherent programme

which includes addressing social needs, development of infrastructure and a more

favourable environment75. This is implemented in a more politically stable context, with

political entities seeking economic efficiency without causing excessive damage to the

poor76. This is consistent with studies on private sector development, which find that an

70OECD Development Centre, Privatization in the MEDA Region: Where do we Stand? , 45.71 Ibid, 46.72 Ibid, 46.73 Ibid.74 Ibid75 Mohamed Ratoul, Economic Reform & Political Openings: Lessons from Algeria , Arab InsightArticles (2008), 85-8676 Ibid, 86.


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attractive business environment is key to privatization77. These includes political

stability as well as a modern financial and banking sectors but also developed

infrastructure.

Conclusion

Throughout this essay, I have attempted to provide an analysis of the process of

privatization in Algeria. An overview of the privatization as a policy process and the

general trends in the MENA region helped me to illustrate why countries like Algeria

were motivated to undertake privatization. The case of Algeria, with an economy

dominated by oil, gas and large SOE allowed me to examine in detail the process of

privatization in Algeria. The financial burden SOEs represented, the instability in thecountry and the search for foreign aid led the Algerian government of Chadli to launch

the infitah in the 1980s. Despite the potential for success, the oil and gas price collapse

of 1986 and the growing discontent among Algerians only worsened the situation. As a

result, a structural adjustment programme led by the IMF and WB was granted to the

Algerian government in 1995. The process of Algerian privatization has been long and

slow. It has not been until after 2000 that Algeria has finally seen the size of public

companies decrease and the private sector has began to flourish. This has not been by

chance, but because privatization has been included in a broader reforms program and

because of political stability. Overall, the process of privatization in Algeria is

consistent with Dr. Said El Naggars claim that to nationalize is easy but to privatize is

fraught with difficulties78.

77 Robert E. Anderson & Albert Martinez, Supporting Private Sector Developm ent in the Middle East and NorthAfrica, in Prospects for Middle East and North African Economies: From Boom to Bust and Back?, ed. N. Shafik(New York: St. Martins Press, 1998), 184 -192.78 Iliya Harik, Privatization: The Issue, The Prospects and the Fe ars, 4.


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Bibliography:

Alami, Randa. Privatization in the MENA (Lecture, SOAS, London, 2nd February2009)

Anderson, R. & Albert Martinez. Supporting Private Sector Development in theMiddle East and North Africa, inProspects for Middle East and NorthAfricanEconomies: From Boom to Bust and Back?, ed. N. Shafik. New York: St. MartinsPress, 1998.

Chang Ha-Joon.Bad Samaritans: The Myth of Free Trade and the Secret History ofCapitalism. London: Bloomsbury Press, 2007.

Harik, Iliya. Privatization: The issue, the prospects, and the fears, inPrivatisation andLiberalisation in the Middle East, eds. L. Harik and D. Sullivan. Indiana: IndianaUniversity Press, 1992.

Harrigan, Jane, H. El-Said and Wang.The Economic and Political Determinants ofIMF and World Bank Lending in the Middle East and North Africa, WorldDevelopment, 34 (2006), 257

Kauffmann Cecilia and Wegner L. Privatisation in the MEDA region: where do westand?, OECD Development Centre, Working Paper no. 261, 12-13.

Naceur, B., Ghazouani S. and Omran M. The Performance of Newly Privatized Firmsin Selected MENA Countries: The Role of Ownership Structure, Governance andLiberalization Policies, (March 2006),http://papers.ssrn.com/sol3/papers.cfm?abstract_id=8893276.

Nellis John and Nancy Birdsall. Privatization Reality Check: Distributional Effects inDeveloping Countries in Reality Check: The Distributional Impact of Privatization in

Developing Countries. Washington, DC: Center for Global Development,(2005).www.cgdev.org/doc/Privatization/ch%201.pdf,

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Vandevalle, Dirk. Breaking with Socialism: Economic liberalization and Privatizationin Algeria,Privatisation and Liberalisation in the Middle East, eds. L. Harik and D.Sullivan, (Indiana: Indiana University Press, 1992), 194.

Werenfels, Isabelle. Obstacles to Privatisation of State-Owned Industries in Algeria:The Political Economy of a Distributive Conflict, The Journal of North AfricanStudies (2002), 1.

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Evaluating Privatization in the Middle East and North Africa: The Case of Algeria - Olga Guerrero Horas