Evaluation

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Special Evaluation Study on Privatization of Public Sector Enterprises
Completed 2001

Beginning 1984, the Asian Development Bank (ADB) integrated privatization into its operational strategies and assistance plans for its developing member countries (DMCs).

ADB's Medium-Term Strategic Framework (1992-1995) identified privatization as a desirable strategy to help meet economic growth objectives. In the late 1990s, renewed attention was given to developing strategies for effective reduction of poverty. ADB's private sector development strategy (2000) was approved to help promote growth and support poverty reduction efforts.

This study was designed to help increase understanding of the privatization process and provide guidance on how the objectives of privatization should be managed and incorporated in project designs.

   Summary of Findings

• Unsustainable budget deficits, high taxation, and burdensome funding are common factors precipitating the need to privatize. But while fiscal crisis has been a prime reason in Asia, the justification is also driven by ideology and efficiency grounds.



• The general pattern among DMCs has been to privatize retail businesses, manufacturing, and road transport services before privatizing monopoly and oligopolistic entities such as banks, airlines, telecommunications, electricity and water utilities, ports, and energy enterprises.



• No single institutional framework stands out as the best for privatization. Studies show, however, that for privatization to be successful, it is essential to define the roles and powers of participants, and ensure that legal, regulatory, and enforcement mechanisms precede divestment.



• Capital markets increase the available financing sources for firms to fund new investment.



• The privatization link with poverty reduction stems from the relative ineffectiveness of public ownership to fulfill economic growth needs.



• While no established framework is evident as to how nongovernment organizations' participation should be structured into the planning and implementation of privatization, study observations suggest that they can be most effective in the design and implementation of social awareness campaigns, retraining, and compensation for displaced employees and communities.



• While experience of privatization has been positive, privatization has proceeded largely without attention to the sequencing of reforms and appropriateness of approach for maximizing its effectiveness.



• Assistance is needed for
• developing policy, legal and regulatory frameworks
  
• establishing the institutional framework for privatization
  
• organizing workshops and advisory sessions
  
• funding implementation including separation from non-core activities
  
• restructuring and retraining


• Attention is drawn to the problems of successfully implementing public private partnership agreements and achieving an appropriate balance of risks between the two parties

   Recommendations

ADB should review strategies for assisting DMCs with privatization, taking into account

• the need for a more integrated approach to reforms to promote economic growth and private sector development,
  
• the importance of sequencing, and
  
• the need for more comprehensive social welfare assistance.

DMCs are encouraged to adopt policy reforms that take into account

• global lessons for prioritizing the legal framework and institutional requirements,
  
• need to restructure to infuse competition,
  
• need to regulate only where competition is limited, and
  
• need to ensure that accompanying social programs are comprehensive and fully supported by the community and persons affected.