Privatisation & the Distinctive Libyan Experience
Posted: Monday, December 31, 2007
by Waniss A. Otman
Department of Economics, University of Aberdeen
In theory, the privatisation process as an economic option or tool for governments to reform poorly performing and inefficient State Owned Enterprises (SOEs). The main driving force for privatisation is the promise of greater economic efficiency when a SOE (State Owned Enterprise ) is sold or transferred from the control of bureaucratic managers and administrators to the private sector. They contend that the improvement in efficiency of SOEs is largely due to differences in the incentives provided to political appointees as managers and the "jobs for life" mentality of employees prior to privatisation, and the fact that owners, managers and employees have to compete aggressively post-privatisation for the business to stay profitable in a market economy.
Often sophisticated mechanisms, for privatisation which have evolved since the early 1980s, such as Direct Sales to Strategic Investors, Public Offerings, Mixed Sales, Management Buyouts, Mass Privatization through Voucher Schemes, and Concessions.
In order to fully grasp its many social and political impacts, the author considered in detail the privatisation process in practice in selected countries. In Argentina, for example, under Carlos Menem, the Justicialista Party from 1989 onwards privatized virtually everything that was privatizable, including The National Telecommunications Enterprise, ENTEL, the airline company, Aerolneas, the state oil enterprise, YPF (Yacimientos Petrolferos Fiscales), most state electricity generation and distribution enterprises, state petrochemical firms, steel mills, radio and television channels, the state natural gas company, shipyards, and many others.
The writer observes that the privatisation process in Argentina was rushed, poorly planned, opportunistic, and corrupt. By 2001 the disastrous results of this rushed privatisation process had became apparent. In a contagious effect brought about by the 1997-98 Asian meltdown, an outflow of capital from Argentina gradually evolved into a four year economic depression, which culminated in the financial panic in November 2001, followed in December by the resignation, amidst bloody riots, of Menem's successor, President De la Rua. Soon after, Argentina defaulted on $88 billion in debt, the largest sovereign debt default in history.
To conclude from the Argentinian experience that privatisation should not represent the complete forfeit of state authority over public services, and that governments of developing nations should pursue privatisation with extreme caution. A regulatory and legal framework that limits the activities of privatised companies and grants the state broad powers of intervention ought to be established prior to the transfer of state assets to the private sector. As the case of Argentina shows, swift privatisation for the sake of short-term expediency carried enormous long-run costs.
The Malaysian privatisation process, where the approach was entirely different from that of Argentina , but ultimately effective, although it entailed many policy reversals, evolving successfully over a sustained period of over 17 years. They point out how significant, for future events, it was that in 1983, when Malaysia decided under the Mahathir government to climb on the privatization bandwagon, it was a voluntary policy decision not forced on the country by external agencies such as the IMF or World Bank. This contrasts starkly with the Indonesian experience of having privatisation in 1997 forced down its throat by the IMF, an experience which traumatised Indonesian society and institutions, and from which it is unlikely to recover economically.
Analysis of the recently felt need for privatisation in Libya by examining the complex set of historical events, commencing with the nationalisations in the 1970s which eventually led to the government's central control over the entire Libyan economy. As well as effectively nationalising the key hydrocarbon industry, the Libyan state established controlling interests in the supply and operation of electricity, water, transportation, communications, the ports and airports, while public corporations also entered the banking and retail markets. A publicly-owned import company, the National Organisation for Supply Commodities (NOSC), was also awarded, in the early seventies, a monopoly for the import and sale of many basic consumer items.
Note that, in general terms, the current ongoing privatisation process in Libya fulfils the definition of the "Privatisation Wheel" i.e. an economy originally having its entire retail and private sector arbitrarily shut down and nationalised, now in the process of being restructured for significantly greater private involvement. Underlying this is a frank admission by senior figures in Libya that many of the economic attributes and institutions of the previous 36 years have failed to produce an efficient economic system. In fact, there is growing evidence which suggests that privatisation is no longer just one of the options for economic reform but its sine qua non, as the Libyan government saddles the burden of a massive public sector of over 800,000 employees which is continuously expanding (Ghanem, 2005).
Survey the early attempts of the Libyan government, such as Regulation N0.427 of 1989 and Regulation No.300 of 1993, regarding privatization policy for state enterprises, The latter clearly highlighted the body responsible for the privatization or "tamleek" process, in this case the Central Committee established by the General People's Committee which consisted of the Secretary (President) and other members comprising specialists and experts in their respective fields or sectors. However many observers in Libya believed at the time that the power and autonomy of the Central Committee was extremely limited, with power over key processes such as establishing the evaluation committees for the businesses to be privatized still directly under the authority of the General People's Committee.
As well as this, other measures towards economic liberalization or "infitah" were announced by the Libyan government in 1993.These included the liberalization of the wholesale trade and the right to form partnerships for that purpose, provided for in Decree No.491. Later in the year and in 1994 there were legal guarantees covering foreign capital investment, permission for the promotion of tourism through assistance from foreign companies, as well as regulations liberalizing the convertibility of the Libyan Dinar. In fact, taken together, the legal framework for privatization and infitah were extensive and far-reaching. But, as the author observe, in actuality very little was achieved throughout the nineties.
Concluding that the basic reason was that through its earlier dismantling of the market economy in the seventies, which had affected every business and every sector, the Libyan government had destroyed the very institutions and entrepreneurial spirit which were necessary to ensure its success. Few people in Libya were willing to trade the uncertain economic future of a full scale market economy for the steady wages and subsidies which enabled them to enjoy a standard of living envied by their neighbours. At the same time, the main beneficiaries of the public ownership system such as the middle and senior managers, the military, the technocrats who ran the oil business and derived many benefits from it, as well as the political elite, had little to benefit from a major change in the status quo.
In a more recent context, they note that the legislation covering the renewed privatization policy in Libya had started with the General People's Committee Regulation No.198 in 2000, regarding the establishment the General Board of Ownership Transfer (GBOT) as a sovereign and financially independent state body similar the other Secretariats (Ministries) and under the direct supervision of the General People's Committee (the Cabinet). The remit of the GBT which, it is important to note, is directly under the Libyan Prime Minister, was to advise on the social, legal and economic issues associated with privatisation, as well as the preparation of reports, studies, the financial evaluation of units to be privatized, and to provide the necessary flexibility to overcome any obstacles facing the Libyan privatization process.
The privatisation process commenced in earnest with the appointment of the reformist Prime Minister Shukri Ghanem in June 2003, was Decision No.31 of 2003 issued by the General People's Committee, together with its articles and regulations. This was a very significant piece of legislation which signalled that the Libyan government was preparing to embark on a major privatization exercise. Decision No.31 proposed the privatization of 360 state owned units in a wide range of sectors, including industrial, agricultural, animal and marine resources. It specified that they should either be privatised in full, or in partnership with the private sector, over three stages. The first stage comprised 260 companies, to be accomplished in the period from 1/1/ 2004 to 31/12/2005; the second phase, covering 46 units, was to take place within the period from 1/7/ 2004 to 30/6/2007; while the third phase, encompassing 54 units, which would become joint Public/Private sector partnership companies, was scheduled to take place between 1/1/ 2004 and 30/12/2008. The authors provide detailed lists of all of the SOE's to be privatised and the progress made up to November, 2005.
It is too early to predict the outcome of Libya 's privatisation programme. The view, however, is that in view of the extensive literature and experience of the privatisation experience in many countries over the previous 20 years that there are important lessons to be learned. The writer note that Libya , like Jordan and Egypt , has opted for a privatisation commission or board, in this case the General Board of Ownership Transfer (GBOT). The fact that it reports directly to the General People's Committee (the Libyan Cabinet) signals that it has strong support at the very highest executive levels in Libyan government. However it is not yet clear whether the General People's Congress, as the supreme law making body in Libya and which in fact appointed Dr. Ghanem in the first place as Prime Minister, has the power to derail the privatisation process if, as it proceeds, it begins to upset political figures and alliances.
The facilities offered to Libyan workers to acquire shares in the companies targeted for privatization, where the government stated that it was possible for them to withdraw, and use their accumulated 1.5% salary contributions, made compulsory by Law No.1 since 1986, as payment for such shares. The writer notes that this raises key issues. Firstly the government only stated it was possible to do this but did not explain the circumstances in which such possibility applied. Secondly, even if this was known, and a worker did have access to and use these accumulated funds to acquire shares in his privatised company, why could not another worker who, say, did not want to acquire these shares, simply ask for the cash?
The right of the new owners, whether workers or not, as determined in the reconstruction exercise carried out by the GBOT before offers for privatisation, to decide on employment categories and numbers also seems to leave many questions unanswered about crucial issues relating to post privatisation downsizing. For example the fate of a worker made redundant will be decided by the GBOT who will either allocate him/her to a new job in the public sector, or if unsuccessful, force him to take early retirement, which is clearly very unsatisfactory. In this connection the role and function of the Tunisian government agency responsible for dealing with redundancies caused by privatisation appears to be much more focused and from the point of view of the worker concerned, more realistic. The Tunisian " Fund of Rationalization of the Employment in the Public Enterprises" (FREEP) guaranteed, in 1990, that laid off workers would receive a severance package based on one months salary for each year of work with a cap of 12; in addition, they received a bonus of 30 percent. Starting in 1991, the severance payment was increased to 2 monthly salaries plus one for each year of work with no cap.
The writer observe that in other respects the institutional framework for the privatisation process might appear to some observers to be somewhat unwieldy, with four separate entities involved in the privatisation process, the Higher Committee for Administrating the Programme of Transformation of Property, the GBOT itself, the Supervisory Committees of the GBOT in the Sha'biyat (Provinces), and the Domestic Manufacture Support Fund (DMSF). While this might mean that a system of checks and balances exists to combat corruption in such areas as, for example, asset valuation, there clearly also exists a lot of room for extemporising and delay in any of these entities, thus slowing down the privatisation process. As well as this, it appears that the level of representation of the Libyan General Federation of Producers Trade Unions in the various privatisation entities would also appear to be very low – surely a serious omission in view that this is the organisation which ostensibly represents those stakeholders most affected by the privatisation exercise.
They observe that little has been done in Libya, apart from the press and TV coverage on individual privatised units, towards formulating a comprehensive and coordinated publicity plan to educate the public about the key issues surrounding privatisation as well as its benefits i.e. a public awareness programme. The global experience of the last twenty years has shown that major policy changes such as privatisation can often fail because inadequate attention is paid to the communications support necessary to build and maintain public support for such major reforms. Privatisation can and does affect millions of consumers, suppliers, investors and very importantly, workers. Well-designed and effectively executed communications programmes are essential so that the public and key stakeholders understand the nature of privatisation, the benefits it will bring and the alternatives if it does not take place. Without this, the political risks increase and the obstacles to change can quickly become insurmountable.
The writer believes that the announcement of fixed timetables to achieve specific privatisation objectives often puts unnecessary strain on a government and its privatisation board. Although, in the nature of any policy advocating change, there is always pressure for the privatization process to proceed quickly, unrealistic timetables serve little purpose. One useful approach is to sequence several sales according to market conditions. Moreover, governments should bear in mind that not all transactions will be successful, and that it might be necessary to reject all bids and start the bidding process anew or change the method of divestiture. In this respect, again the Tunisian approach appeared to work. Here the government stated that eventually all SOE's would be privatised, but did not state which ones would be first, or when each one would happen. In taking this approach the " Commission d'Assaissement et de Restructuration des Entreprises à Participation Publique" ( CAREPP), the Tunisian privatisation authority, gained important benefits. It prevented the management of individual SOEs from developing a complacent attitude once they did not see their companies on the list, encouraging them towards greater efficiency to prevent this happening. At the same time, public sector employees were not faced with the uncertainties and psychological impact of seeing their organisation as part of a list of companies to be privatised, thus preventing general public opposition.
By examining the current status of Libya 's privatisation programme as of November, 2005, observe the only data published so far indicates that as of December, 2004, 41 economic units have been privatised. This is a long way behind the privatisation schedule announced in 2003, where it stated that the first stage of privatisation, comprising 260 companies, would be completed in the period from 1/1/ 2004 to 31/12/2005. Again, the government has not advised the public as to why this should be the case. This lack of transparency is not a good sign for the future of the privatisation programme in Libya .
In another respect the writer believe that the Libyan government has really failed to understand the true dimensions of the problems associated with a major privatisation programme. Privatisation is a public sector reform which requires private sector skills. The way in which businesses or assets are transferred from the public to the private sector is an extremely complex, time-consuming and often resource and highly labour -intensive. For example, at the height of the Russian privatisation programme in the mid-1990s one consultancy firm alone had over 800 staff dedicated full time to managing the process on behalf of government.
In comparative terms, it is useful to look at the Polish experience from 1989-1992. In three years, by the end of 1992, small privatization in Poland was almost complete, with the successful privatization of 194,000 units, i.e., 82 percent of the units existing in 1989. Most of such units were in retail trade and services; they were allocated to former employees at well below market value, and in many ways were similar in size and employee numbers to the smaller state enterprises which were to be initially privatised in Libya.
But assuming that Libya can deal successfully with the privatisation of its small SOEs, the fundamental privatization problem in Libya will still be the issue of the privatisation of medium and large sized firms. Methods and experience derived from the OECD and middle-income privatizing countries clearly show how slowly the nationalisation process of these actually unfolded. In the United Kingdom , for example, Margaret Thatcher's enthusiastic and dedicated privatization team had managed to divest about only 20 companies in a ten-year period. In Mexico , starting with a larger number of much smaller firms, the government had sold off only about 150 entities in six years.
The general view of the authors is that although the Libyan government has shown its willingness to undertake economic reforms such as currency stabilization, trade liberalization and has gone some way towards banking and financial sector reform, in one important respect its privatisation policy cannot succeed until it does what Morocco (Casablanca), and Jordan (Amman) did in 1996 and 1999 respectively, that is to privatise their stock exchanges. Although the way forward for this in Libya was paved through Regulation No.53 of 2004, regarding the Practice of Economic Activities, under Section 10, Article 59 which allows for "the organization of the financial papers market, determination of its competencies and body undertaking the supervision of its works, and other relevant rules", there is no evidence or announcement so far for the timeframe within which a private Libyan Stock Exchange will be set up.
The view is that it is therefore difficult to imagine, without a stock exchange, how an effective privatisation programme in Libya can be delivered. The advantages of using public share offerings on stock markets for privatisations of large, profitable, and relatively well-known state enterprises are now well documented in the literature, with the landmark privatisation of British Telecom in 1982 as the trendsetter. The success of the privatisation experiences of Morocco and Jordan to date are inconceivable without the ability of their stock exchanges to absorb both the size of the offerings, as well as to successfully attract FDI to privatisation offerings on their exchanges, such as, for example, Vivendi Universal's acquisition of an operating control of Maroc Telecom in 2001, and the sale of 52% of the capital of Morocco's Union International de Banques to France's Societe Generale in 2002.
With regard to the domestic banking sector, there is also evidence to suggest the in terms of experience and technology it is ill-prepared to play its role in a major privatisation exercise, although several steps towards the economic and legal reform of this sector have already been taken, as early as 1993 in fact, when the establishment of branches of foreign banks in Libya was permitted. In this connection the Central Bank of Libya in June, 2005 announced that "in order to expand the public shareholding base of Sahara Bank, and to boost private sector investments, it will make a public offering to Libyans of its entire stake in this bank at the price of LD 10 per share".
Since that initial announcement the period for the offer period for shares in Sahara Bank has had to be extended, which seems to suggest a rather lukewarm response from the Libyan public to acquire, on the ground floor, shares in the leading commercial bank in Libya, with 44 branches around Libya, and ranked among the best 25 Arab banks. Another major domestic bank, the Wahda Bank, is also currently being divested, again to Libyans only. But again, media reports suggest that this divestiture process might take up to two years, after which "the Libyan Central Bank may look at the possibility of foreign institutions entering the local market".
The writer believe that the slow pace and lack of transparency surrounding the privatisation of these major and profitable banks is sending very negative signals to the international financial community. In other countries, such as Malaysia and Morocco , the sale of these two banks would be ranked as "showcase privatisations" designed to kick start public confidence in the privatisation process. It seems to suggest that Libya, by not promoting a public awareness campaign surrounding the privatisation of these major banks, known to every Libyan, has lost a major opportunity for generating a positive public response to its privatisation programme, which could have gone a long way to ensure its success.
The writer point out that in fact Libya currently possesses conduits through which, if the timing and pricing of Libyan assets was right, could be used to immediately attract foreign investment into the privatisation of some of Libya's major companies and infrastructure providers. The Arab Banking Corp., which is 27 percent owned by the Central Bank of Libya, and Lafico, the Libyan Arab Foreign Bank, both have long and successful track records in international finance, with the latter having been involved in many major deals, particularly in Italy, even during the sanctions period.
To conclude that, the synergy which this could bring to Libya 's privatisation drive may have escaped Libya 's policy makers. The privatisation process is not an isolated event, but a process constantly evolving and changing over time, which must embrace every part of the Libyan economy. Tunnel vision and failure to use this major policy weapon in the opportunistic and responsive way in which Jordan , for example, has successfully deployed it, might mean that, like earlier Libyan efforts in the eighties and nineties, the present privatisation programme will falter in its early stages.
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