State-Owned Enterprises in Africa 9781685855468

Table of contents :
Contents
Tables and Figures
The Contributors
Preface
Part 1 Origins of the Public Enterprise Sector in Africa: Its Size and Scope
1 Public Enterprises in Sub-Saharan Africa
2 Public Enterprise Reforms in Francophone Africa
PART 2 PARASTATALS AND POLITICS: SOEs AND THE AFRICAN STATE
3 Kenya: A Positive Politics of Parastatal Performance
4 Development Strategy and State Sector Expansion in Nigeria
5 The Uganda Development Corporation: State Enterprise Under Duress
PART 3 CONTROLLING PUBLIC ENTERPRISES
6 Control in the Parastatal Sector in Zambia: 1976-1986
7 State Enterprise Control: The Case of Tanzania
PART 4 SOEs AND STRUCTURAL ADJUSTMENT
8 The Politics of Public Enterprise Reform in Cameroon
9 Privatization of State-Owned Enterprises: The Togolese Experience
10 The Political Economy of Economic Reform in Cote d'Ivoire: A Microlevel Study of Three Privatization Transactions
11 The Structural Transformation of OPAM, Cereals Marketing Agency
PART 5 CONCLUSIONS
12 Tying It All Together: What Do We Know?
Index
About the Book

Citation preview

State-Owned Enterprises in Africa

State-Owned Enterprises in Africa edited by

Barbara Grosh Rwekaza S. Mukandala

Lynne Rienner Publishers

•

Boulder & London

Published in the United States of America in 1994 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU © 1994 by Lynne Rienner Publishers, Inc. All rights reserved Library of Congress Catalogjng-in-Publication Data State-owned enterprises in Africa / edited by Barbara Grosh and Rwekaza S. Mukandala. p. cm. Includes bibliographical references and index. ISBN 1-55587-453-3 1. Government business enterprises—Africa. 2. Government business enterprises—Africa—Case studies. I. Grosh, Barbara. II. Mukandala, Rwekaza Sympho. HD4338.S73 1993 338.6'2'096—dc20 93-8957 CIP British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984.

Contents

List of Tables and Figures List of Contributors Preface

Part 1

1 2

3 4 5

6

XI

3 25

Parastatals and Politics: SOEs and the African State

Kenya: A Positive Politics of Parastatal Performance Barbara Grosh Development Strategy and State Sector Expansion in Nigeria Peter Lewis The Uganda Development Corporation: State Enterprise Under Duress James Katorobo

Part 3

IX

Origins of the Public Enterprise Sector in Africa: Its Size and Scope

Public Enterprises in Sub-Saharan Africa John R. Nellis Public Enterprise Reforms in Francophone Africa Alfred Saulniers

Part 2

VII

45 63

83

Controlling Public Enterprises

Control in the Parastatal Sector in Zambia: 1976-1986 Neva Seidman Makgetla

107

vi

7

Contents

State Enterprise Control: The Case of Tanzania Rwekaza S. Mukandala

Part 4 8 9

10

11

12

SOEs and Structural Adjustment

The Politics of Public Enterprise Reform in Cameroon Nicolas van de Walle Privatization of State-Owned Enterprises: The Togolese Experience Robert Barad The Political Economy of Economic Reform in Cóte d'lvoire: A Microlevel Study of Three Privatization Transactions Ernest J.Wilson The Structural Transformation of OPAM, Cereals Marketing Agency Philip Steffen

Part 5

125

151

175

197

221

Conclusions

Tying It All Together: What Do We Know? Barbara Grosh and Rwekaza S. Mukandala

247

Index About the Book

253 259

Tables and Figures

Tables 1.1 1.2 1.3 1.4 1.5 2.1 2.2 2.3 2.4 2.5 2.6 5.1 5.2 8.1 10.1 10.2 10.3 10.4 11.1

Sub-Saharan Africa: Number of PEs PEs' Share of GDP at Factor Cost Sub-Saharan African PEs' Share in Gross Fixed Capital Formation Nonfinancial PEs' Share of Nonagricultural Employment Sub-Saharan African PEs' Share of Domestic Credit Summary Indicators of Public Enterprise Importance in Sub-Saharan Africa Nonfinancial Firm Rankings for Francophone Africa, 1988 African Contract Plans by Country Francophone African Privatizations by Type Financial Indicators for Francophone African Nonfinancial Firms: 1982, 1988 Financial Health of Francophone African Nonfinancial Firms: 1982, 1988 State Share in UDC Subsidiary and Associated Companies, 1952-1971 Ownership by Size of Firm, 1983 Selected Public Enterprises, by Date of Creation, 1960-1980 Phases of Privatization: C6te d'lvoire Implicit Rules Governing Privatization Transactions in C6te d'lvoire C6te d'lvoire: The First Twenty-Eight Privatization Efforts Likely Candidates for Next Privatization Phase PRMC Target and Actual Gross Margins for OPAM

vii

5 6 7 7 8 27 28 31 33 36 37 90 91 154 201 203 204 205 229

viii

Tables & Figures

Figure 10.1

General Privatization Process

The Contributors

Robert Barad served on the World Bank team that wrote "Sub-Saharan Africa: From Crisis to Sustainable Growth." He is the owner of Baobab Communications. Barbara Grosh is an assistant professor of public administration and a senior research associate in the Metropolitan Studies Program at Syracuse University. James Katorobo is managing director of Pace International Consulting Enterprises in Kampala. Peter Lewis is assistant professor of comparative and regional studies at the School of International Service, The American University. Neva Seidman Makgetla is professor of economics at the University of Witwatersrand. Rwekaza S. Mukandala is chair of the Department of Political Science and Public Administration at the University of Dar es Salaam. John R. Nellis is with the World Bank. Alfred Saulniers is an adviser in the Ministry of Commerce, Industry, and P r i v a t i z a t i o n of the K i n g d o m of M o r o c c o . He w o r k s f o r the International Privatization Group of Price Waterhouse. Philip Steffen is with Abt Associates, for whom he serves as adviser to the government of Kenya. Nicolas van de Walle is assistant professor of political science at Michigan State University. Ernest J. Wilson is at the National Security Council. He is on leave from the Department of Government and Politics, University of Maryland.

ix

Preface

This book grew out of fieldwork. We, the editors, originally did detailed work in our respective countries of interest. As we analyzed the reams of primary data we had collected, and turned them into dissertations, we found that we learned a lot from talking to each other. We learned from each other's data and also gained from our differing disciplinary approaches— economics and political science. We are convinced that comparison helps generate and test hypotheses about public enterprise in Africa. We are convinced that combining political and economic approaches gives more insights than either approach alone. We know from experience that primary data on public enterprises are not readily accessible. These are the things that motivated us to put together this collection. Each chapter in this book contains substantial new information, which was not previously readily available, on public enterprises in Africa. The book contains two overviews and case studies from nine countries. The cases come from East, West, and Southern Africa; they come from anglophone and francophone countries. They include countries spanning the ideological spectrum. They include cases from A f r i c a ' s fastest-growing economies and also from some of her tragic basket cases. The chapters in this book were not written to a blueprint. Some concentrate on one firm, others a group of firms, some the sector as a whole. Some concentrate on how public enterprise has performed and the reasons it has performed as it has. Others concentrate on the process of reform and how to improve performance. All of the authors use some sort of political economy approach, though some authors are trained in political science and some in economics, and the way they do political economy differs. Our chief goal in this book is to provide new evidence to inform the debate on the role of public enterprise. Much of the debate during the 1980s suffered from being overly ideological. In the years of Reagan and Thatcher it became a new orthodoxy to assume that the public sector must always fail and the private sector could succeed. The debate was seldom xi

xii

Preface

carefully grounded in the realities of Africa's underdeveloped markets or complex political economies. We offer this book as a way to shift attention to a different level: Given what we know about the political and economic institutions of Africa, what is the appropriate role for public enterprise? Barbara Grosh Rwekaza S. Mukandala

PART 1 ORIGINS OF THE PUBLIC ENTERPRISE SECTOR IN AFRICA: ITS SIZE AND SCOPE We chose John Nellis's paper to introduce this book because we think it is the best ever written documenting the size and scope of the public enterprise sector in Africa. Nellis discusses the many reasons governments choose public enterprise, a tool employed irrespective of region, history, ideology, or personal characteristics of rulers. Nellis shows how negative the performance of this sector has been. Indeed, his picture is of a sector so inefficient and ineffective that it has turned into an albatross around the necks of many African economies. The gravity of the performance problems documented by Nellis gives urgency to the questions posed in this book. We believe that there are powerful reasons, both economic and political, that portend a continued prominent role for public enterprise in Africa. Public enterprise must perform better than it has, and the beginning of wisdom is an examination of its troubled past. The paper by Alfred Saulniers begins the process of comparative work, finding differences in performance between anglophone and francophone Africa and teasing out reasons for the differences. He finds evidence that reform efforts begun in the 1980s have caused some improvement in performance. The process begun in Saulniers's chapter, of using comparative study to build hypotheses of how to improve performance, is continued in later sections.

1

1 Public Enterprises in Sub-Saharan Africa John R. Nellis

Each of the forty countries sub-Saharan Africa comprises possesses a public enterprise sector. The total number of African public enterprises (PEs) is unknown, but it is clear that there are a great many, and that—in line with developments elsewhere in the nonindustrialized world—there was a major expansion of African PEs in the 1970s. At a rough but still conservative estimate, there are some three thousand financial and nonfinancial African PEs, fully or partially controlled by governments. In their calculation of public enterprises, some African governments include hospitals, universities, research units, and what in francophone countries are called "public establishments of an administrative character." This paper excludes such undertakings and deals more narrowly with those government-controlled enterprises which are supposed to "earn most of their revenue from the sales of goods and services, are selfaccounting, and have a separate legal identity" (Shirley 1983, 2). The focus is on those economically important, quasi-independent entities that African governments have created to do what they feel their private sectors and bureaucracies cannot do (or are not doing, or in some cases, should not do). This chapter has three main objectives. The first is to present the available figures on PEs and PE sectors in sub-Saharan Africa; that is, the numbers, sectors of operation, employment patterns, economic importance, etc. This data base, while weak, is presently being added to substantially. Figures produced in recent reports give a bit more detailed picture of PE activity in the region, in terms of the size, composition, and impact of the sector and its performance. The second objective is to examine the many reasons explaining why African governments have so often and so fully relied on public enterprises to try to achieve their development goals. Inevitably, this discussion touches a number of issues not normally regarded as within the purview of economics; for example, questions of ideological preference, political concerns, and social objectives of state firms. Indeed, the need to deal with a 3

4

The Public Enterprise

Sector in Africa

mixture of factors and concerns characterizes the analysis of public enterprises and is a major reason the subject resists easy explanation. Because economic theory provides neither "arguments for global condemnation nor for global preference of public production" (Eckert and Puschra 1984, 333), this chapter does not attempt to establish general principles on what sectors or specific economic activities should or should not be in the public sector. Rather, the argument—and the presentation of this argument is the third objective—is that a review of the past performance record of the PE sector in sub-Saharan Africa indicates (1) that the very large amount of resources invested in African PEs has yielded a very low rate of return; (2) that public enterprises are generally not achieving the objectives assigned to them by planners and leaders, and in many cases are adding to rather than resolving economic problems; (3) that although PEs everywhere suffer from managerial and institutional constraints, these are particularly acute in sub-Saharan Africa; and (4) that the way to attack problems is to expand the role of markets, increase competition, clarify the relation between governments and enterprises, optimize managerial autonomy at the level of the firm, and thus to increase efficiencies in public enterprises. In some cases the situation might call for outright divestiture—privatization or liquidation of state enterprises—but in other cases "allocative efficiencies arising from enhancement of the role of markets ought to be obtainable irrespective of ownership" (Kierans 1984, 24).

Data on African Public Enterprises The greatest difficulty when dealing with African PEs is obtaining accurate, aggregate comparative facts and figures. Different sources give different figures, even for such essential items as total number of PEs in a country. Consistent time series are not available and data on performance are particularly scant and unreliable. Countries in the region do not use a standard definition of PEs, much less the definition employed in this chapter. Some countries' data exclude statutory boards, administrative agencies, and other noncommercial bodies; other countries put them in. With regard to performance data, there are significant anomalies in PE accounts that make them inaccurate or even misleading. For example, in some countries profits may not be adjusted for government transfers, for special tax incentives, or hidden subsidies such as privileged access to inputs at special prices or unofficial permission to incur large arrears without penalty. Assets may not be revalued, and the treatment of depreciation varies among countries, or even among PEs in one country. All of this makes cross-country comparisons exceedingly difficult. Given these problems, it is therefore legitimate to ask, what can be said with some degree of certainty about African PEs? Irrespective of data scarcities, and no matter what definition is used, the sub-Saharan African countries as a group possess a large number of

In Sub-Saharan Africa

5

PEs. (Wherever possible data have been adjusted to fit this chapter's definition of a PE.) As noted, data from thirty countries estimate a total number of financial and nonfinancial PEs at just about three thousand (see Table 1.1). The actual total must be considerably higher, since several of the countries for which no summary figures are available are those with

Table 1.1

Sub-Saharan Africa: Number of PEs

Country

Year

Benin Botswana Burundi Cameroon Comoros Congo Côte d'Ivoire Ethiopia Ghana Guinea Kenya Lesotho Liberia Madagascar Malawi Mali Mauritania Niger Nigeria Rwanda Senegal Sierra Leone Somalia Sudan Swaziland Tanzania Togo Uganda Zaire Zambia Total

1982 1978 1984 1980 1982 1982 1978 1984 1984 1980 1982 1978 1980 1979 1977 1984 1983 1984 1981 1981 1983 1984 1979 1984 1978 1981 1984 1985 1981 1980

Source: World Bank files Note: a. Excludes financial enterprises

Number of PEs 60 9 51 50 10 75 a 147 180 130 181 176 7 22" 136 101 52 112 54 107 38 188 26 44 138a 10 400 73 130 138 114 2959

Number That Are 100 Percent State Owned

Percent Wholly State Owned

70 23

93.3 15.6

100

76.9

47

26.7

20 45

90.9 33.1

40 81

76.9 72.3

36 16

33.6 42.1

12

46.2

54 65

39.1 57.0

6

The Public Enterprise Sector in Africa

heavily interventionist economic policies—Angola, Burkina Faso, GuineaBissau, Mozambique, and Zimbabwe. There is, of course, a wide variation in the numbers and degree of state ownership among countries, as Table 1.1 shows. State-owned enterprises dominate the economies of many A f r i c a n countries. Worldwide, PEs are responsible for about 10 percent of gross domestic product (GDP) on average in both developed and developing countries (World Bank, WDR 1983). In contrast, the figure is much higher in some African countries, as Table 1.2 shows. Moreover, these figures u n d e r s t a t e the importance of PEs in the m o d e m sector of m a n y subSaharan African economies. PEs account for more than 90 percent of manufacturing value added in Ethiopia, almost 80 percent in Somalia, more than 50 percent in Zambia, and 40 percent in Cameroon. Furthermore, PEs produce and market major foodstuffs and exports and attract a large part of investment in several countries (see Table 1.3).

Table 1.2

PEs' Share of GDP at Factor Cost Country Sudan Zambia Guinea Mauritania Senegal Tanzania Togo Côte d'Ivoire Niger Kenya Sierra Leone Botswana Liberia

Year

Percent3

1975 1979-80 1979 1984 1974 1974-77 1980 1979 1984 1970-73 1979 1978-79 1977

40.0 37.8 25.0b 25.0 19.9b 12.3 11.8 10.5 10.0 8.1 7.6 7.3b 6.8

Source: World Bank files Note: a. Weighted average b. GDP at market prices

State enterprises are typically capital intensive in production and hence are usually not a major source of employment. Nevertheless, they employ more people in sub-Saharan African countries than elsewhere (see Table 1.4). And in some sub-Saharan African countries, the PE contribution to formal sector employment is very high. For example, PEs were responsible

Iti Sub-Saharan Africa

Table 1.3

7

Sub-Saharan African PEs' Share in Gross Fixed Capital Formation

Year

PEs as Percent of Gross Fixed Capital Formation 3

1979-80 1979 1978-80 1978-79 1978-80 1970-80 1978 1979 1974 1978-79 1977-79 1974-76 1978-79

61.2 39.5 37.9 37.2 36.5 32.7 21.2 19.6 17.9 17.3 14.4 14.1 7.7

Country Zambia Côte d'Ivoire Gambia Mauritania Ethiopia Tanzania Malawi Sierra Leone Senegal Kenya Mauritius Liberia Botswana

Source: P e t e r Short, " A p p r a i s i n g the R o l e of P u b l i c E n t e r p r i s e s : A n I n t e r n a t i o n a l C o m p a r i s o n . " IMF Occasional Paper, Washington, D.C., 1983; and E c o n o m i c Research Bureau, "Role of the Public Sector in the Economic Development of Tanzania. Dar es Salaam, January 1984. Noie: a. Weighted averages

Table 1.4

Nonfinancial PEs' Share of Nonagricultural Employment Developing Countries

Average share (in percent) Number of countries

OECD Countries

Total

Africa

Asia

Latin America

North Africa

4.1 14

13.9 18

18.7 8

15.7 4

5.5 5

10.3 1

Source: Peter Heller and Allen Tait, "Government Employment and Pay: Some International Comparisons." IMF Occasional Paper series.

for 75 percent of modern sector employment in Guinea (1981), 58 percent in Niger (1981), and 40 percent in Burundi (1980). In those nine countries reporting o n PE employees over time (Benin, Botswana, Ghana, Guinea, Kenya, Liberia, Swaziland, Tanzania, and Zambia), all save Liberia show

8

The Public Enterprise Sector in Africa

increases, sometimes extremely substantial increases, such as in Kenya and Tanzania. (It should be noted that much of the data on African PEs dates from the late 1970s and early 1980s, and it is quite likely that budgetary crises, and stabilization and adjustment programs undertaken in the last four or five years have changed the picture somewhat.) PEs are important borrowers, both domestically and internationally. They dominate domestic capital markets in some countries, as shown in Table 1.5. They often borrow more than their economic share, which crowds out other borrowers. Furthermore, on the basis of admittedly limited data for a very few countries, one can assert that PE external debt is a significant factor in the growing foreign debt of sub-Saharan African countries.

Table 1.5

Sub-Saharan African PEs ' Share of Domestic Credit Country

Year

Percent Share"

Guinea Benin Gambia Senegal Mali Somalia Niger Côte d'Ivoire Burkina Faso Sudan Togo Ghana Malawi Mauritania

1978-80 1978-80 1978-81 1978 1978 1978-81 1978-80 1978-79 1978 1978-81 1978-79 1978-80 1978-81 1978-80

87.1 54.3 40.5 38.7 37.9 37.9 32.4 29.0 27.8 22.5 22.4 20.7 14.7 7.9

Source: Peter Short, 1983. Note: a. At end period. When more than one year is given, this refers to weighted average of end period data.

The sectoral distribution of PEs' value added in reporting sub-Saharan African countries resembles that found in other developed and developing countries. Thus, electricity, gas, and water are provided mainly by PEs, and they play a significant role in transport and communications. They produce an insignificant share of agricultural output (although they often dominate agricultural markets and processing), and are responsible for less than 25 percent—or even less than 5 percent in some countries—of value added in

In Sub-Saharan Africa

9

c o m m e r c e and construction. In mining and m a n u f a c t u r i n g , the p a t t e r n varies considerably from country to country, which is in line with figures reported from other regions of the world.

Rationale for Public Enterprises Why is it that African states came to rely so heavily on PEs in their development strategies? The reasons are many. At independence most African states inherited the notion that extensive government involvement in the e c o n o m y and society was the natural order of affairs. Colonial governments, especially in the period from 1945 to 1960, had created economic p l a n n i n g bodies and agricultural marketing boards, instituted wage and price controls, started industrial parastatal enterprises, and generally never hesitated to interfere in many socioeconomic spheres untouched by government in the metropole. Therefore most of the national elites that came to p o w e r in the 1960s were thoroughly accustomed to legally strong, hierarchically organized and centralized, and economically intrusive governing systems. T o the predisposing heritage were added the factors of obvious need and prevailing ideology. In many African countries, most of what commercial agricultural and manufacturing base existed was in the hands of aliens, either from the metropole, the Near East, or Asia. This created deep resentment and sparked calls for controls and nationalizations. In many countries across the region, one often encountered—and still encounters—attitudes that cannot be termed expressions of a coherent socialist position, but that nonetheless reveal a strong strain of anticapitalism, a pronounced mistrust of the market and the profit motive. Elsewhere, the association of colonialism with imperialism and exploitation, the postwar ascendancy of a leftist intellectual climate, the support for independence f r o m socialist m o v e ments and governments, and the seeming success stories offered by socialist models in terms of political unification and rapid industrialization were but some of the factors that, taken cumulatively, led many newly independent A f r i c a n g o v e r n m e n t s to f o r m a l l y espouse one f o r m or a n o t h e r of socialism. At least sixteen sub-Saharan African countries, either at present or at some point in the past, have claimed to be socialist, or on the path of transition to socialism, or to be using basically socialist a p p r o a c h e s to d e v e l o p m e n t ( A n g o l a , Benin, Burkina F a s o , C o n g o , E t h i o p i a , G h a n a , Guinea, Guinea-Bissau, Madagascar, Mali, Mozambique, Senegal, Sudan, Tanzania, Zambia, and Zimbabwe.) Some have discarded or heavily modified the socialist option; in others socialism—either humanitarian or scientific—remains the official approach to development. One policy result of the mixture of stimulants outlined above were several outright nationalizations of key economic sectors ( f o r instance, in

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The Public Enterprise

Sector in Africa

Tanzania, Zambia, Ethiopia, and Sudan). In Tanzania, the nationalizations of enterprises and agricultural estates in 1967 were designed to "ensure the proper management of the commanding heights" of the economy; "to transform the economy by articulating the principles of socialism and selfreliance"; and to promote equity, improve income distribution, and stimulate equitable regional development (Msambichaka and Bagachwa 1984, 384). In other African countries ideology played a more muted role. For example, PE sectors have often been viewed as essential to establishing a new private sector or restructuring an alien one; to stimulating a weak or small national private sector; or to attempting to transfer technology absent in the local private sector in fields regarded as "strategic," such as communications, transport, or certain branches of heavy industry. Further, PEs were thought to be able to fill an "entrepreneurial gap" and gain access to international concessionary and commercial credit that would be denied to small local entrepreneurs possessing limited assets. African planners also hoped that PEs would use more appropriate, less capital-intensive technologies. One can readily understand the circumstances that gave rise to such reasoning, as it is obviously the case that private sectors in sub-Saharan Africa were (and often continue to be) quite weak; local capital markets are undeveloped or nonexistent; and local businessmen still often are traders, brokers, and small- or medium-sized merchants, not investors or industrial entrepreneurs. African planners thus argue that public enterprises are, or should be, useful in providing experience to technicians and specialized administrators who undergo an invaluable apprenticeship, unobtainable elsewhere in their economies. They justify the existence of the PE sector, and frequently go further and excuse its often mediocre economic performance for reasons relating to market imperfections and to perceived shortcomings in indigenous private sectors, combined with their fear of returning to a dependent or neocolonial status if they rely heavily on the foreign private sector. Another set of arguments for PEs deals with savings and investment issues. For example, it has been hypothesized that PEs will raise aggregate levels of savings and investment, because the indigenous or foreign private sectors will either consume wastefully or remit abroad resources that governments could direct to the expansion of the economy. Thus PEs have been formed not simply for the negative reason that there is no alternative but also due to their supposed capacity to generate higher investment ratios. Along the same lines, it is reasoned that PEs can aid the composition of investment, by giving government the power to direct investment to priority areas determined by planners rather than to the production of nonpriority items that a free market might produce. Much of this reasoning has been based on plausible assumptions that subsequent experience has often failed

In Sub-Saharan Africa

11

to validate. Nonetheless, the reasoning continues to be appealing in good part because it seems to offer economic support to what African governments are strongly predisposed to do for basically social and political reasons. Though it has for some time been evident in most African countries that the hoped-for investment effects were not occurring, planners have continued the experiment on the grounds that it needed more time to prove itself. Increasingly, however, the question arises: How long must and should one wait for the policy to produce beneficial results? This brief discussion does not at all exhaust the reasons for which African public enterprises have been created and sustained. To review rapidly some others, PEs often have been created to avoid the consequences of or simply prevent private business failures, to promote national security considerations, or to offset the power and market share of multinationals. Many political leaders supported PEs and were reluctant to accept criticism of their performance, for they provide jobs for loyal supporters and wellpaying management posts for a variety of personalities, from retiring army officers to departing cabinet ministers for whom something suitable must be found. The PE sector offers African political leaders a key employment mechanism to reward followers and defuse or forestall discontent. Another justification for African public sector expansion, seldom officially discussed in policy documents, is the prevalent assumption by African leaders and populations alike that only rigorous control, backed by the power of the state can—sometimes—prevent theft, fraud, and corruption. Although every state and every public sector in the world probably contains examples of fraudulent practice, it is widely believed that the degree and intensity of corruption is, on average, higher in sub-Saharan African countries than elsewhere. There is little comparative evidence to prove or disprove this belief. Nonetheless, the belief persists, and its logical implication is that only the state has the resources and authority to restrain excessive and unwarranted acquisition. An additional reason for the creation of public enterprises—especially rural development authorities or entities managing major projects—has been the insistence of the international donor community that autonomous implementing bodies be created to manage donor-financed activities. This demand reflects a lack of confidence in the civil service. Countries relying heavily on official aid have a fair number of PEs of this type. Thus, for historical, economic, social, and political reasons, almost every African state has created a large public enterprise sector.

Performance of Public Enterprises How have African public enterprises performed? The general view is that they have yielded a very low rate of return on the large amount of resources

12

The Public Enterprise

Sector in Africa

invested in them. Although no aggregate figures on PE performance are available for the region as a whole, limited data from individual countries and subregional groupings reveal reason for concern. Of the PEs in a sample drawn from twelve West African countries, 62 percent showed net losses, while 36 percent had negative net worth (Bovet 1985). In a 1986 study of sixteen major Kenyan agricultural PEs, aggregate before-tax losses for the years 1977-1984 totaled 1.934 billion Kenya shillings (K Sh), or $183.4 million at the 1986 exchange rates (Grosh 1986, 18-19). By Kenyan government estimates, over U.S. $1.4 billion had been invested in all Kenyan PEs by the early 1980s, yielding an annual average rate of return of 0.2 percent. The overall performance of PEs is so poor that even those African governments most philosophically committed to socialist principles now openly voice concern. For example, the Tanzanian commissioner for public investment said in late 1984 that the "public enterprise sector in Tanzania has been in existence for almost nineteen years, but the performance has been disappointing" (Mkulo 1985, 189). The assessments of other African governments have been even more harsh. A 1982 Kenyan report stated: First, experience suggests that many of these commercial investments would be more productive, better managed and more profitable in the hands of private owners. . . . Second, troubled investments have required an inordinate amount of the time of government administrators, managers and policymakers, hence diverting their attention from the more basic development needs of the nation. Third, many of the initial reasons for these investments have been satisfied or are of lesser importance under present circumstances, (quoted in Shirley 1983, 56)

Across the continent, public enterprises have either performed poorly, as measured by standard financial and economic criteria, or not as well as it seems reasonable to think they should have. Moreover, there is very little evidence to show that they have produced the anticipated levels of nonfinancial benefits in such areas as employment generation, income distribution, technology transfer, and contributions to regional equity. In several countries claiming positive results in these nonfinancial terms, there has been little or no assessment of the costs involved in producing such results and no consideration of whether similar or better results were obtainable by other, lower-cost methods. Available data show that earnings from PEs are low, that many run losses, and that in some countries PE deficits have reached large proportions. In Niger, for example, the cumulative total of deficits for twentythree loss-making enterprises, as of 1983, had surpassed 40 billion CFAF (Communauté Financière Africaine Francs)—close to $90 million at present exchange rates and considerably more at 1983 rates. Even after deducting the surpluses of some fifteen nondeficit PEs, the net deficits of the studied PEs surpass CFAF 29 billion ($65 million at 1985 exchange

In Sub-Saharan Africa

13

rates), or roughly 4 percent of Niger's 1982 GDP. In Tanzania, between 1 9 7 6 a n d 1 9 7 9 , o n e - t h i r d of all P E s r a n l o s s e s ( M s a m b i c h a k a a n d Bagachwa 1984, 390); it is highly unlikely that the situation has improved in the 1980s. In Benin, more than 60 percent of all PEs show net losses; more than three-quarters have debt-equity ratios greater than 5:1, close to half have negative net worth, and more than half show negative net working capital. T h e P E p e r f o r m a n c e situation is equally distressing in m a n y o t h e r countries. Cumulative PE losses in Mali reached 6 percent of G D P by the end of the 1970s; a 1980 study of eight Togolese P E s revealed that their losses alone equaled 4 percent of G D P (leading one to think that the losses as a percentage of G D P figures given in other countries might be severely u n d e r e s t i m a t e d ) ; and half of a s a m p l e of t h i r t y - n i n e i n d u s t r i a l P E s in Madagascar ran substantial losses in the period 1981-1983. Reports f r o m Sudan, Nigeria, Mauritania, Zaire, Sierra Leone, and Senegal reveal, at best, heavy losses in many PEs in the period studied and suggest, at worst, permanent loss-making PE sectors in these countries. A 1985 World Bank report on transport sector public enterprises in eighteen francophone African countries estimated that only 2 0 percent of PEs in the subsector generated revenue sufficient to cover operating costs, depreciation, and financial charges; 20 percent covered operating costs plus depreciation; 4 0 percent scarcely made enough revenue to cover operating costs; and a final 20 percent were far from covering operating costs (Institut de développement économique 1985:36-37). One must exercise particular care and caution in interpreting financial data because differences in accounting and tax systems, methods of funding, and the treatment of depreciation, inflation, subsidies, and interest payments result in profit and loss statements that are simply not comparable. Of course, the very notion of profits and losses is itself a questionable evaluator of PE performance. On the one hand, PEs in a monopoly position can be extremely inefficient but very profitable; on the other hand, an efficient, cost-minimizing firm may show losses if its output prices are kept artificially low by government decree, or if it is obliged to fulfill noncommercial objectives that cannot be achieved profitably. Although profits and losses are necessary and powerful indicators of PE financial performance, they do not always or fully provide an accurate picture of PEs. Price controls, subsidies, overt or hidden transfers exist in most African countries; all serve to distort the incentive structure and to make precise performance evaluation difficult.

Analysis of Performance This does not prevent one from perceiving some general trends. For example, it is clear that pricing policies have had a powerful and generally nega-

14

The Public Enterprise

Sector in Africa

tive effect on African PE performance. Many sub-Saharan countries have a regime of controlled prices. Control led prices have seldom kept pace with rising costs; indeed, in most countries market and profit calculations have taken a decided second place to sociopolitical considerations. Control of PE prices for both the materials they buy and the products or services they sell has led to great inefficiencies in resource allocation, contributed to large operating losses, reduced financial responsibility and accountability, and increased the dependence of PEs on government subsidies. Aggregate data to illustrate these generalizations are not readily available; one must rely on a second-best method of amassing individual examples. In Benin, the government kept the retail price of cement low while prices of essential imported production materials rose rapidly. The result was an annual loss of CFAF 1 billion by the two cement factories up to the end of 1982, in plants judged to be reasonably efficient. In Niger and Madagascar, PEs in grain marketing and foodstuff trading have been required to sell commodities well below the efficiency price and, often, below the cost of production. In Niger, these significant losses are not subsidized; in Madagascar, PEs are supposed to receive compensation for loss-making socially priced items from an equalization fund, but such subsidies are only rarely forthcoming. In Sierra Leone, a transport PE requested a raise in fares in 1974; government approval of the request came five years later. A second request in 1981 was approved in 1983. Although the two increases were eventually approved they did not match cost increases; Sierra Leone's annual average rate of inflation in this period was 12.2 percent. Inappropriate investment decisions also contribute to poor PE performance. Some African PEs have been established without sufficient reflection, with unclear objectives, and few linkages to the rest of the economy. Inadequate appraisal processes, especially weak or nonexistent economic and financial feasibility studies, have led to the creation of PEs that the most minimal study would have advised against. In Somalia, in 1976, a plant to box banana exports had a break-even production level that was greater than national banana production; that is, if the factory boxed all marketed Somali bananas it would still have run at a loss and would have had nonutilized capacity. Clearly, planners were hoping for increased banana production and exports, but these did not take place; by 1982 the factory operated at 25 percent of capacity. This problem of underutilized capacity is extremely common in African PEs; few firms work at anything close to originally planned output. An additional and common problem is that public enterprise plants in just about every African country have been located because of political and regional considerations, despite the added costs and distorted allocations such sitings caused. In several instances, PE investment decisions have been either excessively ambitious, predicated on the maintenance of historically high prices

In Sub-Saharan Africa

15

for the commodity, or excessively reliant on uncontrollable external factors. Niger's uranium-producing PE, set up during the short-lived c o m m o d ity boom of the 1970s, had by 1983 accumulated operating losses equivalent to 10 percent of the massive total investment. The overriding reason was the collapse in the world price of uranium, which by the 1980s had fallen below the cost of Nigerian production. In Benin, an efficient and long-profitable textile PE suffered a reversal in 1983 when its major export market in Nigeria was suddenly closed off. Nigeria's decision to close its border to printed textile imports was, of course, outside the control of either enterprise management or the government of Benin. This is the nature of commercial operations; it happens constantly and is not—despite the use of strategic planning and sophisticated market-analysis t e c h n i q u e s — a l w a y s predictable. Most important, the government of Benin could not respond rapidly to altered market conditions. It could not find a substitute market (indeed, perhaps there wasn't one); in addition, it could not quickly reduce the f i r m ' s work force or sell or close the firm. Whereas a private firm might have taken steps to cut losses (even drastic steps such as layoffs or liquidation), the PE was obliged to continue on in much the same manner and to hope that the Nigerian border would reopen. The result was a continuing stream of losses. A f r i c a n P E s have largely failed to generate internally a s u f f i c i e n t amount of working capital; they have demonstrated a limited ability to finance new or replacement investments, or even maintain existing investments. T h e y have moved from being a burden on the budget to a state of being a burden on domestic banking systems. This is particularly true of African countries in the franc zone. For example, in a sample of seven countries in the West African Monetary Union, PEs account on average for 36.7 percent of all domestic credit, whereas in six n o n m o n e t a r y union countries the average is a more modest 16.9 percent (Bovet 1985, 3). In Senegal, PEs accounted for 49.4 percent of all bank credit in 1982 and 56 percent of short-term credit. In the same year, 82 percent of the Senegalese banking sector's total outstanding debt was tied up in P E s — w h i c h taken as a group accounted for 1 percent of all bank deposits (Gouadain et Lecointre 1984, 302-303). The situation is similar in Mali and Madagascar and tends in this direction in many other countries. The picture of African PE performance is not unrelievedly negative. In some countries the bulk of the losses in PE sectors can be traced back to one or a small number of grossly inefficient firms. This means that many individual African PEs (though few PE sectors) run at a profit. Data do not establish a regional or much of a sectoral pattern, but some information is available. In Sierra Leone, production and financial enterprises have shown much higher returns for capital than service enterprises, and it seems reasonable to think that this is the pattern elsewhere. In Ethiopia, the industrial PE subsector made sustained and substantial net profits from 1979 to 1982.

16

The Public Enterprise

Sector in Africa

(On the other hand, agricultural sector PEs are almost universally criticized as especially poor performers, although there is some evidence that cottonproducing PEs organized on the French CFDT model are an exception.) With the proper mix of macroeconomic policies and internal management arrangements, African PEs can run well and produce significant benefits f o r the c o u n t r y . M a l a w i ' s A g r i c u l t u r e D e v e l o p m e n t and M a r k e t i n g C o r p o r a t i o n , the T a n z a n i a I n v e s t m e n t B a n k , and the P a l m i n d u s t r i e Corporation in C6te d'lvoire are all examples of PEs that previously had great difficulties and that benefited from restructuring efforts. (Still, it must be noted that in a number of countries, even when the returns to capital invested in PEs have been positive, they would be minimal if assets were adjusted for inflation. For example, Ghanaian industrial PEs returned 17.8 percent on invested capital over a studied period, compared to the prevailing inflation rate of 96 percent.) Overstaffing A modest amount of good news comes from another problem area. Almost every African country has severe problems of overstaffing in public enterprises. In Congo, Ghana, Guinea, Liberia, Nigeria, Somalia, and Tanzania (among others), official reports have underlined this issue. As an illustration, the Nigerian Railway Corporation has about twice the staff per traffic unit of other West African railways, which, in turn, have about twice the staff per traffic unit of European railroads. Although it is reasonable to assume that lower labor costs in Africa should normally lead to greater labor intensities, all too often numbers of workers are unproductively excessive. One African airport authority had two eight-hour shifts of workers operating one regional airport that received a grand total of two flights a day. A World Bank study estimated that a West African agricultural marketing board had three thousand positions in excess of reasonable requirements. In country after country, PE officials complain of their inability to suspend, fire, or indeed sanction in any meaningful way their large and costly work forces. Nor do they possess discretionary power on salaries and benefits; thus they have neither sticks nor carrots. Acute and costly problems of overstaffing at the lower levels of PEs coexist with scarcities of skilled labor and trained and experienced managerial personnel. PEs in Zimbabwe and Nigeria suffer from shortages of technicians and middle management even in the most overstaffed organizations. Unified salary systems that equalize salaries and benefits in PEs and the regular civil service have been instituted in several African countries, primarily to avoid loss of good people from the civil service due to higher PE wage scales. The creation of unified systems may have slowed the flow from the civil service to the PE sector, but it seems also to have increased the f l o w of c o m p e t e n t m a n a g e r s f r o m the P E to the p r i v a t e s e c t o r .

In Sub-Saharan Africa

17

Moreover, the tendency of governments to impose salary uniformity among PEs acts as a disincentive to good workers. There tends to be a relatively narrow range of remuneration between workers and management, and in many countries the salaries of PE managers have not been adjusted for a considerable time and no longer serve as a sufficient incentive to attract competent individuals. Lately a significant number of African countries have admitted the overstaffing problem and have begun to take steps to correct it. In Niger, several of the most blatantly overstaffed PEs have undergone work force reductions of up to 25 percent in the past three years. "Survival plans" in Sierra Leone have resulted in substantial staff reductions. Layoffs in PEs are reported recently in Tanzania, Togo, Senegal, and Nigeria. A government commitment to implement a layoff policy has been noted in Benin, and Mauritanian, Guinean, and Malian authorities are also working along the same lines. That so many African governments are taking steps in such a politically sensitive field as public sector employment indicates their realization of the serious economic situation of their PE sectors. Liquidity and Debt Ratios Although some positive aspects of even the o v e r s t a f f i n g issue can be uncovered, it would be very difficult to make the same claim for the issue of liquidity and debt ratios. In case after case, one finds African PEs that are undercapitalized because of insufficient capital contributions on the creation of the firm and through the erosion of the capital base by chronic losses and inflation. Budgetary restrictions and increases in a c c o u n t s receivable have dried up government transfers to the PEs. This has led PEs to rely increasingly on commercial borrowing to finance new investments and even operations, and to a buildup of arrears. Historically high interest and U.S. dollar exchange rates have caused severe financial problems for PEs depending more and more on commercial borrowing. In Somalia, for instance, manufacturing PEs' interest charges amount to almost 50 percent of their losses. Because most African governments guarantee PE debts (and even when they are not officially guaranteed, there is often an assumption of an unofficial guarantee) and management is not held accountable for these loans, many enterprises have overborrowed and used money imprudently. In far too many African cases, this has led to high debt-equity ratios, increased arrears to banks and suppliers, and virtual paralysis of operations. In Benin, for example, the majority of PEs have a debt-equity ratio exceeding 5:1. Out of a sample of thirty PEs, only 20 percent have debtequity ratios below 2:1, and 50 percent have ratios above 10:1. In Togo, data on six key public enterprises indicate that in 1980 they were seriously undercapitalized, with a debt-equity ratio of 8:3. Furthermore, four PEs had indefinite ratios because they had negative net capital positions.

18

The Public Enterprise

Sector in Africa

In Sudan, a huge amount of net working capital is tied up in receivables and inventories. The equity of many corporations has shrunk because of large operating losses. Fixed assets have increased only slightly because most of the resource increases have gone to finance current assets. High debt-equity ratios are also true of enterprises in Sierra Leone, Zambia, Madagascar, and Nigeria. Many African PEs have proven incapable of servicing the debts they have generated; in Zaire the state has assumed responsibility for $1.3 billion of PE debts—an enormous but hidden subsidy. PEs in most of sub-Saharan Africa lack liquidity because they are often not paid or paid very late for their products or services. Partly as a result of the fact that few government bills are paid on time, many African PEs have in turn stopped paying taxes and have stopped paying each other. For example, as of 1983, the central government and municipalities in Senegal owed CFAF 6 billion to the national water company, SONEES, a sum roughly equivalent to SONEES's total turnover in 1983. However, tax payments withheld by SONEES offset the arrears. As elsewhere in the region, the Senegalese government's inability to provide subsidies led PEs to finance their deficits with commercial bank overdrafts and governmentguaranteed short- and medium-term credits. Such financing resulted in high financial charges, and, in the case of the housing construction PE, interest charges in 1982 equaled half of its turnover. (African governments' reluctance to provide a flow of subsidies to unprofitable PEs is understandable. But in a few cases it is clear that had the PEs been adequately capitalized to start with, or had they received from government promised injections of working capital, then the firms could probably have operated in a profitable manner.) PEs in Togo are also saddled with large accounts receivable. For eight enterprises these amounted to nearly five months of sales in 1980, while liquid assets covered only two weeks of operating costs. In attempts to mobilize or retain liquidity to pay personnel, at the least, large short-term debts were incurred. This story has been repeated across Africa, from Mali to Kenya. High rates of taxation on profits and government requirements to transfer a large portion of post-tax profits to its budget have often led to reduced funds for reinvestment, forcing additional borrowings, causing cash-flow problems, and reducing PE incentives to generate profits. For instance, in Mali, 90 percent of post-tax profits, in those few instances when profits are made, must be transferred to the government budget. (On the other hand, it must be noted that many African PEs receive various forms of tax exemptions and nonetheless cannot earn profits or even amounts sufficient to cover their operating costs.) In Niger, any accumulated surplus of the major development bank has often been reallocated, at the discretion of the government, as subsidies to poorly performing enterprises. It is thus apparent that African public enterprises do not meet the

In Sub-Saharan

Africa

19

expectations of planners and leaders. Some special—that is, special to Africa—circumstances and reasons account for this inadequate performance; these are discussed below. But there are also several determinants of poor performance that are general and that apply to almost all PEs, whatever the culture, region, or economic system in which they are found. These general problems are unclear and contradictory objectives; excessive political interference in issues and decisions that should—from an efficiency standpoint—be taken by enterprise managers or boards of directors; overly frequent rotation of managers, both because good PE managers are in high demand and in short supply because of lack of incentives and because incompetent managers are rarely fired but frequently transferred; the incompatibility of civil service procedures with commercial operations; and the pervasive and negative effects on PE efficiency of the lack of competition. These issues have been analyzed elsewhere (Shirley 1983; Jones 1982); it is sufficient to summarize rapidly the reasoning of previous studies and to stress that there is a worldwide reluctance on the part of governments to admit that some enterprises are beyond repair and to liquidate them. African PEs exhibit all the problems noted above. There is no African country in which PEs are not required to meet noncommercial or social objectives. Indeed, this is perfectly legitimate. But in those many cases where governments do not clearly rank a PE's goals according to priority, and do not make any attempt to assess systematically the social costs and benefits of noncommercial operations, then the enterprise manager will attempt to meet all objectives at once—a situation that strains scarce resources and usually results in confusion and poor performance. Africa is also no exception to the universal finding that politicians interfere, often and arbitrarily, in low-level PE managerial decisions; for example, specifying who should be hired, who cannot be fired, where contracts must be awarded, who should receive credit, what bills should be paid and which can safely be ignored, and where services will be provided and maintained, despite insufficient revenues. The acutely negative effects on PE performance of these and many other acts of political interference are quite well known. The short supply of good PE managers also creates problems worldwide. Pay scales are generally higher in the private sector, and managers there have more freedom to pursue more clearly defined and thus more easily attained objectives. Everywhere, managers of public enterprises complain of having to cope with excessive, rigid, time-consuming, and inappropriate bureaucratic procedures, which hinder the efficient and profitable running of firms. And finally, around the world many public enterprises are monopolies, which means they are not subject to the efficiency-enhancing pressure of competition. Although these problems are common to PEs everywhere, the intensity

20

The Public

Enterprise

Sector

in

Africa

of at least some is greater in sub-Saharan Africa than elsewhere. For example, the scarcity of experienced managers is absolutely greater in Africa than in the Middle East, Asia, or Latin America, reflecting both the poor human resource base inherited at independence, and the appointment policies followed by a number of governments, which have stressed political loyalty over operational skills. Poor pay for managers frequently impedes recruitment and performance, as in Ghana, Benin, and Guinea. In an increasing number of African countries, public sector wage freezes necessitated by economic crises have led to erosion of purchasing power and living standards for PE managers and civil servants alike. As an illustration, Ethiopian public sector wages, in all sections and at all levels, have been frozen since 1974; those in Zimbabwe since 1981. However, in Sierra Leone pay policies are judged to be conducive to attracting and retaining qualified people. In many other countries, PE salary scales are appreciably higher than those for the civil service. Immediately after independence the civil service was the preferred employer for most trained Africans. In the 1970s the advantages of the PE sector—higher pay, supposedly less red tape, supposedly greater freedom of managerial maneuver—made PE employment highly desirable. In the 1980s the erosion of PE wages and increasing criticism of PE performance contributed to a loss of managers to the private sector. Across the continent, in anglophone and francophone countries alike, there has been a maintenance and indeed a strengthening of the inherited administrative structures and managerial attitudes, which are highly formalistic and legalistic. This legacy is especially apparent in francophone Africa. The most obvious effect of these rigid, formal structures, and the attitudes of close, rigorous supervision and surveillance that accompany the structures, has been that government agencies controlling PEs spend most of their time on the assessment of questions of inputs—that is, have supplies been obtained according to regulations? have they been devoted to the precise purposes for which they were requested? have, in sum, all actions been carried out in conformity with the rules? These classic bureaucratic considerations underemphasize or entirely overlook questions of output— of productivity and profitability. A common criticism of public sector operations the world over is that they compare performance not to preestablished economic or social objectives but rather to conformity with legal regulations. Is Africa so special in this regard? The response is yes, in Africa the degree of supervisory concentration on nonproductivity issues seems extraordinary. In Senegal and elsewhere, the PE sector falls under the supervision and control of a large number of imperfectly coordinated bodies with different legal forms of PEs being supervised by different bodies, and with different agencies having as their responsibility only a part of the supervisory process. No focal point exists to provide coherence and continuity in policymaking and supervi-

In Sub-Saharan

Africa

21

sion; at the very least, much time and effort are wasted in attempts to inform ministerial and interministerial committees of coordination about what has happened. Indeed, many PE supervision meetings of any sort throughout Africa are difficult to arrange and are frequently postponed or rescheduled; they often start late and are almost invariably subject to frequent interruptions and telephoning by key participants. There is a tendency to avoid an open statement of conflict, which means that they drone on interminably, often wind up without putting forward a decision, and commonly pass any seriously contentious issues to a higher authority. In sum, the problems of committees the world over reach a pathological state in Africa. African government administrations are centralized in the extreme. The reasons for this are too numerous and complex to sort out in this chapter. But the high degree of centralization has a decided impact on African PE performance. First, it means that ministers and high administrative officials interfere easily and often in enterprise m a n a g e m e n t decisions. Extensive supervision and control regulations, many limiting such interference at least in theory, are in existence. Most of the time they are simply ignored. Because the ministers, and in turn the officials, are often interfered with by their superiors, they see it as normal behavior toward their subordinates, including the PEs under their supervision. This interference causes acute overstaffing, protection of nonperforming individuals by powerful patrons, and much blatantly corrupt behavior. The dominance of centralized governments and the absence of a substantial indigenous private sector in most African states means that PEs have no role model to follow other than government. Thus, PE activities cannot be compared to a substantial sector of obviously more efficient performance. Moreover, African educational systems are still geared to produce bureaucrats, technocrats, and professionals; schools of commerce and business administration are few and training in them is limited to postgraduate studies. Training institutions turn out people who think in terms of applying regulations, not seizing opportunities. In industrialized countries executives frequently move from the private to the public sector and back, presumably to the benefit of both. In Africa there is little revitalizing interchange of this sort. Indeed, how could there be much of an exchange when domestic African private sectors are mostly dominated by traders and artisans, not enterprise managers and investors? Of course, today's trader is tomorrow's general manager, and many operations now being run by African private sectors are financially sophisticated. Some promising first attempts at cross-fertilization are under way. In Togo, the appointment in 1984 of a new minister of state enterprises is revealing in this regard. The new minister, a successful businessman and president of the Togolese Chamber of Commerce, had not previously held political office. He was appointed

22

The Public Enterprise Sector in Africa

expressly to bring his private sector experience to bear on the Togolese PE malaise. While such appointments remain rare, they will probably grow in number and popularity as the pool of experienced African enterprise leaders increases, and as governments acknowledge the need to try new, potentially more efficient managerial arrangements. Systematic problems are matched by difficulties at the level of the firm. One of the most often-cited obstacles to good PE performance is the extremely poor quality of basic information on enterprise activity. Across the continent one hears complaints of poor accounting practices in PEs, of accounts being completed only after lengthy delays, of the lack of standardized accounting systems making comparisons difficult if not impossible, and of the great difficulties of obtaining and retaining competent accountants. Putting decent accounting systems in place must be regarded as an extremely important preliminary step, for rational and efficient PE management will not develop without it. In the absence of good, timely, standardized accounts it is pointless to recommend the use of more elaborate management-information systems and performance evaluation systems. This would simply be the same as ordering vehicles but providing no gasoline. The cumulative nature of African PE problems should by now be well apparent. Weak accounting results in feeble information and evaluation systems. Inexperienced management does not understand the inadequacy of the data they use to make decisions. Boards of directors of PEs do not fulfill the needed policy-setting and decisionmaking roles, because of deficiencies in their composition (mainly civil servants representing ministries) and functioning. Civil servants in supervising agencies and ministries—and the fact that there are almost always more than one of each compounds the problem—are usually good at the meticulous and time-consuming application of regulations, whereas ministers frequently ignore them with impunity, especially with regard to personnel issues. All of these institutional and managerial difficulties typically take place in a flawed macroeconomic policy environment of price distortions, subsidies, and overvalued exchange rates. Thus, in African PEs one is dealing not with a weak link in a chain, but rather a chain of weak links.

Conclusions Given the complexity of problems in PE performance, it must be admitted that reform actions are administrative-intensive operations, demanding much of weak and already overstrained administrative systems. It must also be stressed one final time that even if the African countries attack successfully their institutional and managerial obstacles to good PE performance, they must at the same time improve the macroeconomic and financial setting in which the PEs operate. These factors compound the difficulty of finding a quick and simple solution.

In Sub-Saharan

Africa

23

Thus, the complexity of the issue is daunting. Public enterprise reform involves macroeconomic policy issues and micromanagerial administrative details. Sensitive sociopolitical concerns intrude into every aspect of the issue. To master the field one must be, at the same time, an economist, financial analyst, management specialist, and political analyst. There is an absence of proven solutions, especially in Africa, where alternatives used elsewhere with some success—divestiture and subjecting PEs to the stimulant of competition—are problematic, but not impossible. Nonetheless, the need for thoroughgoing reform is acute. Poor African PE performance in the 1960s and 1970s was marked by good (compared to the present) commodity prices, capital flows, and growth rates. These factors have altered, revealing plainly the scope and intransigence of the PE problem. The reform of public enterprise sectors is now everywhere in Africa a matter of the highest priority. The reform effort will be lengthy and expensive and will demand much from both African governments and the developmentassistance community.

Notes This chapter is a shortened version of a World Bank paper, published as Nellis, John R. 1986. "Public Enterprises in Sub-Saharan Africa." World Bank Discussion Papers No. 1. Washington, D.C.: The World Bank.

References Bovet, David. 1985. "Financial Impacts of Public Enterprises in Sub-Saharan Africa," paper submitted to the World Bank, August 1985. Cliffe, Lionel. 1975. "Underdevelopment or Socialism? A Comparative Analysis of Kenya and Tanzania." In Richard Harris, ed., The Political Economy of Africa. New York. Schenkman Publishing Co. Eckert, Gerhart, and Werner Puschra. 1984. "Public Enterprises and Development." Viertel Jahres Berichte (December, 1984). Gouadain, D., and Lecointre, U. 1984. "Difficultés de gestion des entreprises des pays en voie de développement," Institut d'Administration des Entreprises. Grosh, Barbara. 1986. "Agricultural Parastatals Since Independence: How Have They Performed?" Working Paper No. 435, Institute for Development Studies, University of Nairobi. Institut de développement économique de la Banque mondiale. 1985. Les politiques de transport en Afrique francophone au Sud du Sahara: Problèmes et choix. Washington, D.C.: Banque Mondiale. Jones, Leroy P. 1982. Public Enterprise in Less Developed Countries. Cambridge: Cambridge University Press. Kenya. 1982. Report and Recommendations of the Working Party on Government Expenditures (Philip Ndegwa, chairman). Kierans, Tom. "Commercial Crowns." 1984. Policy Options/Options Politiques (November 1984.)

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The Public Enterprise Sector in Africa

Killick, Tony. 1981. Policy Economics. London: Heinemann. Mkulo, M.A.M. 1985. "Interview." Public Enterprise (February 1985). M s a m b i c h a k a , L. A., and M.S.D. B a g a c h w a . " P u b l i c Sector E n t e r p r i s e s in Tanzania: Problems and Constraints." Viertel Jahres Berichte (December, 1984). Shirley, Mary M. 1983. Managing State-Owned Enterprises. World Bank Staff Working Paper no. 577. Washington, D.C. W o r l d B a n k . 1983. World Development Report—1983. New York: Oxford University Press.

Public Enterprise Reforms in Francophone Africa Alfred Saulniers

The adoption of public enterprise reforms in francophone Africa differs significantly from that in Africa's anglophone countries; this chapter explores those differences. Sharp divergence is found in the use of such structural performance-improvement mechanisms as privatization and management contracts. The effects of adjustment measures may be responsible for the observed improvement in financial performance of large public enterprises during the mid-1980s as compared to that of either multinationals or private local firms. This chapter begins by examining the origins and importance of francophone African public firms in order to provide a basis for comparison with the anglophone experiences discussed in other chapters.

Origins Francophone Africa's public enterprise portfolios trace their origins to the effects of colonial policies. The pre-World War II efforts by France and Belgium to exert control over natural resources or other key sectors of their colonies' economies provide the nucleus from which the portfolios later grew. 1 The early public portfolio often comprised mining, transportation, and exporting. 2 For example, Morocco's phosphate processor, O f f i c e Chérifien des Phosphates (OCP), now and for many years the nation's largest firm, was founded in 1920 as a public enterprise; the mining holding company, Bureau de Recherches et de Participations Minières (BRPM) was similarly formed in 1928 (El Midaoui 1981, 23-24). After the war, francophone Africa's portfolio growth lagged behind Europe's. In particular, France's retributory nationalizations, which boosted the number of public firms after 1945, had no African counterparts— yet. There, colonial governments created agricultural marketing boards, industrial ventures, and a wide range of support firms in the service sector. 25

26

The Public

Enterprise

Sector

in

Africa

Nationalist retribution came after independence when, in an effort to Africanize the economy and to demonstrate self-reliance, new governments took over firms or placed them under heavy controls. Often sectors that were held mostly by foreign elites from the former colonial power or by those who had collaborated with it, including locally born Asians and Levantines, were subject to Africanization. Later, portfolios grew as new firms were created to provide essential services and to aid in the state-led, postindependence thrust to industrialize. In the absence of a national private sector capable and willing to provide the levels of capital, risk taking, or technical expertise deemed necessary by g o v e r n m e n t authorities to achieve the h o p e d - f o r industrialization, postindependence African governments invested heavily in large, capitalintensive industries, including steel, fertilizers, basic chemicals, and petrochemicals. 3 Often, in the hopes of expanding employment, such firms were forced to hire far more workers than was necessary for efficient operation. Portfolios also grew both as existing public enterprises created subsidiaries, often to escape heavy-handed government controls over their operations, and as public investment banks took minority shares in private ventures. "Subsidiarization" is perfectly illustrated in Morocco where, from 1973 to 1977, 92 percent of newly created public enterprises were subsidiaries of existing ones (Royaume du Maroc 1980, 22). "Rolling privatization," defined as selling the shares owned by investment banks or development coiporations once the companies they had supported had shown the capacity to survive and reinvesting the proceeds in new ventures, lagged far behind original expectations and resulted in an inertial growth to the portfolio as new firms kept being added without hiving off the old ones. T o d a y ' s portfolios consist of the remnants of the historical process. From an economic standpoint, some public firms were created for rational motives. Others became public accidentally—as subsidiaries of firms swept into the portfolio in broad sectoral or political nationalizations. In most countries, the firms differ in size and composition and are widely distributed throughout many sectors of the economy. Authorities reluctantly admit that the portfolios are far from optimal and, consequently, require major efforts at rationalization.

Measures of Importance Macroeconomic

Variables

Francophone Africa has forty-five hundred or more public over half of which are found in Algeria. Using recent data on Africa only, some measures of their importance may be found They account for an average of 12.2 percent of national GDP,

enterprises, 4 sub-Saharan in Table 2.1. less than the

In Francophone Africa

Table 2.1

27

Summary Indicators of Public Enterprise Importance in Sub-Saharan Africa Average Share in

Gross domestic product Gross domestic investment Employment Domestic credit External debt

Francophone Countries

Anglophone Countries

12.2 23.6 26.2 19.4 14.6

16.3 20.0 21.8 9.9 14.3

Source: Swanson and Wolde-Semait, 1989. The latest published data are used to calculate the nonweighted average.

anglophone African country average of 16.3 percent; for gross fixed capital formation, the order is reversed with 23.6 and 20.0 percent respectively. 5 Public enterprises are important employers. In 1988, the top one hundred public enterprises, ranked by e m p l o y m e n t , had a l a b o r force of 314,000 (Dioh and Massou 1989). The average ratio of public enterprise e m p l o y m e n t to total employment was higher in f r a n c o p h o n e countries (26.2 percent) than in anglophone countries (21.8 percent [see Table 2.1]). Public enterprises are also important borrowers, relying on both the local and international credit markets. The average francophone country share of domestic credit is higher than in anglophone countries—19.4 and 9.9 percent respectively—whereas the shares of external debt are approximately equal at 14.6 and 14.3 percent respectively. Industrial

Rankings

Public enterprises occupy top positions in industrial rankings. Of the twenty-two francophone African countries listed in a recent survey, wholly or majority-owned public enterprises ranked first in sales in fifteen. 6 Only in Burundi, the Comoros, and Togo does the government not have at least a minority share in the top-ranked firm. Apart from the top position, nonfinancial public enterprises figure prominently at all levels in rankings by sales, net worth, profits, losses, or employment. The rankings, shown in Table 2.2, prompt several observations. First, with one exception, there is no type clustering. Most notably, multinationals are not all profit earners nor are public enterprises the only

28

The Public Enterprise Sector in Africa

Table 2.2

Nonfinancial Firm Rankings for Francophone Africa, 1988 Number of Firms Among Top 10

25

50

100

Sales GT 50 percent public GT 50 percent private national GT 50 percent MNC JV (50 percent public/50 percent MNC) JV (50 percent private/50 percent MNC) No majority ownership

6 1 2 1 0 0

14 2 6 3 0 0

23 7 16 4 0 0

42 15 34 4 2 3

Net Worth GT 50 percent public GT 50 percent private national GT 50 percent MNC JV (50 percent public/50 percent MNC) JV (50 percent private/50 percent MNC) No majority ownership

8 1 1 0 0 0

18 6 1 0 0 0

35 7 3 3 0 2

60 14 17 4 0 5

Profits GT 50 percent public GT 50 percent private national GT 50 percent MNC JV (50 percent public/50 percent MNC) JV (50 percent private/50 percent MNC) No majority ownership

6 2 1 1 0 0

16 4 4 1 0 0

29 8 8 3 0 2

50 18 21 4 2 5

Losses GT 50 percent public GT 50 percent private national GT 50 percent MNC JV (50 percent public/50 percent MNC) JV (50 percent private/50 percent MNC) No majority ownership

8 0 1 1 0 0

12 1 9 2 0 0

21 4 19 2 0 4

36 10 44 2 4 4

nployment GT 50 percent public GT 50 percent private national GT 50 percent MNC JV (50 percent public/50 percent MNC) JV (50 percent private/50 percent MNC) No majority ownership

8 1 1 0 0 0

17 3 5 0 0 0

32 6 7 2 0 3

56 16 18 4 1 5

Ranking Criteria

Source: Data from Dioh and Massou 1989 Notes: GT—greater than; JV—joint venture; MNC—multinational corporation

In Francophone

Africa

29

losers. Although in some small countries, public enterprises may "dominate the economies" (Nellis 1986, 4), for francophone Africa as a whole the case is not so clear, because public enterprises make up roughly half the rankings. This observation may have to be modified as the data on Algerian firms become available. Second, public firms have more assets, measured in part by net worth, an expected finding due to their investment in infrastructure and primary industry. The conclusion is heavily qualified, however, because financial data may not accurately reflect asset values: countries with high inflation rates may not provide for mandatory periodic revision of the book value of assets; governments may have forced firms to rely on the capital market by refusing to provide funds at the time of creation; or previous losses may have eroded a firm's net worth. Third, employment provides a slight exception to the unclustered data; public firms employ the most people. Two mining firms each have more than thirty thousand employees, Morocco's OCP and Zaire's Générale des Carrières et Mines (GECAMINES). Moreover, at the top ranks, public enterprises outnumber all others combined. If public firms are capitalintensive, this does not necessarily mean that they are not a major source of employment (Nellis 1986, 8). Indeed, the data provide tentative support for the hypothesis that they are prone to overstaffing (Shirley 1983, 19). Fourth, wholly or almost wholly owned public enterprises are francophone Africa's biggest losers. A Moroccan engineering firm, the Zairian transport company, the Gabonese railway, the Algerian national airline, and a Congolese sugar mill lead the list. According to the 1989 rankings, during the previous year, they each lost more than U.S. $30 million. Fifth, and in opposition to the previous conclusion, public enterprises are also the biggest money-makers. The government owns all or at least half of six of the ten most profitable firms, and 49 percent of one of the others. A Guinea bauxite firm, the Côte d'Ivoire electric producer, and the Cameroonian refinery led the ranks. In 1988, each had profits exceeding U.S. $50 million.

Adoption of Reforms Francophone African countries have adopted reform measures more widely than have countries of anglophone Africa. The reforms go beyond changing the external policy environment in which public enterprises operate from one based largely on government commands to one in which market signals function. They include policies aimed at rationalizing the less than optimal portfolio composition, reducing its burden on the economy, and enhancing management and systems capabilities so that the enterprises may carry out their operations more efficiently (Alexander 1989, 332-333). Lumping

30

The Public Enterprise

Sector in Africa

together such widely different measures as privatizations, liquidations, rehabilitations, management contracts, performance contracts, and studies of the firms as potential candidates for divestiture, Swanson and WoldeSemait identified 391 reforms in francophone countries of sub-Saharan Africa compared to only 168 in anglophone ones (1989, 53). This section examines two important types of reform measures, contract plans and privatization. Contract

Plans

The contract plan consists of a signed statement of the mutual rights and obligations of government and the public enterprise that has force for a fixed term, usually for three to five years. It usually results from a long negotiation process between both parties to define or clarify company goals and to demarcate clearly the strictly entrepreneurial or managerial goals from political ones. It often sets yearly performance criteria to be monitored against the commercial goals while providing for compensation for politically inspired deviations from them (Nellis 1989, 2). It spells out government commitments that may have an impact on management, notably those concerning the firm's institutional environment, government-allowed price or tariff schedules, and resources for the firm, including payment of government arrears for services rendered (commonly found in the public utilities) or for overdue capital transfers. Mechanisms to avoid future buildup of arrears are sometimes specified ("Le cap" 1989). The use of contract plans also sets francophone Africa apart from the anglophone countries. A census of ninety-six African contract plans from 1973 to 1988 found only seven in anglophone nations (Shahrokh 1987, 15). Of the ninety-six, forty-four were in the drafting or planning stages, and fourteen had been completed, ten of them in francophone countries. Table 2.3 lists the plans: Senegal leads with thirty, followed by the C o n g o ' s eighteen, and Morocco's ten. One reason francophone-African countries use contract plans may be the plans' origin—France. The Nora Report of 1967 suggested using contract plans to increase autonomy and responsibility for French firms and to provide "mastery of their own decisions" (Groupe de Travail 1967, 9 0 92). 7 In Senegal, that link to Africa is clear because French government advisers helped set up the process (Shirley 1983, 80). Another reason has been conditionality of some World Bank loans; of the thirty-seven contract p l a n s r e q u i r e d by the I n t e r n a t i o n a l B a n k f o r R e c o n s t r u c t i o n and Development (IBRD), thirty-three were in francophone countries. In francophone Africa, plans have been used in many sectors, most notably in public utilities, water, electricity, communications, and transportation. They have helped improve strategic planning at the company level. In Senegal, companies have been forced to identify the sources of

In Francophone Africa

T a b l e 2.3

African Contract Plans by Country

Number Benin Burundi

7

5 5 8 4

2

1 0 0 3 0

0

Gambia Guinea

6 1

3 0

6 0

6 0

Kenya Madagascar

1 1 1

0 1 1

0 0 0

10 2

6 1

0 0 0 2 1

Senegal Togo Tunisia

30 2

22 0 0

*

6

0 0 3

0 0

Total

96

37

37

11*

Congo Côte d'Ivoire Gabon

5 18 5 1

Required by I B R D » Number O f Which or in Progress Completed Required by I B R D

0 0 3 1

Mali Morocco Niger

31

0 1

Source: Shahrokh 1987, 15, 20, 2 8 - 4 5 . Note: a. Requirement status of twenty-nine contracts unavailable, twenty-two of them in Senegal. No International Bank for Reconstruction and Development ( I B R D ) requirement among the first ten Senegalese contracts completed.

their operating deficits, define their medium-term operating and investment goals, and calculate the cost of loss-making, government-imposed services (Shirley 1983, 80-87). In Morocco's electric utility plan, the principle of government payment for its imposed loss-making services was accepted (Royaume du Maroc 1988, Art. 5, para. 5). In Zaire's REGIDESO water utility, contract plans have been internalized, with a set of plans between the company's central administration and its regional offices forming the company-level counterpart to the plan between the company and the government ("Un cadre" 1989). Empirical research on the effects of the contract plans in francophone Africa has been scanty. A study of twenty-four firms in Senegal, six with and eighteen without contract plans, found two major differences: Firms with contract plans showed faster growth in sales and slower growth of personnel costs than those without (Nellis 1989, 3 7 - 3 8 ) . Some problems have marred the contract-plan experience. Plans have proved unable to resolve complex company problems because the negotia-

32

The Public Enterprise

Sector in Africa

tion process precludes deep restructuring (C6te d'lvoire). Senegal's government has often overcommitted resources that it was later unable to provide, and both the enterprises and their supervising agencies have been unable to "force, pressure or cajole the government into honoring those commitments" (Nellis 1989, 34). Both faults are not associated with contract plans. Rather, the contract plans have made the weaknesses of the governments more apparent. However, both problems point out the need for high-level political commitment to the process and for good-faith negotiations on attainable issues. Exogenous factors have overtaken some plans. In C6te d'lvoire, a bus company plan was abandoned as increased competition forced efficiency to exceed performance targets. In Senegal, government arrears resulted in failures to meet targets, as world prices for primary products exceeded the assumptions that underlay the financial commitments. These problems provide the lesson that although plans cannot account for all the uncertainty in a firm's operating environment, periodic contract revisions or rolling contracts may incorporate changes in underlying assumptions. Provisions for periodically revising contracts have been regularly included in many recent plans, but government negotiators have, at times, been reluctant to renegotiate. Performance monitoring has often fallen short of expectations, as in the Congo's complex contracts that exceeded fifty pages yet did not clearly define responsibilities, complicating efforts to link incentives or sanctions to results. Short, simple plans are easier to monitor. In general, the francophone African experience shows that contract plans provide a useful counterpoint to the often heavy-handed government interference in public enterprises (Saulniers 1989). Moreover, their transp a r e n c y has helped expose some persistent g o v e r n m e n t w e a k n e s s e s . Although their implementation still poses some problems, they help to clarify goals and may lead to increased autonomy and greater efficiency in the use of a nation's scarce resources. The recent contract program-related improvement in Cotonchad's situation provides a clear example of the link b e t w e e n c o m p a n y f i n a n c e s and e f f i c i e n t n a t i o n a l r e s o u r c e u s e , as Cotonchad generates 35 percent of Chad's government revenue and 60 percent of the country's foreign exchange (Aoulou 1989). Privatizations Privatization in its broadest sense encompasses many ways of substituting market forces for the control of the state over the economy. In its narrower sense, however, limited to the total or partial transfer of commercially oriented public enterprises or of government activities or assets to the private sector, privatization has sparked intense debate in Africa. The arguments touch on the issues of microeconomic efficiency, macroeconomic stabilization through reduced government subsidies, economic nationalism, the role of multilateral or bilateral aid agencies, employment policy, and shifts in

In Francophone

Africa

33

domestic economic or ethnic power bases (Mengistu and Haile-Mariam 1988; Wilson 1988). However, apart from the debate and irrespective of ideology, experiments with privatization clearly set the francophone nations apart.8 Many francophone African countries have prepared privatization programs, some with external assistance, as part of broader public enterprise reforms. 9 Table 2.4 shows that with similar portfolio sizes, they have sold assets or equity in eight times as many firms, placed management contracts in twice as many, and liquidated four-and-a-half times as many as have anglophone nations. Placing the figures from Table 2.4 on a per-country basis, francophone nations averaged nine equity or asset sales, three management contracts or leases, and ten liquidations or closures each; anglophone countries averaged two per category. While francophone countries started privatizing earlier, which in part explains the higher numbers, conversion from public enterprise to private commercial corporation requires a greater effort because of the highly structured legal system inherited from France (Alexander 1989, 349-350).

Table 2.4

Francophone African Privatizations by Type Privatizations Carried Out Portfolio Sale of Equity Management or Assets Contract/Leasing Size

Liquidation or Closure

Benin Cameroon Central African Republic Côte d'Ivoire Gabon Guinea Mali Mauritania Morocco Niger Rwanda Senegal Togo Tunisia Zaire

59 67 20 63 40 194 37 41 84 33 37 58 54 123 45

2 2 1 21 3 44 3 5 8 22 1 6 9 5 1

0 3 0 8 0 4 4 1 3 5 0 2 11 0 8

NA 5 NA 15 NA 16 9 4 NA 3 NA 25 11 NA 3

Francophone Africa Total Anglophone Africa" Total

896 829

133 17

49 23

91 20

Source: Portfolio size: International Monetary Fund 1988; Sales and contracts: Vuylsteke 1988, Table I; Liquidations: Berg and Shirley 1987, 21-30 and Hemming and Mansoor 1987, 33-39. Notes: NA—Not available a. Gambia, Kenya, Liberia, Malawi, Nigeria, Sierra Leone, Somalia, Sudan, Uganda, and Zambia

34

The Public Enterprise

Sector in Africa

Limiting the analysis to the detail shown for the francophone nations, it is clear that most privatizations have occurred through sales of equity and assets. Three countries led this category: Guinea, Niger, and C6te d'lvoire. Typically, the privatizations involve selling off small- or medium-sized firms in manufacturing or services. Firms judged strategic, usually found in energy, mining, transport, and public services, generally remain in the public portfolio. A less common technique was to close down a firm or, in a limited number of instances, to liquidate it (Nellis 1986, 45^46). By keeping alive the option that the firm could reopen, closure avoids the thorny political problems that can materialize around price or purchaser when a firm is sold. Liquidation closes even that option. Senegal led the list with twenty-five closures or liquidations, followed by sixteen in Guinea, fifteen in C6te d'lvoire, and eleven in Zaire. Leasing or management contracts form the third m a j o r category. T o g o ' s eleven firms accounted for a fourth of those reported. Leasing has been most c o m m o n f o r service firms. Leasing, closure, and liquidation avoid recourse to Africa's thin or missing domestic capital markets, as do private sales to local or foreign investors. Another method of avoiding the capital market constraint is to abolish government-granted monopolies, thereby opening the possibility of private sector competition. Demonopolization constitutes a nondivestiture privatization that has been subject to little systematic analysis. In contrast to divestiture, it does not involve any asset transfers that may lead to politically motivated questions about buyers and prices. Morocco has demonopolized municipal bus services in Rabat and Casablanca. Private firms received franchises to operate alongside the public firms, which resulted in the rapid alleviation of urban transport bottlenecks and gave passengers more transport options with less waiting. Morocco employed this policy most strikingly in demonopolizing the large export service firm, OCE, ranked third nationally in sales in 1982. 10 Within a few months after demonopolization in 1984, producers, cooperatives, and new private firms made up of former OCE staff had captured most of OCE's business—at lower cost to exporters. Now, OCE maintains a paper existence, kept alive by its holdings in agroprocessing subsidiaries, most of which are now slated for privatization. OCE's case attracted negative political attention, with questions raised in Parliament and front-page headlines for months in the opposition press about the problem of labor redundancy. However, the overall effects of the demonopolization appear positive, largely because studies have shown that more jobs were created in the new export firms than the seven hundred positions lost in OCE staff redundancies (Salah 1989). The privatization movement shows signs of growing in francophone Africa. Under a new National Charter, Algeria began providing greater autonomy for its public enterprise managers and plans to distribute millions

In Francophone

Africa

35

of hectares of its "socialist agricultural domains" to the people (Soudan 1987). The large Cameroon industrial holding has begun to spin off its subsidiaries (Bdjot 1989). The Congo has approved a debt-for-equity swap linked to its privatization plan ("Congo" 1989). The Moroccan parliament approved a privatization law in December 1989 that may lead to the transfer of approximately a third of the portfolio by 1995. Tunisia undertook forty privatization operations in 1988 and 1989 without major problems. Tunisia's handling of redundant labor is instructive: of the almost eight hundred workers made redundant in Tunisia's operations, half left voluntarily; three-quarters of the remainder took early retirement ("Privatisations" 1990). In general, privatization provides the ultimate solution to the often heavy-handed government interference in public enterprises. By transferring ownership of some manufacturing or service firms to the private sector, francophone African countries have been working toward the retention of a core portfolio of strategic firms. By implementing contract plans in some of those remaining firms, countries have adopted the principle that public enterprises should be allowed to operate as enterprises, not as some bureaucracy-ridden extension of a government department.

Financial Improvement: A Result of Reform? The financial performance of public enterprises in francophone Africa appears to have improved during the mid-1980s. 11 Based on a group of companies for which financial data exist for both 1982 and 1988, the figures presented in Table 2.5 indicate that, in 1988, the ratio of profit to net worth of large public firms averaged above 16 percent, a rise of 6.2 percent compared to 1982. In contrast, the same ratio for large privately held firms or for multinationals dropped by more than 10 percent during the same period. 12 In 1988, the share of profits in sales revenue was also highest for public firms (7.2 percent), having risen from 1982 while, during the same period, the profits share fell for both private local firms and for multinationals. To test the significance of the observed shifts through time, t-ratios were calculated on the basis of mean profit ratio differences for the same firms over time. As shown in Table 2.5, only the drops for large privately held local firms (both indicators) and for multinationals (net worth indicator) proved significant. Extending the analysis to company-level data for francophone countries that were not limited to the matched pairs supports the startling figures. As shown in Table 2.6, in 1988 there were fewer large public enterprises with losses (both in absolute and in relative terms) than similar multinationals, and there were fewer public enterprises with negative net worth, five compared to seven multinationals. 13

36

The Public Enterprise Sector in Africa

Table 2.5 Financial Indicators for Francophone African Nonfinancial Firms: 1982,1988 Rate of Return (in percent) to 1988

1982

t-ratios

Net Net Net Number Worth Sales Worth Sales Worth Sales GT 50 percent public GT 50 percent private national GT 50 percent MNC JV (50 percent public/50 percent MNC) JV (50 percent private/50 percent MNC) No majority ownership

36 25 49

16.1 7.5 6.3

7.2 2.4 2.2

9.9 18.0 16.9

3.5 0.78 1.17 4.7 -1.58 a -1.46 a 2.3 -1.74 a -0.20

1

24.2

10.2

25.9

4.8

7 7

12.0 8.1

3.9 3.0

3.3 10.9

0.3 0.70 0.91 3.9 -0.51 -0.48

NA

NA

Source: Data from "Entreprises" 1983; Dioh and Massou 1989. Notes: NA—Not applicable a. Significant at the 10 percent level GT—greater than JV—joint venture MNC—multinational corporation

The 1982 data support the conventional wisdom that multinationals do substantially better than do public enterprises. However, the relative shift, whereby a smaller share of the public enterprises show losses, while the shares of multinationals in similar conditions climbed from 18.1 percent to 29.3 percent, is noteworthy. When taken in conjunction with statistically significant drops in performance for private sector firms, the findings of improvement in public enterprises from 1982 to 1988, while themselves not statistically significant, support the tentative hypothesis advanced elsewhere that the institution of reform measures may have had beneficial effects on portfolio performance (Alexander 1989, 344; Saulniers 1990). The hypothesis still merits further detailed attention, particularly to possible distinctions that may be drawn between reform through company-specific rehabilitation measures (information systems, staff development, diagnostics, etc.) versus reform of a general policy or regulatory environment.

Conclusions Francophone Africa's public enterprises dominate neither the commanding heights of the e c o n o m y n o r the list of losers. Instead, f o r the set of

In Francophone Africa

ha I s ^ z

o uy •5Y* * S « I l z £ cu a

oo o\

O) VÌ (N

© (S —I

— 00 -H

W-l > O Z -1

£

E

oc 06 -!

5

£ E s Z

in

cVu

s u a« a

ci v S es H

o o ts

X) S. C o o 8. O >/-) H O

^

^

O

S c o •a es c 4J a > "S.

o

8.

Si

H O

H O

'g •é? E o Z

38

The Public Enterprise Sector in Africa

countries, they share rankings with private local firms and multinationals. The analysis of company-level financial indicators shows that public enterprises in francophone Africa have apparently improved in the m i d - 1 9 8 0 s when compared to private national firms or multinationals. The findings are tentative, however, and require further exploration of the p o s s i b l e link between the apparent company-level improvement and structural changes in the public enterprises' policy environments.

Notes I am indebted to Jamal Echiguer, Clive Gray, and Richard Mallon for comments on an early draft, but claim responsibility for any remaining errors. 1. Similar motives impelled the colonial powers in Latin America over a century-and-a-half earlier (Saulniers 1985). 2. Belgium entrusted much of the natural-resource development to the private sector through concessions. This postponed much portfolio growth to a later "retribution" period. 3. For many of the same countries, the development during the past thirty years of a national private sector capable of undertaking investment in industry may be interpreted as a factor favoring privatization. See Saulniers 1988. 4. The total of Table 2.1, plus 343 firms from Burkina Faso, Burundi, Chad, Congo, Djibouti, and Madagascar (International Monetary Fund 1988); 15 from Comoros, 22 local government firms from Gabon (International Monetary Fund 1986); 128 more majority-owned firms from Morocco (Ouassini 1988:171); 2,800 from Algeria (Ziady 1988); 50 from rankings ("Les leaders" 1988 and "269 leaders" 1988). 5. The GDP figures are naturally biased downwards, because public enterprise output, valued at market prices, may often be less than its opportunity cost. See Swanson and Wolde-Semait (1989, 20). 6. Dioh and Massou 1989. Data are compiled for an annual survey of large African firms. The surveys provide far better coverage of francophone countries, except for Algeria, than they do of anglophone ones. A questionnaire is sent to preselected large firms, and all information received by press deadline is entered into the database and subsequently published. To alleviate the problem of missing data for individual firms, the previous year's information is often provided and indicated as such in the text. For information on Algerian public enterprises, see Les 500 1987. 7. There is an extensive French-language literature on French contract plans; English-language treatments are limited. See Mallon 1983; Vernon 1983; and Trivedi 1988. 8. For a general survey of privatization intentions and actions in francophone Africa, see B6jot (1988). For the World Bank role in francophone Africa, see Alexander (1989, 347-349). 9. For a review of World Bank assistance for privatization, see Nellis and Kikeri (1989); Alexander (1989). 10. "Entreprises" 1983, 83. The Office de Commercialisation et d'Exportation had monopolies on exports and marketing abroad of citrus fruits, fresh fruit and vegetables, preserves, canned meat and fish, wines, fruit juices, and cotton fiber (El Midaoui 1981,329).

In Francophone

Africa

39

11. Comparative analysis of financial data requires special care. Intercountry differences in accounting systems plus variations in taxation, depreciation, revaluation, and inflation may distort the meaning of standard financial indicators. Further, the caveat that profits may not be a good estimator of public enterprise performance bears repeating, because monopoly public enterprises may have tried to use their economic power to keep prices up while governments may have tried to use their monopoly over coercive power to keep them down. 12. In Table 2.5, average profit ratios do not include (a) firms where either numerator or denominator was missing; (b) outliers, fixed arbitrarily as firms whose rates exceed ± 100 percent; and (c) firms with negative net worth. Multinationals may have adopted strategies to lower profits and taxes in Africa; for a review see Susungi 1988, 17-19. 13. The negative net worth figures fall far short of the 36 percent of firms reported for West Africa (Nellis 1986, 17) and (Nellis and Kikeri 1989, 8). However, careful study of the original source on which their claim is based shows that Madagascar, Sudan, and Tanzania are included as West African nations and only thirty-four firms are reported with negative net worth, or 9 percent of the 371 firms analyzed (Bovet 1985, Exhibit 2).

References Alexander, Myrna. 1989. "Privatisation in Africa." In Privatisation in Developing Countries, edited by V. V. Ramanadham, pp. 322-351. London: Routledge. Aoulou, Yves. 1989. "La toute puissante Cotonchad." Jeune afrique économie 123:83-85. Béjot, J e a n - P i e r r e . 1988. "Privatisations: L ' h e u r e de vérité." Jeune afrique économie 114:160-209. . 1989. "SNI: Offre publique de participation." Jeune afrique économie 117:81. Berg, Eliot J., and Mary M. Shirley. 1987. Divestiture in Developing Countries. Washington: World Bank Discussion Paper 11. Bovet, David. 1985. "Financial Impacts of Public Enterprises in Sub-Saharan Africa." Paper submitted to the World Bank August 1985. "Un cadre fructueux." 1989. Jeune afrique économie 125:191. "Le cap du contrat-programme." 1989. Jeune afrique économie 125:188-191. "Congo: Premier swap de la dette grâce à la privatisation." 1989. Jeune afrique économie 117:35. Dioh, Barthélémy, and Assou Massou 1989. "600 Leaders de l'entreprise." Jeune afrique économie 126:134-207. El Midaoui, Ahmed. 1981. Les entreprises publiques au Maroc et leur participation au développement. Casablanca: Afrique-Orient. "Entreprises africaines: 500 Leaders." 1983. Jeune afrique économie 2 9 - 3 0 : 2 7 131. Groupe de Travail du Comité Interministériel des Entreprises Publiques. 1967. Rapports sur les entreprises publiques. P a r i s : S e c r é t a r i a t G é n é r a l du Gouvernement. Hemming Richard, and Ali Mansoor. 1987. Privatization and Public Enterprises. Washington, D.C.: International Monetary Fund Working Paper, WP/87/9. International Monetary Fund. 1986. Government Finance Statistics Yearbook. Washington, D.C.

40

The Public Enterprise Sector in Africa

. 1988. International Financial Statistics: Supplement on Public Sector Institutions. Washington, D.C.: Supplement Series 13. Les 500 entreprises publiques algériennes. 1986. 1987. Paris: IC Publications. "Les leaders de l'entreprise africaine, classement 1988." 1988. Jeune afrique économie 114:65-100. Mallon, Richard. 1983. Performance Contracts with State-Owned Enterprises. Cambridge, Mass.: Harvard Institute for International Development, Development Discussion Paper 143. Mengistu, Berhanu, and Yacob Haile-Mariam. 1988. "The Status and Future of Privatization in Sub-Saharan Africa." Journal of African Studies 15, nos. 1 - 2 (Spring-Summer 1988):4-10. Nellis, John. 1986. Public Enterprises in Sub-Saharan Africa. Washington: World Bank Discussion Paper no. 1. . 1989. Contract Plans and Public Enterprise Performance. Washington: World Bank Discussion Paper 48. Nellis, John, and Sunita Kikeri. 1989. "Public Enterprise Reform: Privatization and the World Bank." World Development 17, no. 5:659-672. Ouassini, Ramdane. 1988. "La reforme des entreprises publiques au Maroc: Expérience en cours." In Actes du colloque secteur public-secteur privé: Vers un meilleur équilibre, pp. 169-189. Rabat: L'Amicale des Ingénieurs des Ponts et Chaussées and La Confédération Générale Economique Marocaine. "Privatisations: L'expérience tunisienne sur les entreprises en difficulté." 1990. L'Opinion (Rabat). February 21, 1990. Royaume du Maroc. 1980. Le Ministre Délégué auprès du Premier Ministre. Rapport général: Rélations Etat-entreprises publiques. Rabat. . 1988. "Contrat-Programme: Etat-ONE, 1989-1991." Rabat. Salah, Nadia. 1989. "Privatisation: Ombres et lumières." L'Opinion (Rabat). December 27, 1989. Saulniers, Alfred H. 1985. "Public Enterprises in Latin America: Their Origins and Importance." International Review of Administrative Sciences 4:329-348. . 1988. "Nationalisation/privatisation: Bases d'une discussion." In Actes du colloque secteur public-secteur privé: vers un meilleur équilibre, pp. 132-149. Rabat: L'Amicale des Ingénieurs des Ponts et Chaussées and La Confédération Générale Economique Marocaine. . 1989. "Contract-Program Background and Negotiations: A Case Study of M o r o c c o ' s National Electricity C o m p a n y . " Case prepared for the Public Enterprise Workshop. Cambridge: Harvard Institute for International Development. . 1990. "Public Enterprises in Francophone Africa." pp. 126-141. In Public Enterprise at the Crossroads, edited by J. Heath, London: Routledge. Shahrokh, Roya June. 1987. "The Contract Plan Experience in Africa: A Census." Unpublished M.B.A. report. University of California at Berkeley. Shirley, Mary M. 1983. Managing State-Owned Enterprises. Washington: World Bank Staff Working Paper 577. Soudan, François. 1987. "Algérie: Jusq'où iront les privatisations?" Jeune afrique économie. 101:28-29. Susungi, N. N. 1988. The Caveats on Privatization as an Instrument of Structural Adjustment in Africa. Abidjan: African Development Bank Research Paper. Swanson, Daniel and Teferra Wolde-Semait. 1989. Africa's Public Enterprise Sector and Evidence of Reforms. Washington: World Bank Technical Paper no. 95. Trivedi, Prajapati. 1988. "Theory and Practice of the French System of Contracts

In Francophone

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for Improving Public Enterprise Performance: Some Lessons for LDCs." Public Enterprise. 8, 1:28—41. "269 leaders de la banque en Afrique." 1988. Jeune afrique économie 112:57-74. Vernon, Raymond. 1983. "Governing by Contract: The French Experience with State-Owned Enterprises." Paper given at conference on Managerial Problems of State Enterprises in Latin America, Caracas, November. Vuylsteke, Charles. 1988. Techniques of Privatization of State-Owned Enterprises, Methods and Implementation. Washington: World Bank Technical Paper 88. Wilson, Ernest J., III. 1988. "Privatization in Africa: Domestic Origins, Current Status, and Future Scenarios." Issue. 16, 2:24-29. Ziady, Hassan. 1988. "Les vertus de l'initiative privée." Jeune afrique économie. 108.

PART 2 PARASTATALS AND POLITICS: SOEs AND THE AFRICAN STATE The chapters in Part 2 examine the relationship between parastatal performance and politics, which is one of interdependence and mutual reinforcement. Barbara Grosh shows that public enterprise in Kenya has performed essential functions (including reliable physical and financial infrastructure) that enabled the private sector in Kenya to be one of the most dynamic ones in Africa. By providing good public services and fostering dynamic private sector growth, public enterprises in Kenya have contributed to political legitimacy and stability. In contrast, Peter Lewis shows that Nigerian public enterprises have largely failed in the same roles, despite the availability of enormous resources. This failure has then undermined the legitimacy of the ruling faction and contributed to instability. Some minimum level of political coherence within the state is necessary for public enterprise to be able to function. Uganda provides an extreme example of how political chaos intrudes into state enterprise operations, even where there is a strong professional managerial cadre and strong institutionalization of sound business practices. James Katorobo argues that given the destructiveness for firms of patronage politics and the unlikelihood of coherent policy emerging from a political system that is not coherent, it is better to privatize much of the sector. Short of complete privatization, Katorobo proposes including all important stakeholders on the boards of directors for state enterprises. Mobilizing groups with direct interests in the efficiency and effectiveness of a public enteiprise will help protect it from other groups who might exploit it in ways that undermine its viability.

43

Kenya: A Positive Politics of Parastatal Performance Barbara Grosh

Political interference frequently features prominently among the list of things that ail SOEs (Aharoni 1986, 220; Killick 1978, 243). In this chapter I argue that parastatals can and have been used in political ways for very positive ends. I will describe what I term a "positive politics of parastatal performance," and argue that it was essential to Kenya's considerable achievements since political independence was achieved in 1963. There are two important elements of the positive politics of parastatal performance. The first element involves growth. It is a well-recognized fact that developing economies suffer from a host of market failures that leave room for policy intervention to increase growth and welfare (Jones 1983), and public enterprise is one tool among many that may reasonably be used in this context. The second element lies in the realm of redistribution of wealth, income, or opportunities. At independence Africans had a legitimate interest in seizing control of Kenya, which was mostly controlled by outsiders. The population as a whole saw such redistribution as important and was willing to see somewhat lower levels of total GDP if greater amounts could be controlled and enjoyed by indigenous Kenyans. During the first quarter century of independence, parastatals have been used in keeping with this dynamic of positive politics. They have promoted growth per se and they have been used to gradually shift control from foreigners to Kenyans and to promote growth into regions where it didn't automatically flow. They have incidentally been used to generate popularity and hence legitimacy for the regimes in power, contributing to Kenya's relative political stability. Kenya's success lies not in isolating parastatals from politics, which has certainly not been done, but in using them creatively, both to foster growth and to gradually redistribute at an acceptable cost in terms of growth foregone. The chapter begins by presenting historical background on the Kenyan economy and the role of parastatals therein, and then reviews the operations of parastatals in the postindependence e c o n o m y . T h i s section 45

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describes the role parastatals played and how well they performed in four major sectors: infrastructure, agricultural marketing, banking, and manufacturing. Finally, this chapter considers the contributions parastatals made to Kenya's achievement of its overall goals, analyzes the sources of problems with parastatal performance, and ruminates on the role of parastatals in Kenya's future.

Historical Background Before independence the Kenyan economy was virtually controlled by foreigners (see Leys 1975; Kaplinsky 1982; National Christian Council 1968). For example, European settlers, who comprised less than half of one percent of the population, controlled one-quarter of the high-potential land. 1 White farmers depended on exploitation of African labor. Several policies combined to ensure a supply of labor to settler farms: taxes on Africans, which forced them to accept wage labor to pay them; alienation of enough land to create land scarcity in the native reserves; prohibitions on Africans' growing of the most lucrative cash crops; and various pass laws that limited labor mobility (van Zwanenberg 1975). Public enterprises were an essential part of the colonial strategy to develop and exploit the Kenyan colony. Indeed, the colonial era in Kenya began with the building of the railroad, the first parastatal enterprise. Once the railroad existed it became essential to export something in order to generate revenue to cover its finance charges. White settlers were recruited to the colony to engage in agriculture. Efficient marketing of settler produce was essential. Following a period of discontent with private traders, marketing was organized via parastatals with a strong cooperative flavor, which kept control of the marketing function in the hands of the farmers. In this way they gained economies of scale without being subjected to monopsonistic exploitation, as had happened with private traders (van Zwanenberg and King 1975, 201-213). Marketing boards regulated the sale of coffee, pyrethrum, and beef. Cooperatives with quasi-parastatal status were used to market dairy products, pork, and maize. Later, some of the marketing boards that handled European produce also came to handle African produce. They cross-subsidized European farmers at the expense of their African counterparts. For example, the Kenya Meat Commission was set up to handle cattle from European mixed farms, and later handled African cattle acquired through forced de-stocking campaigns. 2 State marketing of maize dated from World War II and had a more complicated history. European farmers formed the Kenya F a r m e r s ' Association (KFA) to grade maize, enabling the KFA to negotiate forward

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bulk export sales, increasing the incomes of member farmers. The KFA excluded African members, thus succeeding in monopolizing the export trade if not in preventing them from growing for the domestic market (van Zwanenberg and King 1975, Chapter 11). During World War II the British needed more maize from Kenya to support the war effort. At that time it set up Maize Control, to be converted later into the Maize Marketing Board. The wartime regulations included a form of crop insurance tied to seasonal credit, which guaranteed farmers a certain minimum return per acre. Because the desire was to induce greater production of maize, only farmers willing to plant fifty acres of maize qualified for the crop insurance and price support (Trapman 1974, 64). It was the first time parastatal marketing boards had been used to manipulate (in this case subsidize) domestic producer prices. African leaders were determined to reshape the economy so that Africans could share the fruits of uhuru (Swahili for independence). They envisioned an economy based on private property, where Africans would have better access to land and where peasants would become prosperous accumulators, rather than being exploited for their labor, as during the colonial period. 3 Former president Jomo Kenyatta was clear about the potential conflict between growth and redistribution, and chose faster growth, even if this meant slower Africanization. He refused to nationalize land held by settlers, instead buying large tracts for resale to Kenyans of African origin (see Leys 1975, Chapters 2 and 3). This refusal to redistribute by fiat was clearly enunciated in his "no free things" speech. 4 Later the famous Sessional Paper no. 10, "African Socialism and Its Application to Planning in Kenya," clearly acknowledged the potential conflict between growth and distribution goals, coming down squarely on the side of growth: The most important of these policies is to provide a firm basis for rapid economic growth. Other immediate problems such as Africanization of the economy, education, unemployment, welfare services, and provincial policies must be handled in ways that will not jeopardize growth. If growth is given up in order to reduce unemployment, a growing population will quickly demonstrate how false that policy is; if Africanization is undertaken at the expense of growth, our reward will be a falling standard of living. 5

The Parastatal Strategy After Independence Just as parastatals had been central to the creation of the colonial economy, they remained central in the postindependence period. They were key to both of the new government's goals, growth and redistribution. I will review each of the sectors in which parastatals functioned, describing the

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role which parastatals played, how well they performed, and how they fit into the goal of rapid growth accompanied by redistribution. 6 Although there have been problems with the operation of parastatals, the overall experience has been positive. The infrastructure in Kenya facilitates private economic activity. Export marketing boards created a prosperous peasantry. Parastatal banks proved dynamic and provided a challenge to private banks. Development finance institutions supplemented the private capital market and fostered growth in manufacturing. The economy of Kenya has shown stronger growth than that of most African countries. 7 M u c h of this s u c c e s s d e p e n d s on the s u c c e s s f u l u s e of p a r a s t a t a l s . Although foreign business retains an important position in Kenya, Africans have clearly succeeded in seizing progressively greater control of their growing economy (Leys 1982). Infrastructure

Public

Enterprises

At independence parastatal coiporations dominated Kenya's transport and communications infrastructure. The sector had functioned well before independence and showed a great deal of continuity in organization and performance afterwards. Most of the infrastructural firms operating prior to independence fell under the jurisdiction of the East African Community (EAC). East African R a i l w a y s and Harbours provided both goods and p a s s e n g e r t r a n s p o r t throughout the EAC, East African Posts and Telecommunications provided communications, and East African Power and Lighting (which did not fall under the EAC) provided electricity. All functioned relatively smoothly, accommodating rapid growth. For example, revenue-ton miles carried by the railroad increased at a rate of 4.2 percent per year from 1963 to 1975, while real cost per ton fell 3.1 percent per year from 1963 to 1973. During this period the railroad earned a small positive rate of return on investment. The number of private telephone lines grew at nearly 8 percent per year from 1966 to 1985, while the company's finances remained very solid. Electricity sales grew at 7.4 percent per year from 1964 to 1988, while real unit costs stayed nearly constant and company finances remained sound (Grosh 1991b, Chapter 6). The EAC broke up in 1977. The breakup was disruptive for the common service organizations that had functioned under its auspices. Some of the new organizations created in the aftermath of the breakup functioned fairly well. For example, Kenya Posts and Telecommunications and the Kenya Ports Authority seem not to have been too seriously affected (Grosh 1991b, Chapter 6). Kenya Railways suffered considerably. M u c h of its long-haul and hence low-cost freight had been transit traffic bound for Uganda, which diminished greatly after 1977. Competition increased due to the opening of the Nairobi-Mombasa road and the pipeline from Dar es Salaam to Ndola,

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which resulted in surplus tanker capacity. Increases in unit costs, loss of high-value traffic to road transporters, and poor financial performance resulted. At the same time Kenya Railways was coping with increased competitive pressures, it continued to receive directives from the cabinet to carry various categories of goods at special concessionary tariffs. In 1983, 35 percent by weight of Kenya Railways freight was carried at these special low rates (Grosh 1991b, 148). Out of the breakup of the EAC, another firm was b o r n — K e n y a Airways. KA was started with virtually no financial base and very poor equipment. During its early years it lost a lot of money due to both these factors. Only with the eventual purchase of new equipment and some financial restructuring has it become financially solvent. During its financially dismal years, however, real costs per passenger were stable, and market shares and load factors increased (Grosh 1991b, Chapter 6). After independence two new transport parastatals were launched. The Kenya Pipeline Corporation, set up to move oil from the coast to Nairobi at lower cost than the railway could, exhibited very good performance on every measure. It showed declining unit costs as it expanded toward highcapacity utilization as well as very high rates of return (Grosh 1991b, Chapter 6). The performance of the Kenya National Transport Corporation (Kenatco), a trucking and taxi company, was more problematic. This firm came into the public sector in a rescue operation of suspiciously political origin rather than any well-thought-out decision that a transport firm was needed. Competition in the sector was fierce and Kenatco's performance mediocre. Its demise finally came when it was required to use its excess fleet to provide security escorts to all coffee shipments going by road, for which it was never compensated (Grosh 1991b, Chapter 6). Clearly, the successful use of public enterprises in the infrastructural sector has enhanced the success of the Kenyan economy. Travel and communication in Kenya are much easier than in most African countries, and the result has been that Kenya and Nairobi have become hosts to many international firms and organizations serving the entire East African region. Elements of this successful strategy include the following: For the most part the policy environment surrounding these firms was coherent and directives relatively clear. The constituents served by these infrastructural firms included many who were powerful and vocal, so that pressure was kept on management to deliver reliable service. Problems in the sector typify common problems with state enterprise. The state did put demands on the state firms that would not have been faced by private firms (concessionary rates to certain traffic, provision of services without compensation). Where this occurred and the firm in question faced competition, the result was poor performance. Consumers did not suffer unduly, however, because in these cases alternatives to the parastatal sector were available.

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Marketing Boards Agricultural marketing boards were the focal point of colonial settler agriculture. All of the marketing boards that existed at independence continued after independence, and they retained their role of providing efficient marketing services for the benefit of farmers. The firms were not supposed to be a point of capital accumulation; instead they passed on the highest possible producer prices to suppliers. 8 The export marketing parastatals transformed their mission from serving a small number of large settler farmers to reaching m u c h larger numbers of small farmers. Rules prohibiting Africans from growing the lucrative e x p o r t c r o p s w e r e l i f t e d , and A f r i c a n s a d o p t e d t h e s e c r o p s v e r y quickly. In this instance the parastatals probably played their most important role in facilitating rapid growth, which reached increasing numbers of African peasant farmers. In 1958 3,000 African smallholders grew coffee on 11,000 acres. By 1968, this had e x p a n d e d to 1 3 3 , 0 0 0 g r o w e r s o n 270,000 acres, and coffee revenue of African smallholders expanded from a little over £1 million in 1958 to £8.5 million nine years later. By 1968 African smallholders were producing 9 0 percent of K e n y a ' s pyrethrum, w h e r e a s t h e y h a d p r o d u c e d j u s t 6 p e r c e n t in 1 9 5 7 ( K i t c h i n g 1980:317-318). During the transition from large farms to small farms production tripled. Large expansion of smallholder production also occurred in dairy farming. In each of these cases parastatals were transformed from serving a relatively small number of settler farmers to much larger numbers of small peasant farmers. That such a transformation went so smoothly is a tribute to much good planning and good management. In addition to marketing boards that existed since the colonial era, several new firms were established to make new crops available in new areas. T h e Kenya Tea Development Authority (KTDA) was phenomenally successful at enabling smallholders to make good incomes raising tea (see L a m b and Mueller 1982; Leonard 1991; Steeves 1975; Grosh 1991a). The K T D A was an efficient, streamlined organization that contained its own costs as it expanded, enabling it to pass on large payments to the tea farmers it served. The number of smallholders growing tea grew from approximately 18,000 in 1962/63 to 105,000 in 1976 and 150,000 by the mid1980s. The other main expansion in agricultural parastatals occurred in the sugar industry. Five sugar parastatals were eventually built, all in the west. Three were in the Nyanza sugar belt and two in the western province near Kakamega and Bungoma. These firms were part of the regional and ethnic balancing act so necessary to the cementing of the ruling coalition. By making a profitable cash crop available to Luo smallholders, the regime could undercut some of the opposition coming from the Kenya People's Union. T h e first three sugar parastatals have been relatively successful

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(East African Sugar Industries, Chemelil, and Mumias). The two firms that began operations after the collapse of the coffee boom (Nzoia and the South Nyanza Sugar Company, known as Sony) were, like Kenya Airways, undercapitalized, and have suffered severe operational and financial problems from the beginning. The number of farmers growing sugar for parastatal sugar mills is probably nearly sixty-five thousand, compared with practically none at independence. 9 The sugar sector has suffered various problems throughout the 1980s, so that most of the firms are not realizing their full potential. First, there is a basic question as to whether Kenya has a comparative advantage in sugar. World sugar spot prices are very volatile, so that answering this question in a sensible long-term time frame is important. Mumias came on-line in the early 1970s when world prices were at their peak, and the scheme very q u i c k l y recouped its investment through e f f i c i e n t l y saved f o r e i g n exchange. By the time Nzoia and Sony came on-line, prices had dropped. Kenya has maintained internal prices above world prices in most years since then, in order to protect the large investment made in domestic sugar production. In light of the differential between world and domestic prices, large rents have accrued to those who get licenses to import sugar, creating a powerful constituency that desires to see rehabilitation plans for the Kenyan sugar industry fail. Second, there has been poor planning of investments. Serious mistakes were made in purchasing machinery for Nzoia, and shortcuts have been taken in building and maintaining roads in several schemes. Inadequate investment funds have curtailed cane planting, so that firms are unable to operate near full capacity. Some of the problems of the sugar parastatals could be solved by further careful investments, and the World Bank has attempted to convince Kenya to do so. However, the rehabilitation of the industry has been largely a failure. Contracts for equipment overhaul have gone to firms unqualified to fulfill them. Much of the rehabilitation plan agreed on has been canceled, and the World Bank loan that was to finance it has been terminated. In the face of large idle capacity at Sony and Nzoia, the Kenyan government has continued with plans to build at least one more sugar parastatal near Busia. The history of the sugar industry in the 1980s reflects interesting new trends in the politics of parastatals in Kenya. Throughout the 1970s sugar parastatals constituted an important part of the positive politics of parastatal performance. A large number of peasant farmers with no previous access to lucrative cash crops entered the market on terms that were economically sound. President Daniel arap Moi is attempting to continue this pattern by planning to build more schemes in different areas. However, an important element of the positive politics is sound management and good delivery of services to smallholders. In the 1980s, this element seems to have been forgotten. Rather, the interests of the many smallholders have

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been sacrificed, in a series of incidents of corruption, to the interests of a few big players. Nzoia is taking on very heavy debt loads to finance its supposed rehabilitation. It can be expected to continue to make large losses, remain illiquid, and suffer perpetual breakdowns, meaning that it will provide very poor service to its outgrowers as well as being a drain on the treasury. Another alarming breach in the positive politics of parastatal performance is in process in the tea industry. The KTDA was set up to pass on maximum incomes to growers. Grower prices are calculated by each factory, so that regional differences in quality are reflected in payments to growers. Farmers thus have incentives to maintain high standards of crop husbandry. It also means higher incomes in the regions with better soils, the high-potential areas, which were a natural part of Kenyatta's constituency but not of Moi's. In 1989 Moi began attacking the KTDA, seeking to discredit its management and suggesting that it needed a complete overhaul. Among the items to be overhauled was the pricing policy. A uniform prod u c e r price will cross-subsidize f a r m e r s in l o w e r rainfall z o n e s at the expense of other (largely Gikuyu) farmers. Such a change in pricing structure will undermine farmer incentives and ultimately the success of tea farmers in Kenya. In order to legitimize restructuring the KTDA, the president attacked KTDA management relentlessly in the press. 1 0 KTDA managers, like all top parastatal managers, serve at the pleasure of the president. Had serious problems really existed it would have been a simple matter to replace the board and top managers. Instead the president campaigned against the parastatal managers as though they were rival politicians. In 1993 Eric Kotut (Moi's nephew) was appointed chairman of the KTDA. The IMF had insisted that Kotut be removed from his position as G o v e r n o r of the Central Bank following scandals in which the Central Bank made billions of shillings of improper, unrecoverable loans to banks owned by friends of the president. The marketing boards have been an important mechanism for incorporating African peasant farmers into the cash economy. Significant accumulation occurred in the African farm household sector, especially in the highpotential regions. Surpluses have been reinvested, especially in education, but also in improved housing, water systems, and transport. A l t h o u g h K e n y a ' s income distribution remains very unequal, Kenyan smallholders have shared in the general prosperity and have even gained at the expense of large landholders. 1 1 Standards of living have improved and so have life expectancies. 1 2 Some of the markets served by the marketing boards could have been served adequately by private traders. However, certain crops handled by marketing boards (especially tea, sugar, milk, and pyrethrum) require caref u l c o o r d i n a t i o n due to perishability. T h e s e products are best handled through some type of contract-farming scheme (Grosh 1991a). It is possible

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for private firms to operate such schemes, as proved by BAT with tobacco in the late 1970s and 1980s. However, at independence none had ever shown any interest in doing so, leaving state enterprises to prove their feasibility. Furthermore, a private firm can be expected to pay monopsonistically low prices to farmers. A well-run state firm that minimizes costs and passes on the highest possible incomes to farmers is, therefore, preferable. Both the Kenyatta and Moi regimes have used the success of the marketing boards to shore up their legitimacy. Kenyatta proclaimed himself Farmer Number One and took a keen interest in the success of the boards and the quality of services provided to farmers (Leonard 1991, 149). The annual reports of various parastatals are full of pictures of the president or other high officials paying visits to their operations, often along with visiting dignitaries such as the queen of England, ambassadors, or representatives of donors. The message is never lost that these are state corporations and that the rural peasantry owes its prosperity to the regime in power. In recent years Moi has contrasted the success of the Kenyan government at delivering to its constituency with the disasters of neighboring states, with the intent of squelching support for opposition. Of all sectors in which parastatals operate, the marketing boards have had some of the most severe problems (Grosh 1991b). These include the marketing of domestic crops, particularly maize. The chronic problems stem largely from the practice of fixing prices in advance of the crop year (a practice that made sense in the wartime conditions in which it was begun). The result of fixing prices without regard to crop size can be disastrous. If the crop is bigger than expected, the board quickly runs out of cash and can't purchase produce it is bound by law to purchase. This has resulted in a series of well-known malpractices, which do much to undermine the popularity of the regime and even perhaps the legitimacy of the state. These malpractices include selective enforcement of grading regulations, the need to bribe to get one's crop accepted, long queues, and delayed payments. The resentment caused by these malpractices is compounded by the use of police roadblocks to enforce movement controls. In an effort to keep prices at preannounced levels, the board sometimes must either import or export at a loss. The attempt to maintain panseasonal and panterritorial pricing has never been successful. The regulations that ban private marketing have caused price differentials to be greater than they otherwise would be (de Wilde 1984, 18; Schmidt 1979). The regulation and monopolization of maize and probably also of milk contribute neither to growth nor to equity and should be abolished. This has been acknowledged repeatedly, as early as 1978 13 and as recently as 1989. 14 Plans for deregulating maize marketing have been discussed repeatedly but never implemented, probably because most traders in a private market would be Gikuyu. Kenyan policymakers have exhibited great unwillingness to move

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away from the fixed prices that have led to such poor performance on the part of certain marketing boards. In addition to the problems with maize d i s c u s s e d a b o v e , s i m i l a r p r o b l e m s have plagued the K e n y a M e a t Commission, which attempts to pay preannounced prices and acts as buyer of last resort. Given that the KMC competes with a large and vigorous private sector, its adherence to preannounced prices in the face of fluctuating market prices contributed much to its eventual demise (Grosh 1991b). Once the KMC collapsed, plans were mooted to revive it in the form of a cooperative, in effect canceling the policy of price supports. In doing this, the Kenya government would have emulated the successful Botswana Meat Commission, whose policies and success have been very similar to those of the KTDA. In any event, the KMC was revived without any change in pricing policies. Despite their acknowledged problems, the success of the marketing boards at serving smallholders permitted a revolution in Kenyan agriculture, a revolution that facilitated the creation of a prosperous yeoman peasantry, the gradual dismantling of the large settler farms without a drop in production, the earning of sufficient foreign exchange to finance a dynamic economy, and the growth of food production to keep up with one of the fastest-growing populations in the world. Manufacturing

The colonial government began to encourage manufacturing in Kenya during World War II, in response to wartime shortages of manufactured goods. During the 1950s it set up the Industrial Development Corporation (IDC) to provide equity participation and loans. During this period the Nairobi Stock Exchange also started, and provided a market for equity and debt instruments. Following the Mau Mau emergency and the transition to African self-rule, large-scale investors (who were overwhelmingly white and/or foreign) were pessimistic, and private investment declined (Munga 1974; Swainson 1980). In order to stimulate growth, Kenyatta's government invested heavily in state corporations. The IDC was expanded into the Industrial and Commercial Development Corporation (ICDC), which also assisted with m e d i u m - s c a l e investments within the reach of more A f r i c a n s . T h e Development Finance Company of Kenya and the Industrial Development Bank were set up with similar missions. These firms created many subsidiaries, most of them joint ventures, some with foreign capital, some with local entrepreneurs. In addition to direct participation, Kenya fostered import-substituting industrialization (ISI) via a set of tariffs and quotas, including the no-objection certificate. Effective rates of protection were very high for many goods. With hindsight, it is easy to question the wisdom of fostering ISI via

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protective barriers, although it was an orthodox policy at the time. Given Kenyan policymakers' determination to build a manufacturing sector, the use of the development finance institutions (DFIs) made sense. Providing government equity served as a form of guarantee to foreign investors against arbitrary policies that might negatively affect profitability. It was probably a better way to induce investment than using trade barriers and tax concessions alone. Although there have been a number of problem firms in the DFI portfolios, the overall record is surprisingly good. Efficiency of purely public DFI subsidiaries (measured by the Domestic Resource Cost ratio, or DRC) is on par with purely private firms in the same sectors, although joint ventures are considerably more efficient (see Grosh 1990). Despite many investment mistakes, Kenya in the late 1980s and 1990s is well positioned to benefit from manufactured exports to other countries of eastern and southern Africa under the Preferential Trade Agreement (Hall 1987) which lowers trade barriers among nineteen countries in eastern and southern Africa. The positive politics of parastatals has been visible, then, in the manufacturing sector. Growth has been fostered using less overall protection than would otherwise be necessary. What about other aspects of the politics of this sector? Since the early 1980s, Kenya's official development policy has been one of district focus, of intentionally spreading development beyond the traditional urban centers. In manufacturing this has resulted in the location of much new industry in the Eldoret area. This was accompanied by the building of excellent infrastructure in the area, so that the firms that located there have not suffered increased costs. Manufacturing parastatals have never been located in areas so backward as to be unable to sustain their demands for power, transport, and the like. The manufacturing parastatals have been a target for rent-seeking politicians in various ways. Some have been conduits for corruption involving procurement contracts, notably the power alcohol plant in Kisumu, which has never been completed. These firms have been used as parking lots for politicians temporarily out of favor. The use of such persons as managers has undoubtedly contributed to the firms' operating problems. Poorer efficiency is discernible in those firms with politically appointed managers than in those in which managers are appointed according to merit (Grosh 1990). The government has followed a cautious and successful policy of Africanization. There are still expatriate managers in Kenyan parastatals, but never more than a handful in any firm. The process of Africanization has been achieved gradually and generally in pace with the building of human capital among Kenyans. Manufacturing parastatals have faced pressures to carry larger payrolls than they need; their comparatively good performance as measured by DRC ratios suggests that these pressures have not been too severe.

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Sector

It is, perhaps, in the financial sector that the positive politics of parastatal performance is most clearly visible. Public enterprises there have made large contributions both to growth and to distributional goals. At independence the financial sector in Kenya consisted of a small, tightly knit oligopoly of foreign-owned banks with little confidence in a Kenya under African self-government. The government entered the financial sector both by creating new firms and by acquiring foreign firms via friendly takeovers. The parastatals grew rapidly, garnering a growing share of a dynamic market and helping to stimulate the sector (Grosh 1991b). Financial parastatals have fostered distributional goals in at least four ways: via loan policies, via branching, via innovation in nonbank financial institutions, and via human capital formation. I will discuss each briefly. The private foreign banks that dominated Kenya at independence found few worthwhile loan recipients in Kenya and instead channeled money overseas, so that Kenya was a net lender to the United Kingdom (van Zwanenberg and King 1975, 291). The new parastatals operated on conventional banking principles but were able to find many more good credit risks among Kenyans of African origin, facilitating the expansion of A f r i c a n s into trade (Leys 1975, 157). Annual reports of the K e n y a Commercial Bank (KCB) stressed this role, featuring human interest stories on African entrepreneurs and describing how the bank had helped enable them to become successful in business. Parastatal bank performance changed noticeably after 1978 (Grosh 1991b, pp. 65-68). Although Moi claims to follow a nyayo philosophy— following Kenyatta's footsteps—in fact he has followed a policy of district focus, consciously allocating resources of all kinds to all districts, rather than following the more market-driven policies of Kenyatta, which let development concentrate in the high-potential zones. Supporting district focus, it has been the policy of the Kenya Commercial Bank to open a branch in every district. At the time this policy was announced, nearly onethird of the districts did not have branches, so this represented a substantial commitment of resources (Sunday Nation, September 9, 1984). The bank espoused the policy as an investment that would promote growth in the backward districts and eventually pay off. The presence of banking facilities has certainly contributed to the ease of operating income-generating projects of all types in the various districts. The surprising thing is that Barclays has followed suit, indicating that KCB's conception of district branches as a sound, if long-term, investment may be accurate. The KCB accomplished its expansion while remaining profitable and apparently businesslike and efficient. It helped finance the expansion by floating shares on the Nairobi Stock Exchange in a well-publicized and oversubscribed issue. The financial sector in Kenya includes both commercial banks (CBs)

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and nonbank financial institutions (NBFIs). Both are subject to interest-rate ceilings below market rates, with the NBFI rate higher than the CB rate. The ceilings resulted in credit rationing, with the predictable effect that credit to well-established firms took precedence over credit to small, innovative, or African borrowers. It was the KCB, followed by the National Bank of Kenya (both parastatal), that pioneered the use of general-puipose NBFI subsidiaries to channel loans to such borrowers, thus evading the interest-rate ceilings and incidentally making credit markets more open to new African entrepreneurs (Grosh 1991b, 67). The parastatal banks followed judicious policies of Africanizing their staff, which acquired a lot of training and experience. Later, following the transition from Kenyatta to Moi and changes in the ethnic politics of parastatals, many of these by then veteran managers left the parastatals to start private NBFIs, which have mushroomed since the late 1970s, again contributing to the impressive growth in the financial sector. The mid-1980s saw a banking crisis in Kenya, with several CBs and NBFIs going into receivership. This crisis can be blamed partly on the fact that growth in the sector spurted far ahead of the ability of the government to regulate and support it (e.g. with proper bank examination and deposit insurance). It was undoubtedly made worse by the role the president played in denouncing the banks in question and warning wananchi (citizens, the common people) that their savings were in danger, thus encouraging rather than stemming runs on various institutions. There is little doubt that these attacks were politically motivated, as the banks in question were Gikuyuowned and provided a source of wealth and prestige to potential challengers to Moi. The episode turns the conventional wisdom regarding politics and parastatals on its head. In this case it was the private sector whose performance was seriously impeded by politics of the most negative kind, at great cost to wananchi, while the public enterprises emerged unscathed. By most measures the financial sector in Kenya has been growing and developing well, facilitating saving and investment throughout the economy. The parastatals have been employed in a very positive manner, encouraging more competitive behavior on the part of all the banks in the sector, spreading banking services to clients not well served before, and providing the training ground for Africans who have gone on to make contributions in the private sector.

Conclusion Parastatals in Kenya have been used in manifestly political ways, with largely positive results. I have described this overall strategy as one of a "positive politics of parastatal performance." The strategy has two ele-

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ments. First, parastatals have been used to attend to the traditional lists of market failures, hence permitting efficient growth that would not be possible in the absence of a state that could organize these functions. The second element of the strategy is to use the parastatals to accomplish distributional goals. They have been used to foster Africanization, to push development into regions previously neglected, and as part of the ethnic balancing act so important to Kenya's stability. These distributional goals have involved some sacrifice of pure growth, but in general the policies have been carried out carefully, so that the sacrifices were of an acceptable magnitude and the gains clearly worthwhile. The successful use of this strategy has permitted both the Kenyatta and Moi regimes to be successful at presiding over a growing economy, with the benefits of the growth fairly widely, if not evenly, distributed. It has thus bolstered their popularity and contributed to political stability. Those who dismiss poor parastatal performance as an inevitable result of political entanglements miss an important point. Parastatals that perform well generate resources and goodwill for the regime, thus helping it to stay in power. Kenyatta was a master of the positive politics of parastatal performance. He came to power as a national hero and as a member of the largest and most powerful ethnic group. Because those who benefited most from the building of institutions that supported economically efficient forms of growth formed his power base, conflict between the two roles of parastatals was the exception rather than the rule. Moi has no such base, and has been able to remain in power by preventing anyone else from building a base from which to challenge him. (This was most recently exemplified by the case of the Greenbelt Movement, headed by Wangari Mathai, who dared to criticize Moi's plan for building a sixty-story office building in Uhuru park.) Thus Moi is extremely threatened whenever development proceeds in ways which he does not control. He has proved himself willing to destroy institutions to get at individuals who might use them to challenge him. Thus he shows less interest in the role of parastatals as facilitators and promoters of growth generally and more interest in making all players beholden to him. The future of parastatals in Kenya is problematic. Many observers believe that the politics of parastatal performance have become more negative in recent years, with greater corruption sapping the performance of individual firms, and the use of parastatals as parking lots for politicians whose careers are temporarily on hold dragging down the ability of managers to do their jobs. Hard evidence on these issues is difficult to find. Certainly Kenya's economic situation has been more precarious since the late 1970s. Much of this is due to external circumstances, including adverse terms of trade shifts accompanied by world recession. It has also been argued that during the 1960s certain one-time soft options were avail-

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able (such as adoption of hybrid maize) that are no longer available. These factors, combined with less budgetary discipline following the coffee boom, mean that resources are much scarcer than during the 1960s. Thus, what comprised an acceptable cost for redistributional gains has become more difficult to sustain. Some feel that parastatals must be privatized in order to isolate business from the dictates of such negative politics. Although I agree that the impact of such politics is highly destructive to public enterprise performance, private enterprise is not immune either. Private enterprise must negotiate many bureaucratic hurdles, making it vulnerable to political pressure. In addition, private enterprise is subject to takeover by politicians, and in Kenya can be forced to accept partners from among the big players in hostile, if private, takeovers. Recent declines in foreign investment suggest that the environment for private business is increasingly difficult. It is unclear whether private business is safer than public, or that private business can continue to flourish in such an atmosphere. Data are hard to come by in either arena, so the comparative susceptibility of public and private firms remains unknown. The future of parastatals is hard to predict. Following the 1982 report of the Working Party on Government Expenditure, a Presidential Task Force on Divestiture was appointed to advise the government about privatizing many firms considered nonstrategic. The task force informed the president that there were three groups available to buy up public firms: foreigners, Asians, and Gikuyus. In 1984 that was a realistic assessment, and the result was that no privatization resulted. By the early 1990s much redistribution had occurred. There are now Kenyans of other ethnic groups who may be able to buy and run various public enterprises, so that privatization has become a politically more acceptable option. On the other hand, Moi still controls things closely enough to prevent anyone else from building a power base from which to challenge him. Privatization of any appreciable part of the Kenyan portfolio would probably make Moi's control less complete in the long run.

Notes 1. See David Gordon, quoted in Lofchie 1989:149. 2. See KMC annual reports from the 1950s. 3. For evidence on the intentions of political leaders, see Sessional Paper No. 10, "African Socialism and Its Application to Planning in Kenya." See also Ajuma Oginga Odinga, Not Yet Uhurw, David Throup, The Economic and Social Origins of Mau Maw, Bildad Kaggia, Roots of Freedom; and Leys 1975. 4. S e e "'Harambee,' Says Kenyatta—'Let's All Pull Together,'" New York Times Magazine, November 7, 1963, p. 36. 5. Republic of Kenya, 1965, page 18.

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6. Much of the information given here is discussed at greater length in Grosh 1991b. 7. Over the period 1961-87 Kenya's GDP per capita grew over twice as fast as that in sub-Saharan Africa as a whole (World Bank 1989, 18). 8. In the annual reports emphasis is always placed on the achievements of the boards in passing on incomes to farmers. Any capital retained for reinvestment is carefully justified in terms of future benefits to suppliers, and no dividends are paid. For further discussion, see van Zwanenberg and King 1975, Chapter 11. 9. Mumias reported 30,000 outgrowers in 1984. The other firms did not report the number of outgrowers. Based on Mumias's 40 percent share in total sugar produced, the number of total outgrowers is probably in the neighborhood of 65,000. 10. See the Nairobi Weekly Review, October 13, 1989 "Tea on the Agenda"; O c t o b e r 20, 1989, "The K T D A Probe"; N o v e m b e r 3, 1989, " O v e r h a u l i n g a Parastatal"; November 24, 1989, "Tea: A Probe's Peculiar Procedure." 11. See Leys for a discussion of the breakup of large farms into high-density units, a process that went on much longer than government planners had ever envisioned. It has continued into the 1980s, with small farmers managing to buy farms via land-buying companies, without the type of aid given in the early postindependence period. 12. Life expectancy at birth increased from 41 in 1969 to 55 in 1979 and 58 in 1987. Infant mortality dropped from 112 per 1,000 in 1965 to 83 in 1980 and 74 in 1987. Enrollment in primary schools as a percentage of children of primary school age increased from 54 percent in 1965 to 110 percent in 1980. Secondary school enrollments increased from 4 percent in 1965 to 19 percent in 1980 (World Bank 1989). 13. Letter from P. P. Mukuru of the Ministry of Finance to the Permanent Secretary, Ministry of Agriculture, DFN 150/23/074/00 May 18, 1978. The letter notes the dire financial straits of the Maize and Produce Board and goes on to say that "in view of the crippling problems with which the Maize and Produce Board is faced, our Minister has after considering the Board's overall financial situation, directed that your Ministry should provide the necessary funds for the basic strategic reserves and then free the market. This will no doubt eliminate the major problems which are currently confronting the Board." 14. See the Booker Agriculture Report on Grain Marketing from 1983, or, more recently the Economic and Social Soundness Analysis for the Kenya Market Development Program, D e v e l o p m e n t A l t e r n a t i v e s , Inc., and I n s t i t u t e f o r Development Anthropology, July, 1989.

References Aharoni, Yair. 1986. The Evolution and Management of State-Owned Enterprises. Cambridge: Ballinger Publishers. Booker Agriculture International. 1983. Report on Grain Marketing, confidential consultancy report to World Bank. Development Alternatives, Inc. and Institute for Development Anthropology. 1989. "Economic and Social Soundness Analysis for the Kenya Market Development P r o g r a m , " c o n f i d e n t i a l c o n s u l t a n c y report to United States A g e n c y f o r International Development, Nairobi, de Wilde, John C. 1984. Agriculture, Marketing and Pricing in Sub-Saharan Africa. African Studies Center, University of California.

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G r o s h , B a r b a r a . 1990. " T h e S u r p r i s i n g C a s e of a C l i c h é G o n e A s t r a y . " Development Policy Review vol. 8, pp. 43-58. . 1991a. "Contract Farming in Africa: Why, Where, When and How?" In the Tenth Anniversary Publication of the Robert M. McNamara Fellowships Program, edited by Gerald Meier. . 1991b. Public Enterprise in Kenya: What Works, What Doesn't and Why. Boulder, Colo.: Lynne Rienner Publishers. Hall, Susan. 1987. ' T h e Preferential Trade Area (PTA) for Eastern and Southern African States: Strategy, Progress, and Problems." Institute for Development Studies Working Paper 453, University of Nairobi. Jones, Leroy P. 1983. "The Linkage Between Objectives and Control Mechanisms in the Public Manufacturing Sector." Industry and Development 7:1-12. Kaggia, Bildad. 1975. Roots of Freedom. Nairobi: East African Publishing House. Kaplinsky, Raphael. 1982. "Capitalist Accumulation in the Periphery: Kenya." In M a r t i n F r a n s m a n , e d . . Industry and Accumulation in Africa, London: Heinemann Educational Books. Kenya, Republic of. 1965. "African Socialism and Its Application to Planning in Kenya," Sessional Paper No. 10. Nairobi: Government Printer. Killick, Tony. 1978. Development Economics in Action: A Study of Economic Policies in Ghana. London: Heinemann Educational Books. Kitching, Gavin. 1980. Class and Economic Change in Kenya: The Making of an African Petite-Bourgeoisie. New Haven, Conn.: Yale University Press. Lamb, Geoffrey, and Linda Muller. 1982. "Control, Accountability, and Incentives in a S u c c e s s f u l D e v e l o p m e n t I n s t i t u t i o n : The K e n y a Tea D e v e l o p m e n t Authority." World Bank Staff Working Paper no. 550, Washington, D.C. Leonard, David K. 1991. African Successes: Four Public Managers of Kenyan Rural Development, Berkeley: University of California Press. Leys, Colin. 1975. Underdevelopment in Kenya: The Political Economy of Neocolonialism. Berkeley: University of California Press. . 1982. "Accumulation, Class Formation and Dependency: Kenya." In M a r t i n F r a n s m a n , ed., Industry and Accumulation in Africa, London: Heinemann Educational Books. Lofchie, Michael. 1989. The Policy Factor: Agricultural Performance in Kenya and Tanzania. Boulder, Colo.: Lynne Rienner Publishers. Munga, Douglas Ndumia. 1974. " T h e Nairobi Stock E x c h a n g e : Its History, Organization and Role in the Kenyan Economy." MBA thesis, University of Nairobi. National Christian Council of Kenya. 1968. Who Controls Industry in Kenya? Nairobi: East African Publishing House. Odinga, Ajuma Oginga. 1967. Not Yet Uhuru. New York: Hill and Wang. Schmidt, G. 1979. "Maize and Beans in Kenya: The Interaction and Effectiveness of the Formal and Informal Marketing Systems." Institute for Developmenl Studies Occasional Paper no. 31, University of Nairobi. S l e e v e s , J e f f r e y . 1975. " T h e P o l i t i c s and A d m i n i s t r a t i o n of A g r i c u l t u r a l Development in Kenya: the KTDA." Ph.D. dissertation, University of Toronto. Swainson, Nicola. 1980. The Development of Corporate Capitalism in Kenya: 1918-1977, Berkeley: University of California Press. Throup, David. 1988. Economic and Social Origins of Mau-Mau 1945-53. Athens: Ohio University Press. Trapman, Christopher. 1974. Change in Administrative Structures: A Case Study of Kenyan Agricultural Development. Overseas Development Institute, London, van Zwanenberg, R. M. A. 1975. Colonial Capitalism and Labour in Kenya: 1919-1939, Nairobi: East African Literature Bureau.

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van Zwanenberg, R. M. A., and Anne King. 1975. An Economic History of Kenya and Uganda: 1800-1970, Atlantic Highlands, N.J.: Humanities Press. World Bank. 1989. Sub-Saharan Africa: From Crisis to Sustainable Growth, Washington, D.C.: the World Bank.

4 Development Strategy and State Sector Expansion in Nigeria Peter Lewis

This chapter considers the evolution and performance of Nigerian public enterprise within the context of state economic strategies. Nigeria's public enterprise sector is perhaps the largest in sub-Saharan Africa. Since the late colonial period the state sector in Nigeria has assumed increasingly diverse and strategic developmental roles. During the oil boom of the 1970s successive military governments, prompted by ambitious economic nationalist objectives and burgeoning public revenues, fostered an enormous expansion in the size and scope of the public enterprise sector. Public enterprises became the central instruments through which a strategy of state capitalism was articulated. The growing scope and declining performance of the public sector played a pivotal role in Nigeria's economic downturn during the early 1980s, and efforts at public sector reform have been central to economic adjustment programs in recent years. Nigeria's public sector has long been criticized for its inefficiency, politicization, corruption, disarray, and poor output, weaknesses that have increased exponentially with the proliferation of government enterprises. By the end of the oil boom the nation possessed a huge, wasteful, and unwieldy public sector. Investments in public enterprises totaling billions of dollars have provided few dividends and enormous liabilities: basic utilities and infrastructure have not functioned properly; public sector efforts in industry have yielded extraordinary waste, growing deficits, and scant production; and massive capital projects in agriculture have offered no fillip to a stagnant agrarian sector. Public enterprises have increasingly burdened the government budget, and their faltering performance has far-reaching consequences for the Nigerian economy. Although the sources of public enterprise failure in Nigeria have long been apparent from numerous government investigative panels, the state sector has generally been impervious to efforts at change. The intractable stagnation within the public sector reflects the combined characteristics of bureaucratic weakness, political instability, and state fragmentation. The 63

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onset of economic crisis in the early 1980s, and the assumption of p o w e r by a reformist military leadership in 1985, engendered a more assertive m o v e ment toward reducing and rationalizing the public sector. The scale and obduracy of poor performance within the public sector in Nigeria has been noteworthy: With few exceptions, the public sector has presented a picture of unrelieved failure spanning three decades. T h e availability of abundant revenues and the ostensible advantages of skill and experience within the Nigerian civil service only underscore the shortcomings in public enterprise performance. As Nigeria experienced economic decline during the early 1980s, observers of the nation's economic travails focused increasing attention on the problematic role of the public sector. The widespread politicization of economic activity and the expansion of state economic management were adduced as central causes of economic stagnation. 1 The Nigerian state has exhibited profound shortcomings as an agency of d e v e l o p m e n t : E x p a n s i v e state tutelage has yielded neither e n d u r i n g growth, economic diversification, nor improved state capacity. The expanded intervention of the state has not produced effective state accumulation or bolstered what remains a weak and dependent indigenous private sector. State expansion in Nigeria was an ad hoc, expedient process, increasingly driven by the impetus of state elites to extend patrimonial control over economic resources and opportunities. The economy became suffused by political authority with no corresponding d e v e l o p m e n t of administrative o r managerial capacity. This resulted in the growth of an ineffectual and profligate state sector and a private sector simultaneously co-opted and stifled by public tutelage. State intervention in the Nigerian economy has been driven by norms of distribution rather than norms of production and accumulation. T h e state has been the locus of wealth and opportunity since the late colonial era, and state e n t e r p r i s e s have p r o v i d e d a v e n u e s for the d i s t r i b u t i o n of p u b l i c resources to diverse communal and particular interests. These imperatives stand in direct contradiction to the achievement of effective state-led accumulation. The growth of Nigeria's public sector also carried extensive repercussions for the pattern of private sector development. State sector expansion did not prompt significant opposition from organized private sector interests, and the indigenous private sector relied on state protection, patronage, and rent-seeking opportunities. The corrupt and ineffectual character of Nigeria's dirigiste strategy, while impeding accumulation generally, has nonetheless encompassed domestic business within the arena of clients and beneficiaries. Consequently a broad domestic coalition, drawn from both the public and private sectors, has acquired a fundamental stake in state-led capitalist development. A d j u s t m e n t and reform e f f o r t s must c o n f r o n t a wide range of tacit resistance within the state and the business community.

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Despite this historical symbiosis, in recent years influential circles within the private sector have criticized state economic intervention and the poor performance of the state sector. Private sector groups and voices within the government have advocated limitations to the state's economic role. The latter half of the 1980s witnessed the advent of direct if tentative contention between the government and the organized private sector over the scope and purpose of state economic activity. With the implementation in 1986 of a structural adjustment program (SAP) linked to IMF- and World Bank-sponsored reforms, and the concomitant initiation of a program to privatize and commercialize various entities in the public sector, a process of reshaping and redefining the public sector began. In elaborating the preceding themes, I begin with an historical overview of Nigerian development strategy, providing the broad context for the growth and character of the public enterprise sector. I then turn to the specific problems of performance and reform within Nigeria's public sector. Consideration of the relationship between the public and private sectors and the prospects for a realignment of public-private sector relations follow.

D e v e l o p m e n t Strategies and State Sector Expansion Nigeria's developmental experience may be divided into three broad phases, roughly delineated by independence in 1960, the civil war of 19671970, and the onset of economic decline and adjustment efforts in the early 1980s. Throughout the late colonial period and the early years after independence, the government's economic role was interventionist and tutelary, although restrained. Following the civil war and the advent of petroleum revenues in 1973, the government adopted a more assertive nationalist and statist strategy. The state capitalist direction was abruptly undermined in the early 1980s, when the sudden downturn in international petroleum markets caused a sustained economic decline that prompted adjustment measures. During the concluding years of colonial rule and the early years of independence, the state acted as a catalyst for private sector development by creating the physical, institutional, and financial environment for economic progress (Aboyade 1974, 30; Berry and Liedholm 1970, 76-77). The earliest state enterprises in Nigeria date from World War II, when the colonial government established agricultural marketing boards. The boards purchased export crops from producers at prices below those of the world market, retaining the surplus for stabilization and welfare purposes. After 1954, marketing board funds were turned over to regional development corporations with a mandate to promote production and development (Helleiner

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1966, 250). These resources were appropriated as valuable sources of patronage by the emergent nationalist parties in Nigeria's three regions. Major federal enterprises evolved in the late 1950s from colonial government departments, including the Electricity Corporation, the Coal Corporation, the Railway Corporation, the Ports Authority, the Shipping Line, the Broadcasting Company, and Nigeria Airways. The regional development corporations acquired numerous holdings, concentrated in commercial agriculture and small- to medium-scale import-substitution industries such as textiles, glass, bricks, beer and soft drinks, paper, cement, and construction. The beginnings of public finance capital were established with the introduction of agricultural and industrial loan schemes and the establishment of indigenous commercial banks funded by the development corporations (Forrest 1987). Though the scope and resources of the public sector were expanded, the central purposes of state economic activity broadly resembled those of the late colonial era. Following independence, the regional governments increased their efforts to attract external investment and to encourage the activities of indigenous business. They conducted competitive and often invidious campaigns to influence industrial siting and attract foreign investment to their respective regions. The federal government also strengthened inducements for foreign investors and made efforts to rationalize and upgrade the national planning apparatus. The state remained essentially an agency of private sector development in the early years after independence (Ajakaiye 1984, 376-377). Contending regional parties struggled for control of federal institutions and the resources they commanded and consolidated hegemony in their geographic heartlands through the strategic manipulation of the public sector. The regional public development structures were employed to promote local accumulation among party adherents and private sector allies. The selective distribution of public amenities and services also helped secure the loyalty of popular constituencies (Sklar 1963, 504). Contention over access to the state and the concomitant politicization of the economy proved corrosive to political and social stability. In 1966, amid increasing sectional competition, communal conflict, and political upheaval, the civilian regime of the First Republic was overthrown by the military, setting into motion a chain of military factionalism and ethnic violence culminating in civil war (Luckham 1971; Diamond 1988). This episode signaled a significant shift in Nigeria's development strategy and an accentuated role for the public sector. Two military coups in 1966 and the ensuing civil war marked a decisive change in the pattern of Nigerian development. Prior to the outbreak of civil conflict, General Yakubu Gowon attempted to defuse sectional tensions by dividing the four regions into twelve states. Although this maneu-

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ver failed to avert eastern secession, it created new patronage networks and bolstered the power of the federal executive (Joseph 1987, 72). The war experience accentuated nationalist and statist tendencies in Nigeria's leadership. The federal military effort necessitated strict economic austerity measures, including trade, monetary, and fiscal controls (Tims 1974, 24). The experience of financing a costly military campaign without recourse to heavy foreign borrowing convinced Nigerian leaders of the need to utilize state intervention to achieve national autonomy (Ayida 1987, 187; Federal Republic of Nigeria 1970, 29). These proclivities were expressed in the Second National Development Plan for 1970/75, which in newly resolute nationalist terms called for the state to assume control of the "commanding heights" of the economy. The Second National Development Plan was promulgated by a military government determined to cement federal unity and promote rapid postwar reconstruction. The Second Plan articulated a nationalist economic philosophy, substantiated by provisions for expanding development finance and nationalizing critical sectors of the economy. The plan prompted the creation of the Nigerian National Oil Corporation (NNOC), precursor to the National Petroleum Corporation, the Nigerian National Supply Company, and the Nigerian Bank for Commerce and Industry. Provisions were also made for large-scale capital projects in steel, petrochemicals, cement, pulp and paper, and fertilizer. The public sector assumed new centrality in the nation's development strategy. The Second Plan coincided fortuitously with Nigeria's entry into the world arena as a major oil producer. At independence the petroleum sector accounted for less than 1 percent of Nigeria's gross domestic product and export revenues. Beginning in 1970, oil production expanded very rapidly. By 1974 oil production constituted 30 percent of GDP, nearly 70 percent of government revenues, and more than 92 percent of export revenues. Subsequently, petroleum accounted for between 93 percent and 98 percent of Nigeria's export values (World Bank 1981, 52). The steady increases in Nigerian production and international prices created a windfall in revenues, prompting a rapid expansion of the economy. The GDP increased fourfold (at current prices) between 1973 and 1981 (Federal Office of Statistics 1982, 1). The advent of enormous petroleum revenues engendered a precipitous expansion of the state sector. Nigeria's military rulers, invigorated by newly abundant resources, raised their sights from controlling the commanding heights to a more expansive strategy of de facto state capitalism. T h i s d i r e c t i o n was a c c e n t u a t e d a f t e r 1975, when G e n e r a l M u r t a l a Muhammed ousted Gowon and articulated an ambitious program of economic growth and expansion. Following Murtala's assassination in 1976, Lt. General Olusegun Obasanjo (a member of Murtala's ruling council) pledged to continue this policy thrust. Central planning efforts and regula-

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tory authority were greatly expanded. Public investments increased and diversified, as the state moved directly into strategic productive sectors. The state became a central source of growth, accumulation, and entrepreneurship (Forrest 1987; Bienen 1985). State capitalism is a term often utilized yet infrequently defined. State capitalist strategies aim at limiting the influence of foreign economic forces, creating a framework for national economic integration and selfsustaining growth, and providing the critical resources and coordination for advanced industrialization (Petras 1977; FitzGerald 1979; Waterbury 1983). Depending upon the ideological character of the regime and the tenor of state relations with the indigenous private sector, the strategy may also entail efforts to foster domestic enteiprise (Frieden 1981). Where promotion of indigenous private capital is linked to the expansion of state tutelage, the state takes on a dual role: the public sector acts in lieu of an absent or incipient domestic bourgeoisie, whereas government intervention is also intended to foster a domestic capitalist class. These objectives are often in tension, as contradictions arise between the state's roles as substitute and patron for indigenous capital (Petras 1977). The rapid increase in petroleum rents fostered the emergence of state capitalism during the latter half of the 1970s. Government spending rose by a factor of five between 1973 and 1977 (World Bank 1981, 42). Federal expenditures equaled 21 percent of GDP in 1970 and 61 percent by 1977 (Ndekwu 1981, 228). The g o v e r n m e n t ' s share of gross i n v e s t m e n t increased from 36 percent in 1965 to 68 percent in 1977 (Okigbo 1981, 171). The Second Plan called for an expenditure program of three billion naira ($4.5 billion); 2 the Third Plan for 1975-1980 specified thirty billion naira ($48 billion) and was later revised to forty-three billion ($68 billion). The Fourth Plan for 1981-1985 projected expenditures of eighty-two billion naira ($150 billion). These figures testify to the speed and magnitude of increasing government spending. Public economic activities expanded along several fronts: planning became more ambitious, comprehensive, and detailed; public investments experienced a tremendous growth and diversification; federal and state governments participated in a variety of agricultural and industrial ventures; the regulatory scope of the state increased greatly, as the government implemented substantial nationalizations in the petroleum and financial sectors as well as widespread indigenization. Administrative restrictions on imports, exports, and foreign exchange allocations were introduced (or revived from the war era) in an effort to control trade and monetary flows. The government moved from a supportive to a vanguard role in the process of economic growth. This role was articulated in planning documents and in the mixed economy model of the 1979 constitution (Federal Government of Nigeria 1979, 16-17); it was widely accepted throughout the public and private sectors.

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State expansion in Nigeria was not guided by a coherent strategy of state capitalism; it was not structured by a focused program of state-led economic reform; and perhaps most important, the Nigerian public sector had no effective or competent technocratic cadre to implement such a program. In consequence, the rapid proliferation of state roles and institutions took place with little planning, management, or financial discipline. Projects were rushed into the pipeline, feasibility studies were largely irrelevant, inappropriate siting and technologies were employed, inordinately ambitious expansion plans were targeted, excess capacity was planned, finances were not monitored, and there was virtually no coordination among or within sectors (Forrest 1987). Although this pattern of growth certainly dispensed copious patronage and rents to state and business elites, it could not engender a planned or effective expansion of national productive capacity. State capitalist strategy in Nigeria was linked with two central policies: the indigenization program and the expansion of public enterprises. In fact, the two processes were not discrete. The indigenization decrees of 1972 and 1977 required companies under foreign ownership (including those held by Lebanese nationals) to relinquish a substantial portion of their shares to Nigerian control (Collins, 1977, 128-129). Indigenization began as a response to nationalist pressures from domestic business, but it ultimately became a vehicle for the expansion of state ownership and control (Biersteker 1987, 198). The foreign divestiture process facilitated acquisition of equity in foreign-owned companies by the federal and state governments. 3 This coincided with a tremendous expansion of state investments and a proliferation of state-owned enterprises. Public enterprises were a central instrument of state economic policy during the oil boom. The federal government took a mandatory 60 percent share in foreign petroleum companies and financial institutions. Dozens of new companies were established, including joint ventures with foreign capital and numerous wholly owned public enterprises. Massive capital projects in petrochemicals, iron and steel, paper and fertilizer production, machine tools, and sugar processing, many on the drawing boards since the early postindependence years, were expanded and slated for implementation. Federal ministries, state governments, and regional investment companies aggressively sought investment opportunities. The late 1970s saw the establishment of the Nigerian National Petroleum Corporation (a 1977 merger of the NNOC and the Ministry of Petroleum), the Mining Corporation, the Steel Development Authority and associated iron and steel complexes, the Nigerian Airports Authority, the National Freight Company, the National Cargo Handling Company, and the Central Water Transportation Company. Public capital helped establish vehicle-assembly plants, cement factories, flour mills, and the beginnings of several large-scale industrial projects (Forrest 1987). In the agricultural

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sector, the government initiated extensive state-sponsored irrigation schemes, and collaborated with the World Bank on a series of integrated agricultural development projects (Watts 1987). The state governments followed the federal authorities with enthusiasm as state-level elites, like their regional predecessors, apprehended new opportunities for patronage, personal enrichment, and local development (Wilson 1983, 62-63). State-level investments built upon the import substitution activities of the 1960s. Ventures in glass, ceramics, bricks, metal and plastic fabrication, beer and soft drinks, flour milling, breweries, textiles, and agricultural processing were prominent in state portfolios. Real estate and development finance activities expanded. Hotels and technical education were also popular avenues for investment. At least two states set up dry-cleaning companies. State investment activities, prompted by the fervor of civil servants and politicians to gain control over bounteous public resources, were hastily conceived and frequently redundant (Usoro 1977, 67). The waste, inefficiency, and corruption within the public sector were briefly overshadowed by abundant revenues and domestic liquidity, as well as optimism regarding future returns (Joseph 1978). As Nigeria's petroleum economy experienced an abrupt decline in the early 1980s, structural problems within the economy were shaiply highlighted. The slump in the international petroleum market after 1980 caused a precipitous drop in export volumes and prices. Petroleum revenues peaked at nearly $25 billion in 1980; by 1982 that figure was halved, and in 1986 petroleum netted less than $7 billion (World Bank 1981, 52; Central Bank of Nigeria 1987). The reduction of petroleum earnings, accounting for more than threefourths of government revenues, created a fiscal crisis and a rapid deterioration in the external payments situation. The decline in state revenues and economic activity created a swift degeneration throughout the public sector. Capital projects were stalled for lack of funds; manufacturing and agricultural ventures were unable to secure essential inputs and machinery; shortages of replacement parts hobbled productive enterprises, transport, and utilities. Public sector debts accumulated, and subsidies and subventions constituted an increasing burden on a shrinking state treasury. Exogenous shocks were aggravated by domestic political circumstances. The deterioration of world market conditions began under the administration of Alhaji Shehu Shagari, president during the short-lived Second Republic of 1979-1983. Civilian rule undermined economic management and stability, as resources were drained by rampant corruption and uncontrolled political disbursements. The return to open political competition engendered a resurgence of intense struggle over control of public offices and resources (Joseph 1987). Civilian leaders displayed little inclination or capacity to impose austerity measures or fiscal discipline on the

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public sector; dwindling resources were dissipated by a virtual hemorrhage of funds from state coffers (Schatz 1984). Increasing political polarization, economic deterioration, and popular discontent once again prompted military intervention, and an austere "corrective" regime led by Major-General Muhammadu Buhari seized power as 1984 began. Buhari and his close associate, Major General Tunde Idiagbon, sought to reassert probity and austerity within the public realm. They jailed former politicians, curtailed much of the "petty" corruption within the state sector, and supervised unavoidable cutbacks in government funding and personnel. Under pressure of tightening fiscal constraints, Buhari forced the resignation or early retirement of more than fifteen thousand staff in the civil service and public enterprises, constituting the largest single reduction in the history of Nigeria's civilian public sector. These dramatic measures, however, were impelled by resource constraints and political exigencies, and not by a coherent vision of state sector reform; Buhari evinced no comprehensive strategy for economic change. He replaced governing boards of numerous public enterprises, installed military managers in major firms, reduced levels of funding, and convened several study groups to investigate the operations of important companies. None of these measures generated appreciable improvements in the operations of public sector firms. He resisted increasing pressures from international financial institutions and domestic critics to privatize state companies, calling instead for the commercialization of government ventures to produce more efficient operations. The goal of commercialization never progressed beyond general pronouncements, and many viewed it as a rhetorical shield for avoiding difficult reforms within the public enterprise sector. The prevalence of northerners in Buhari's government also prompted speculation by southern groups that the regime sought to maintain the flow of public sector patronage to the north. Buhari and Idiagbon's makeshift approach to economic policy and their increasingly authoritarian governance created severe popular disaffection and discontent within the military. A bloodless coup in August 1985 brought M a j o r General Ibrahim B a b a n g i d a to power. In J u l y 1 9 8 6 , Babangida declared an intention to privatize or commercialize major public enterprises. The president formed two policy committees, comprised o f senior civil servants and leaders in the private capital market, to conduct a survey of public firms and set up the machinery for privatization. In the meantime, the government liquidated seven agricultural commodity boards and liberalized the marketing of export produce, abolished the corrupt and insolvent Nigerian National Supply Company, and sold or transferred the assets of the Nigerian Livestock Production Company—mainly to receivers in the public sector (Callaghy and Wilson 1988). In July 1988 the government released Decree no. 25 on Privatization

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and Commercialization. The decree called for full or partial privatization of ninety-six companies and commercialization of a further thirty firms. 4 Perhaps most significant was the provision for a Technical Committee on Privatization and Commercialization (TCPC), the first centralized state body with broad authority to restructure state firms and dispose of public assets. The TCPC began its work in earnest at the beginning of 1989, supervising the divestiture of shares in a dozen companies during the course of the year and setting up committees to examine the operations of more than thirty other firms. The activities of the TCPC were complemented by government measures to raise public sector prices and further pare staff. Some twelve thousand personnel were retrenched from public enterprises in 1989, and tariff increases were permitted for electricity, telecommunications, fuel, and air and rail services. By the beginning of the 1990s, a new resolve was apparent to implement an agenda of public sector reform. Nigeria's sprawling public sector remains largely insolvent and moribund, but reform measures have reduced fiscal liabilities and marginally improved operational fitness throughout portions of the public sector. The following section sketches the dimensions of the SOE sector and the scale and nature of reform problems.

The Public Enterprise Sector in Nigeria: Scope and Performance Accurate figures are lacking, but it is likely that Nigeria has the largest public enterprise sector in sub-Saharan Africa. By the mid-1980s, as many as 900 enteiprises existed at the federal and state levels. Of this total, 275 were federally owned, and more than 600 were owned by the states. 5 Government enteiprises may be divided into commercial and noncommercial categories; about two-thirds of the federal enterprises are commercial ventures. Estimates of the public enterprise contribution to GDP range between 35 percent and 50 percent (Okigbo 1981, 170). When matched against comparative data, Nigeria's public enterprise sector is among the largest in sub-Saharan Africa, not only in terms of absolute numbers of enterprises but more significantly in terms of the sector's contribution to GDP. 6 Employment in the public enterprise sector is approximately 500,000, about a third of public sector employment and nearly 22 percent of total employment in the formal sector of the economy (Sanda 1986). The public sector makes a huge claim on government resources. The federal government has estimated that about 40 percent of nonsalary recurrent expenditure and 30 percent of its capital budget have gone annually toward public enterprises (Federal Republic of Nigeria 1986, 24). Total investments may exceed $35 billion, including $11.2 billion in equity, $10.2 billion in government loans, and another $11.5 billion in unspecified

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(and largely unrecorded) subventions to various enterprises. These investments have provided meager returns, yielding less than $1.5 billion in dividends and loan repayments from 1980 to 1985. 7 Net outflows from the gove r n m e n t to public enterprises may total as m u c h as $2 billion annually (Callaghy and Wilson 1988, 195). The magnitude, extent, and persistence of failure among Nigeria's public enterprises have been extraordinary. The state sector has absorbed enorm o u s infusions of capital and inputs, while providing few financial returns and little productive output. The government's "passive" shareholding in foreign financial and petroleum enterprises has yielded modest dividends on public investment, but the balance of state-owned f i r m s has drained p u b l i c resources. Public utilities and g o v e r n m e n t - c o n t r o l l e d t r a n s p o r t require continuous, massive subsidies but deliver only intermittent, substandard services. Industrial enterprises typically operate at 2 0 - 3 5 percent of capacity. The large capital projects in agriculture and industry are difficult to treat as anything but good intentions o r e x p e n s i v e b o o n d o g g l e s because most of them are incomplete, some as long as a decade past their original target dates (Federal Government of Nigeria 1984). T h e d e f i c i e n t p e r f o r m a n c e within N i g e r i a ' s p u b l i c s e c t o r m a y b e attributed to both structural and circumstantial factors. Structural constraints include inappropriate siting and technical processes, disadvantageous market position, weak capital structures, and overstaffing. Enterprise p e r f o r m a n c e has also been degraded by such factors as fiscal shortfalls, pervasive corruption, political and administrative instability, arbitrary managerial interventions, and changes in global market conditions. Moreover, deterioration in such strategic enterprises as the Power Authority and the transport sector carry important externalities that i m p e d e p e r f o r m a n c e among other firms. The shortage of funding to state enterprises and projects after 1980 created a steady degeneration within the state sector. As in many other developing countries, the c o n s e q u e n c e s of public enterprise failure in Nigeria are manifold: Scarce resources are absorbed by inefficient, unproductive companies; inadequate production hinders economic growth and sectoral integration and sustains national dependence on imports; the failure of utilities, transport, and service enterprises degrades the economic environment, creating impediments to economic activity and disincentives to investment; and the waste of public funds worsens fiscal and balance-of-payments deficits and aggravates the effects of exogenous shocks. Moribund public corporations account for a significant proportion of Nigeria's burdensome foreign debt. Public sector failure also has detrimental effects on income distribution and popular welfare. 8 Economic stagnation, corruption, and inefficiency ultimately undermine political legitimacy and stability. Since the early 1960s, the operational causes of public enterprise failure have repeatedly been identified by commissions of inquiry convened by

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the federal, regional, and state governments. 9 These reports d o c u m e n t a familiar set of problems, including political and bureaucratic interference with managerial autonomy; multiple goals and uncertain policy and e c o nomic environments; unstable and often mediocre management; poor information and accounting systems; inadequate financing and inappropriate capital structures; and a lack of performance targets and accountability. Official panels have periodically reiterated suggestions for reform, and government leaders have intermittently attempted to obtain better p e r f o r mance and financial discipline in the public sector. But change has rarely been effected, at the enterprise or the sectoral level. Efforts to ameliorate performance within the public sector have been piecemeal and arbitrary; government leaders have cajoled, admonished, and occasionally threatened e n t e r p r i s e m a n a g e r s to improve their charges. P e r e n n i a l m a n a g e m e n t reshuffles and institutional tinkering have failed to produce more effective or efficient operations. Governments have undertaken financial restructuring within individual firms on an ad hoc basis. Staff and salary scales have been reorganized periodically, most notably in 1975 and 1982. Statutory boards to administer staff matters and contracts throughout the public sector were established from 1968 to 1975, but these institutions failed to stem corruption and mismanagement among public enterprises (Tokunboh 1979, 38). Reform measures have been frustrated by political instability, administrative weakness and a lack of managerial accountability. Public enterprise personnel are often flagrant in rebuking the authority of government, as w a s e x e m p l i f i e d in 1 9 8 3 w h e n e m p l o y e e s of N i g e r i a n E x t e r n a l Communications (NET) set the company's thirty-seven-story Lagos headquarters ablaze rather than risk seizure of records revealing official misconduct.

The Politics of Distribution State c a p i t a l i s m in Nigeria has e m b o d i e d a b a s i c p a r a d o x : f i s c a l and administrative authority have progressively been centralized under a rentier state, as state capacities have become increasingly strained and ineffectual. The Nigerian state is fraught with division and instability; there is no public sector technocracy to provide autonomous, politically neutral e c o n o m i c management; and Nigerian governments have historically experienced tenuous popular legitimacy. The fractious communal divisions in Nigerian society and the relative weakness of class politics have created d i f f u s e social bases for Nigerian regimes. Consequently, Nigerian leaders, whether civilian or military, have emphasized patrimonial political strategies incorporating pervasive instrumental ties between state elites and strategic social groups. 1 0 The Nigerian economy has been thoroughly politicized since the end of the colonial era; economic resources and opportunities have derived from

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the control of state offices and policies (Rimmer 1981, 40). As fiscal centralization advanced and state economic activities expanded during the oil boom, increased public resources became the focus o f distributive demands from diverse sectional interests. Formal public policy has long been governed by an "ethnic arithmetic," articulated in the 1979 Constitution as "federal character" (Akande 1982, 15). Balance among communal and regional groups is expected in government revenue allocation, state investments, and public sector staffing. Industrial siting, sectoral and factoral emphases in planning, and the delivery of social services are directed by distributive concerns. Formal policies of income redistribution occupy a small place in Nigerian public policy, but the claims o f diverse geographic and ethnic interests suffuse government decisions (Bienen 1981, 162). Distributive pressures are often satisfied at informal levels, as patronage networks and corruption provide widespread access to public largesse. An implicit moral economy governs state patronage, as all major actors in this highly factionalized system expect access to state bounty, and the state contends with private interests over the control of such wealth. 1 1 The widespread tendency toward private appropriation o f public resources has been characterized by Richard Joseph, after Max Weber, as the "prebendalization" of the Nigerian state (Joseph 1987). Joseph has succinctly portrayed how particularistic interests undermine state prerogatives and public policy by informal means. The politics of distribution in Nigeria comprise a broader syndrome, encompassing both the formal goals of the state and the informal contention for public resources. Distributive politics hinder state-led accumulation, as the public sector provides avenues of distribution at the expense of its productive goals. The formal purposes of public enterprises, ostensibly intended to produce goods and services, are undermined as these organizations become hostage to a rash of separate acquisitive interests. At the levels of both policy formation and enterprise operations, production is subverted and ultimately frustrated by political criteria. The ubiquitous politicization of economic activity, prevalent throughout Africa, stands in direct contradiction to the realization of capitalist development (Sandbrook 1985). The predominance of corruption, nepotism, patronage, and political factionalism create a highly capricious and arbitrary economic environment. This is inimical to the conditions of calculability and rationality that have historically facilitated the growth o f productive, systematic accumulation in n a s c e n t capitalist economies (Berry 1984:92; Callaghy 1988).

Public-Private Sector Relations: Change and Prospects The Nigerian variant of state capitalism, poorly articulated and implemented though it was, nonetheless fostered tremendous economic expansion and provided a framework for the disbursal of petroleum profits. State econom-

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ic strategies accorded a dual role for the public sector, as an arena of direct accumulation and an adjunct to private sector development. As state capital, public corporations were intended to increase state control over the economy, to advance national productive capacity, and to bolster the government's revenue base. The illicit diversion of resources from a burgeoning state sector also contributed to the development of a private property base among state elites. Moreover, state capital provided an important foundation for domestic entrepreneurs. Although weak and fragmented, and regarded with considerable ambivalence by an interventionist state, local business interests were nonetheless beneficiaries of state-sponsored indigenization exercises, and they played a critical role in the economic growth generated by state investment. The proliferation of public enterprises occurred in tandem with the expansion of the domestic private sector into territory previously held by foreign capital. The private sector provided contractors, suppliers, and distributors for state projects and businesses (Forrest 1987, 336). Patronage, corruption, and the abundant rent-seeking opportunities generated by state economic intervention provided a bounteous environment for the accumulation of wealth within the private sector. Rather than seeking to constrain state economic expansion, domestic business interests endeavored informally and individually to secure public favors. However, by the mid-1980s organized private sector interests became increasingly critical of excessive government intervention as inefficiency, mismanagement, and corruption within the state sector played a more conspicuous role in the nation's economic decline. Prominent members of the Manufacturers Association of Nigeria, the Lagos Chamber of Commerce, the Stock Exchange, and the Securities and Exchange Commission have supported economic liberalization and the privatization of public enterprises. The summons to restrain the state's economic role was backed by much of the domestic financial community and found resonance among senior technocrats. The neo-orthodox prescriptions espoused by the World Bank, the IMF, lenders, and investors have attracted wider adherence among Nigeria's state and private elites. The pattern of public-private sector development in Nigeria and the configuration of domestic political coalitions and economic interests carry important implications for a potential realignment of Nigeria's political economy. Two integrally related challenges are paramount in the process of economic reform: (1) the state sector must be restructured to operate more efficiently and effectively, in order to fulfill the developmental roles for which it has been delegated; and (2) the structure of incentives and sanctions within the private sector must be transformed to sustain productive investment and domestic accumulation. The performance of the indigenous Nigerian private sector has not been more auspicious than that of the public sector. Productive investment has chiefly been undertaken by foreign capital, whereas local business

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r e m a i n s c o n c e n t r a t e d in trade and c o m m e r c e , t r a n s p o r t , s e r v i c e s , and small-scale manufacturing. Considerable activity has also been devoted to "pirate capitalism," the relentless pursuit of illicit rents and favors (Schatz 1984). Lacking cohesion, expertise and capital, the Nigerian business class has exhibited scant ability to revitalize the economy. The current business c l i m a t e , characterized by a shortage of f o r e i g n e x c h a n g e , tight credit, depressed imports, and dwindling external investment, has impelled local entrepreneurs to exploit domestic markets and resources. Such pressures have encouraged support for privatization, as state assets represent a potential outlet for indigenous investment. Although indigenous capital is understandably interested in potential rent-seeking opportunities through privatization, there is little reason to anticipate the gains in efficiency and productivity suggested by many advocates of neo-orthodox reform. The pool of potential buyers for state assets remains limited. Regulations on share dispersal and management transfers will create difficulty in divesting enterprises to private receivers capable of reorganizing and restructuring the firms. State assets may be plundered and mismanaged by the new owners. The transfer of equity and the reduction of state expenditure may provide significant fiscal relief to government, but economic rigidities such as poor infrastructure, weak technical capabilities, fragmented markets, and bureaucratic capriciousness will have to be ameliorated before structural adjustment measures can effectively e n g e n d e r economic revitalization. State sector consolidation and market liberalization are certainly necessary instruments in Nigeria's economic restructuring, but they are not likely to be sufficient elements for economic regeneration. What is ultimately needed is not simply to reduce the state's economic role, but to create the conditions for more "effective intervention" (Evans and Reuschmeyer 1985).

Notes 1. See, for example, Gavin Williams and Terisa Turner, "Nigeria," in John Dunn, ed., West African Stales: Failure and Promise (Cambridge: Cambridge University Press, 1978), pp. 170-171. 2. Estimated at current prices. The exchange rate for the naira has fluctuated substantially. In 1973, the naira was valued at $1.52; in 1980, it had appreciated to $1.84; by 1985, the naira had depreciated to $1.20; following the introduction of a currency auction system in July 1986, the naira has declined from $0.33 to $0.12. 3. Biersteker (1987, 2 6 6 - 2 6 7 ) notes that state and federal government holdings constituted only 15 percent of the shares on the stock exchange in 1982. 4. Seventy-one ventures in all are to be fully divested, including hotels, breweries and distilleries, agro-industrial companies, textile mills, flour mills, and wood fabrication and insurance companies. The government will relinquish controlling interests in twenty-five enterprises, including oil marketing companies, Nigeria Airways, the National Shipping Line, steel-rolling mills, and many of the larger industrial ventures. Candidates for c o m m e r c i a l i z a t i o n include Nigerian Telecommunications (NITEL), the NNPC, the Railway Corporation, the National

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Electric Power Authority, the Ports Authority, and the River Basin Development Authorities. 5. This is a controversial figure, four or five times the estimates of international financial institutions and other observers. The figure is derived from a collation of available federal listings of SOEs, reporting from state governments, and the rosters from annual conferences of SOE managers. 6. Nellis (1986, 5) lists Tanzania with the largest number of SOEs in subSaharan Africa, at 400. Zambia appears to have the greatest SOE share in GDP, with a figure of 37.5 percent, in Short (1984, 118-119). Statistics on the magnitude of Nigeria's SOE sector are notoriously unreliable, but general figures indicate that the country has the largest SOE sector among sub-Saharan countries. 7. Press statement by Commodore Ebitu Ukiwe, Chief of General Staff, Lagos, November 27, 1985. 8. Johnson O. Odufalu (1981, 475-481) describes the uneven geographic and sectoral distribution of economic services, infrastructure, and capital projects. Mary Shirley (1983, 18) also observes the inequitable impact of subsidies on public utilities, large industries, and urban commercial enterprises. 9. Among the most prominent of these were the Elias Commission, published as the Report of the Commission of Inquiry into the Administration, Economics and Industrial Relations of the Nigerian Railway Corporation, Lagos, 1960; the Report of the Coker Commission of Inquiry into the Affairs of Certain Statutory Corporations in Western Nigeria, Lagos: Ministry of Information, 1962; the Ani Commission, published in the Report of the Working Party on Statutory Corporations and State-Owned Companies, Lagos: Ministry of Information, 1967; and the O n o s o d e C o m m i s s i o n , p u b l i s h e d as the Report of the Presidential Commission on Parastatals, Lagos: Federal Government Printer, 1982. At least forty other government commissions have conducted inquiries ranging from studies of individual projects and companies to broad investigations of state and federal enterprises. 10. Robert Price (1984) has advanced a similar argument with respect to Ghana. Nigeria exhibits the same pattern of distributive politics and low institutional autonomy that Price noted for Ghana, though it differs from Ghana in important respects: the size and complexity of the distributive arena; the mediating structures of federalism; and the palliative effects of petroleum revenues, which have paradoxically fostered greater profligacy and staved off economic decay for a slightly longer period than in Ghana. 11. "Moral economy" describes a system of cultural expectations surrounding e c o n o m i c a f f a i r s , stressing substantive c o n c e p t i o n s of justice o v e r relative conceptions of equity. See Scott (1977) for a fuller treatment. Nigerians do not expect equal apportionment of public power and resources as much as they expect broad opportunities to compete for wealth and influence. This is a minimum acceptable standard of public life. As Price observed about Ghana, "Although state largesse was certainly never distributed in an egalitarian manner, few, if any, sizeable groups were excluded from the distributional process" (Price, 1984, 189).

References Aboyade, O. 1974. "Nigerian Public Enterprises as an Organizational Dilemma." In Public Enterprises in Nigeria, proceedings of the 1973 annual conference of the Nigerian Economic Society, Ibadan: Ibadan University Press.

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Ajakaiye, D. Olu. 1984. "Impact of Policy on Public Enterprise Performance in N i g e r i a , " Nigerian Journal of Economic and Social Studies 26, N o . 3 (November):371-386. Akande, J. O. 1982. Introduction to the Nigerian Constitution. London: Sweet and Maxwell. Ayida, Allison. 1987. "The War Economy in Perspective." Reflections on the Nigerian Economy, Ibadan: Heinemann Educational. Beckmann, Björn. 1987. "Public Investment and Agrarian Transformation in Northern Nigeria." In Michael Watts, ed., State, Oil and Agriculture in Nigeria. Berkeley: Institute of International Studies. Berry, Sarah. 1984. "Searching for the Evidence: African Agriculture in National and International Perspective." African Studies Review (June):61-112. Berry, Sarah, and Liedholm, Carl. 1970. "Performance of the Nigerian Economy, 1 9 5 0 - 1 9 6 2 , " in Carl K. E i c h e r and Carl L i e d h o l m , e d s . , Growth and Development of the Nigerian Economy. East Lansing: Michigan State University Press. Bienen, H e n r y . 1981. " T h e Politics of Distribution: Institutions, C l a s s and Ethnicity." In Henry Bienen and V. P. Diejomaoh, eds., The Political Economy of Income Distribution in Nigeria. New York: Holmes and Meier. . 1985. "Oil Revenues and Policy Choice in Nigeria." In Henry Bienen, ed., Political Conflict and Economic Change in Nigeria. London: Frank Cass and Co. Biersteker, Thomas. 1987. Multinationals, the State, and Control of the Nigerian Economy. Princeton, N.J.: Princeton University Press. Callaghy, Thomas M. 1988. "The State and the Development of Capitalism in Africa." In Donald Rothchild and Naomi Chazan, eds., The Precarious Balance: State-Society Relations in Africa. Boulder, Colo.: Westview Press. . 1990. "Lost Between State and Market: T h e P o l i t i c s of E c o n o m i c Adjustment in Ghana, Zambia, and Nigeria." In Joan Nelson, ed., Economic Crisis and Policy Choice. Princeton, N.J.: Princeton University Press. Callaghy, Thomas M., and Wilson III, Ernest J. 1988. "Africa: Policy, Reality or Ritual?" In Raymond Vernon, ed., The Promise of Privatization: A Challenge for U.S. Foreign Policy. New York: Council on Foreign Relations. Central Bank of Nigeria. 1987. Annual Report and Statement of Accounts for the Year Ended 31st December, 1986. Lagos. Collins, Paul. 1977. "Public Policy and the Development of Indigenous Capitalism: The Nigerian Experience." Journal of Commonwealth and Comparative Politics 15, no. 2 (July): 127-150. Dean, Edwin. 1972. Plan Implementation in Nigeria 1962-66. Ibadan: Oxford University Press. Diamond, Larry. 1988. Class, Ethnicity and Democracy in Nigeria: The Failure of the First Republic. Syracuse: Syracuse University Press. Dudley, Billy. 1982. An Introduction to Nigerian Government and Politics. Bloomington: Indiana University Press. Evans, Peter, and R e u s c h m e y e r , Dietrich. 1985. " T h e State and E c o n o m i c Transformation: Toward an Analysis of the Conditions Underlying Effective Intervention." In Peter Evans, Dietrich Reuschmeyer, and Theda Sko?pol, eds., Bringing the State Back In. New York: Cambridge University Press. Federal Government of Nigeria. 1979. The Constitution of the Federal Republic of Nigeria. Lagos: Federal Government of Nigeria. Federal Government of Nigeria. 1981. Report of the Presidential Commission on Parastatals. Lagos: Federal Government Printer.

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Federal Government of Nigeria. 1984. Report of the Projects Review Committee. Lagos: Federal Ministry of Finance. Federal Office of Statistics. 1982. Nigerian Gross Domestic Product and Allied Macro-Aggregates 1973174-1981. Lagos: Federal Office of Statistics. Federal Republic of Nigeria. 1970. Second National Development Plan 1970-74. Lagos: Federal Government Printer. Federal Republic of Nigeria. 1986. Structural Adjustment Program July 1986-June 1988. Federal Government Information Memorandum, November. Federal Republic of Nigeria. 1988. Decree No. 25—Privatization and Commercialization Decree 1988. Federal Republic of Nigeria, Official Gazette 75, no. 42: A673-A683. FitzGerald, E. V. K. 1979. The Political Economy of Peru 1956-78. Cambridge: Cambridge University Press. Forrest, Tom. 1987. "State Capital, Capitalist Development and Class Formation in Nigeria." In Paul Lübeck, ed.. The African Bourgeoisie, pp. 207-342. Boulder, Colo.: Lynne Rienner Publishers. Frieden, J e f f r y . 1981. "Third World Indebted Industrialization: International Finance and State Capitalism in Mexico, Brazil, Algeria and South Korea. International Organization 35, no. 1. Helleiner, Gerald K. 1966. Peasant Agriculture, Government and Economic Development in Nigeria. Homewood, 111.: Richard D. Irwin. Joseph, Richard A. 1978. " A f f l u e n c e and U n d e r d e v e l o p m e n t : T h e Nigerian Experience." The Journal of Modern African Studies 16, no. 2:221-240. and Prebendal Politics in Nigeria. Cambridge: . 1987. Democracy Cambridge University Press. Kilby, Peter. 1969. Industrialization in an Open Economy: Nigeria 1945-1966. Cambridge: Cambridge University Press. Luckham, Robin. 1971. The Nigerian Military: A Sociological Analysis of Authority and Revolt 1960-67. Cambridge: Cambridge University Press. Ndekwu, E. C. 1981. "The Pattern of Government Expenditures in Nigeria." In E. C. Ndekwu, ed., Proceedings of the NISER Staff Seminar, Ibadan: Nigerian Institute of Social and Economic Research. Nellis, John. 1986. Public Enterprises in Sub-Saharan Africa. World Bank Discussion Paper no. 1. Washington, D.C.: World Bank. Nixon, Charles R. 1970. "The Role of the Marketing Boards in the Political Evolution of Nigeria." In Carl K. Eicher and Carl Liedholm, eds., Growth and Development of the Nigerian Economy. East Lansing: Michigan State University Press. Odufalu, Johnson O. 1981. "The Distributive Impact of Public Expenditures in Nigeria." In Henry Bienen and V. P. Diejomaoh, eds., The Political Economy of Income Distribution in Nigeria, pp. 455-484. New York: Holmes and Meier. Okigbo, Pius. 1981. Nigeria's Financial System. Harlow, Essex: Longman. Petras, James. 1977. "State Capitalism and the Third World." Development and Change 8:1-17. Price, Robert M. 1984. "Neocolonialism and Ghana's Economic Decline: A Critical Reassessment." Canadian Journal of African Studies 18, no. 1:163-193. Rimmer, Douglas. 1981. "Development in Nigeria." In Henry Bienen and V. P. Diejomaoh, eds., The Political Economy of Income Distribution in Nigeria. New York: Holmes and Meier. Sanda, A. O. 1986. "Systematic Planning in the Public Sector." Reprinted in the Guardian (Lagos), August 7, 1986. S a n d b r o o k , R i c h a r d O. 1985. The Politics of Africa's Economic Decline. Cambridge: Cambridge University Press.

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Schatz, Sayre. 1977. Nigerian Capitalism. Berkeley: University of California Press. . 1984. "Pirate Capitalism and the Inert Economy of Nigeria." Journal of Modern African Studies 22, no. 1 (1984):45-57. Scott, James. 1977. The Moral Economy of the Peasant. New Haven, Conn.: Yale University Press. Shirley, Mary. 1983. Managing State-Owned Enterprises. World Bank Staff Working Paper no. 577, Washington, D.C.: World Bank. Short, R. P. 1984. "The Role of Public Enterprises: An International Statistical Comparison." In Robert H. Floyd, Clive S. Gray, and R. P. Short, eds., Public Enterprises in Mixed Economies, pp. 111-194. Washington, D.C.: International Monetary Fund. Sklar, Richard L. 1963. Nigerian Political Parties. Princeton: Princeton University Press. Stolper, Wolfgang F. 1966. Planning Without Facts. Cambridge, Mass.: Harvard University Press. Teriba, O., and Kayode, M. O., eds. 1977. Industrial Development in Nigeria. Ibadan: Ibadan University Press. Tokunboh, M. 1979. "Public Corporations." In Ladipo Adamolekun and Alex Gboyega, eds., Leading Issues in Nigerian Public Service. Ile-Ife: University of Ife Press. Tims, Wouter. 1974. Nigeria: Prospects for Long-Term Development. Washington D.C.: World Bank. Turner, Terisa. 1978. "Commercial Capitalism and the 1975 Coup." In S. K. PanterBrick, ed„ Soldiers and Oil. London: Frank Cass. Usoro, Eno J. 1977. "Government Policies, Politics and Industrial Development Strategy in Nigeria, 1947-74." In O. Teriba and M. O. Kayode, eds., Industrial Development in Nigeria. Ibadan: Ibadan University Press. Waterbury, John. 1983. The Egypt of Nasser and Sadat. Princeton, N.J.: Princeton University Press. Watts, Michael. 1987. "Agriculture and Oil-Based Accumulation: Stagnation or Transformation?" In Michael Watts, ed., State, Oil and Agriculture in Nigeria. Berkeley: Institute of International Studies. Williams, Gavin, and Terisa Turner. 1978. "Nigeria." West African States: Failure and Promise, John Dunn, ed. Cambridge: Cambridge University Press. Wilson III, Ernest J. 1983. "Public Corporation Expansion in Nigeria: Political Interests, State Structure and Government Policy." In Pearl T. Robinson and Elliott P. Skinner, eds., Transformation and Resiliency in Africa. Washington, D.C.: Howard University Press. World Bank. 1981. Nigeria Country Economic Memorandum. Washington, D.C.: World Bank. Young, Crawford. 1988. "The African Colonial State and Its Political Legacy." In Naomi Chazan and Donald Rothchild, eds., The Precarious Balance: State and Society in Africa. Boulder, Colo.: Westview.

The Uganda Development Corporation: State Enterprise Under Duress James Katorobo

Uganda became independent in 1962 with a multiparty parliamentary democracy, a written constitution that aimed at creating a preeminent central government, but with strong and entrenched federal and semifederal powers and institutions. The compromise and balance between republicans and monarchists broke down in 1966 and ushered in a period of political instability from which Uganda has failed to extricate itself. The breakdown of short-lived democratic government in Uganda 1962-1966 that led into five years of quasi-military rule (1966-1971) plus nine years of fascist military rule (1971-1979), and into a rapid succession of ineffective regimes (1980-1985), is reflected in the breakdown, deterioration, and decay of all dimensions of Ugandan society. Against this background is painted an overly large public enterprise sector at various stages of breakdown; and an array of governments, donors, and general managers desperately groping for solutions to daunting problems. In the period from 1950 to 1970 public enterprises played an important role in the development of the economy of "the pearl of Africa," Uganda. The economy grew rapidly, and the enterprises generally functioned well, playing a leading role in the expansion. As the state has decayed, so have the public enterprises crumbled. During this period of decline and disintegration, most basic principles of public administration as they apply to public enterprises have been flouted. Basic legal procedures have been ignored; appointments have been politicized; administration has been carried out by fiat without forethought or follow-through. New firms came into the public enterprise sector for political reasons in a period of violent upheaval. In the late 1980s the economy was still in a shambles, and the public enterprise sector was littered with relics of its own former period of prosperity, as well as a collection of enterprises that resulted from the nationalizations of Apollo Milton Obote and Idi Amin. The state was still largely unable to carry out such basic state functions as maintenance of law and 83

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order and provision of essential public goods, m u c h less provide e f f e c t i v e direction to the large n u m b e r of state enterprises. U g a n d a c a m e to i n d e p e n d e n c e with three d o m i n a n t t y p e s of p u b l i c e n t e r p r i s e s : the a g r i c u l t u r a l m a r k e t i n g b o a r d s , the p u b l i c u t i l i t i e s , a n d i n d u s t r i a l f i r m s o r g a n i z e d u n d e r the U g a n d a D e v e l o p m e n t C o r p o r a t i o n ( U D C ) . T h e U D C spearheaded the creation of industrial and agroindustrial p u b l i c enterprises. T h e nationalization policies of O b o t e a f t e r 1966 a n d those of A m i n after 1972 resulted in a rapid e x p a n s i o n of the U g a n d a n p u b lic enterprise system into all sectors of the e c o n o m y . T h i s c h a p t e r illust r a t e s the p r o b l e m s of the p u b l i c e n t e r p r i s e s e c t o r by f o c u s i n g o n t h e U g a n d a D e v e l o p m e n t C o r p o r a t i o n , o n e o f t h e l a r g e s t e n t e r p r i s e s in Uganda, and several of its subsidiaries and associated companies. It s h o w s h o w the collapse of state enterprises followed the instability and collapse of the state. Neglect of basic legal and organizational procedures contributed to the decline and n o w inhibits rehabilitation.

Uganda Development Corporation (UDC) U D C w a s created by the U D C Ordinance of 1952, which was a m e n d e d by the U D C Act of 1964. T h e objectives of U D C were to facilitate industrial and e c o n o m i c development, to promote and assist in the establishment of n e w u n d e r t a k i n g s , to c o n d u c t r e s e a r c h i n t o the i n d u s t r i a l a n d m i n e r a l p o t e n t i a l i t i e s of U g a n d a , to s e c u r e g o o d w i l l a n d s u p p o r t f r o m f o r e i g n investment, to sponsor training programs, and to establish subsidiary c o m panies and small-scale industries. Stages in the Development

of UDC

F o u r m a i n stages marked by a distinct trend can be identified in the history of the U D C . T h e first is the formative stage ( 1 9 5 2 - 1 9 6 4 ) , w h i c h is c h a r a c terized by a d o m i n a n t f o u n d e r and chief executive with a very strong personality. Both the g o v e r n m e n t and the board of directors tended to agree w i t h the a c t i v i t i e s and p r o g r a m s d e s i g n e d by J a m e s S i m p s o n , t h e f i r s t chairman and m a n a g i n g director of U D C . T h e accepted criterion for determ i n i n g investment decisions was the m a x i m i z a t i o n of c o m m e r c i a l o b j e c tives. T h e second stage is identified with p o s t i n d e p e n d e n c e d e v e l o p m e n t s , w h e n U D C w a s p e n e t r a t e d b y p o l i t i c a l i n t e r e s t s . T h e s u c c e s s i o n to S i m p s o n w a s politicized by the fact that S i m p s o n b e c a m e a m e m b e r of Parliament, was appointed to a cabinet post, and tried to retain his positions in the U D C . This resulted in hasty Africanization of his U D C position and in exposing U D C to political control. T h e supervising minister introduced the innovation of board subcommittees, appointed m e m b e r s of the s u b c o m -

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mittees, and transferred the duties and powers of the main board to these subcommittees. Thus the new chairman, managing director, and the main board were bypassed and undercut by this innovation. As a result, investment decisions were determined by the criteria of spreading development and providing rewards to the most powerful politicians. These decisions resulted in four projects: Uganda Hotels Ltd. (UH), Agricultural Enterprises Ltd. (AEL), Uganda Meat Packers (UMP), and Lango Development Company (LDC). The decision to invest and the location of these investments was determined largely by political forces. 1 The third stage is identified with the Amin military regime. Political interference intensified, appointment of management and boards became ad hoc and arbitrary, and enterprises were moved into and out of UDC at will. "Most of these transfers were by decree stipulating that there would be no c o n s i d e r a t i o n . In two cases, Uganda H o t e l s Ltd. and A g r i c u l t u r a l Enterprises Ltd., there was no legal instrument at all." 2 The fourth stage may be identified with the post-Amin period from 1980 to the present, which was characterized by attempts to rehabilitate the enterprises. Donor funds were mobilized but, although it was easy to destroy the enterprises, recovery has proved elusive. This has resulted in disagreements on the correct prescription between those who would retain strong state involvement and those advocating privatization. Since 1986 the enterprises have moved gradually into the process of privatization. The Organizational Structure of the UDC The fundamental principle of public enterprise management is to give enterprises a degree of autonomy to pursue their objectives without undue political intervention and interference. Whereas the government sets the general policy guidelines and objectives, the responsibility for operational policies and objectives is delegated to the board of directors. Ideally, the government should never issue orders directly to the firm. It should pursue its objectives through the board of directors. Managerial appointments should be made by the board and not by the government. The role of Parliament should be confined to providing a clear legal framework in the act that creates the public enterprises. There may be a committee to review public enterprise audited accounts and reports. On rare occasions public enterprise activities may attract political interest and attention, especially when the public enterprise fails to meet the demands of the public. It is a cardinal principle of good public enterprise management that politicians shall not put undue pressure on managers of public enterprises directly. These principles were fairly honored between 1962 and 1971 but were grossly abused during the Amin regime as well as during the second Obote regime. The autonomy of public enterprises was destroyed by government nominating boards of directors without taking into account integrity, expe-

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rience, and expertise. Successive governments constantly shifted the organizational location of public enterprises and placed some of them under direct ministerial control but did not clarify their legal status. Their capacity to act as legal personalities was, thus, undermined. Finally, recruitment on the basis of merit was replaced with appointment of managers on the basis of political and kinship loyalty. The supervising ministry. The Ministry of Industry and Technology has always been the controlling or supervising ministry for the UDC. As such it advises government on the appointment of the board of directors. It also has the responsibility of determining policy guidelines. Whereas the preind e p e n d e n c e U D C Act had p r o v i d e d f o r g o v e r n m e n t to " g i v e the Corporation directions" 3 in matters of public interest, the UDC was shielded from negative consequences of such directives. If the board felt that a directive might prejudice the corporation's financial position, "the Board shall not carry out any such directives until a legislative council has approved the direction and has guaranteed that any loss made by the corporation as a result of such direction shall be borne by the revenues of the Protectorate." 4 The protection of UDC from political interference was removed in 1963; it was provided that "the Minister may give to the Corporation such directions . . . as appear to the Minister to be requisite in the public interest, and the Corporation shall give effect to any such directions." 5 The government through the then supervising ministry gives general policy guidelines; may give directions regarding day to day operations; and appoints the chairman and managing director as well as members of the board of directors. The selection of the members of the board. The minister of industry and technology appoints the UDC board. The size of the board may vary from a minimum of four to a maximum of twelve, including the chairman. Board members are appointed for two years and may be reappointed. UDC operated with a board of directors from 1952 to 1970, but there was no board of directors for nine years (1971-1980), coinciding with the period of breakdown of politics and management. In 1980 a new board was appointed, and its members then reappointed for a second term. During February 1990 the government released new guidelines for the appointment of boards of directors: The minister presents names to the cabinet for approval; the names are to be drawn from the National Resistance Movement, progressive farmers, workers, and professionals in such a way as to balance politics, tribes, and religion. 6 A recent study has recommended changing this procedure for subsidiary and associate companies of UDC. It urges that "UDC, as a shareholder in its subsidiary and associated companies, should be solely responsible for appointing the Board. If UDC owns 100 percent, it should appoint

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and dismiss the Chairman and Board, and determine their fees. If UDC owns less than 100 percent, it should meet with the other shareholders and appoint Board members in proportion to its shareholding. The Board should elect a Chairman among its members. Questions of dismissal and fees of Board members should be determined by a majority vote in a general meeting of shareholders. The Government should have no say in the appointment of Board members of UDC subsidiaries and associated companies unless they hold shares directly." 7 Selection of management. The chairman and managing director of UDC is appointed by the president, as is the case with regard to general managers of most parastatals. Unlike the civil service, the teaching service, and the judicial service, where there are commissions to advise the president on appointments, there is no public enterprises commission. Government intervention in the appointment of management for the subsidiary companies was even more pronounced, as the case of the Uganda Leather and Tanning Industries Ltd. (ULATI) clearly demonstrates. ULATI suffered from leadership instability. During its eight years of operation, it had eight general managers. ULATI started operations with an Egyptian management team with considerable experience, which gave ULATI a good start. However, when civil war broke out in Uganda in 1979, the Egyptian technicians fled the country. UDC appointed an acting general manager, and replaced him later that year with a general manager. At the same time, the military government that emerged out of the civil war announced on the radio the appointment of a different general manager. There was a month of confusion as the new government, the board of directors, and the UDC tried to reconcile these conflicting appointments with the c o m p a n y ' s bylaws. In early 1980 the government political appointee emerged as the winner against the bureaucratic (technocratic) appointee, establishing a precedent for political appointments. This precedent became dominant in public enterprises during the next five years. Meanwhile, in late 1980 the government changed hands again, and Milton Obote emerged as the new president of Uganda. Obote's government embarked on a wholesale award of top leadership positions to political supporters, especially those who had been defeated during the general elections. It was generally assumed that these politically appointed executives would use their positions to extend political support for the ruling party and the president. The chief executives could enrich themselves and recover from financial losses incurred in the general elections. Branches of the ruling party were set up at each place of work. The annual extravaganza of the ruling Uganda People's Congress (UPC) party depleted the treasury and most parastatals of money. It was in this context that in early 1981 a cousin of Obote was appointed general manager of ULATI. This new general manager had a distinguished career in veterinary

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medicine. He had spent most of his working life in strictly professional undertakings and had no experience managing a large organization. His initial efforts at ULATI were directed at internal reorganization to increase his power and influence and to reduce the role of the board and the UDC managing agents. The acting production manager was demoted to be in charge of effluent. The purchasing manager was demoted, and the general m a n a g e r assumed the purchasing responsibilities. The senior administrative officer was dismissed. It is alleged that the chief accountant found it difficult to work with the new general manager, took to the bottle, and eventually resigned. Mr. J. M. Doii was appointed the new chief accountant but soon developed disagreements with the general manager. Unlike the previous chief accountant, however, they were able to coexist at ULATI. Toward the end of 1981 the general manager wrote to the chairman of the board, alleging that UDC managing agents (executive directors) had stolen documents from his office. The UDC executive directors countered that the general manager was calling board meetings and then absenting himself. These allegations marked the start of an antagonistic relationship between the general manager, the UDC, and the board. In early 1983 the Uganda government obtained technical assistance from the British government to review conditions at ULATI and drew up a program for rehabilitation. The general manager received the team with hostility and took exception to their report. On another occasion the general manager embarrassed the Uganda government by locking the British technical team out of the factory. The High Commissioner protested and the team withdrew from Uganda. The board met and recommended that the Minister of Industry and Technology dismiss the general manager. The minister and the president ignored frequent requests for the dismissal of the general manager. During the next three years the general manager was able to manage ULATI as he wished; the influence of the board and the managing agents declined to zero. In early 1985, the Uganda government called a general election for December. The general manager resigned to stand for election, and the board and managing agents seized this opportunity to appoint Doii as the acting general manager. In July, General Tito Okello Lutwa overthrew the government in a military coup d'état. Subsequently, another Okello, a nephew of the president, was announced on the radio as the new general manager of ULATI. Doii reverted to his former post of chief accountant. The new general manager was very old and sickly and had retired from public service fourteen years earlier. During the two months that Okello was the general manager, he is reported to have appeared at the factory on not more than five days. In January 1986, General Tito Okello was overthrown by Yoweri Museveni's National Resistance Army. The board reinstated Doii as general manager. It turned out that Okello had never had a

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letter of appointment in accordance with the company's bylaws: Thus, ironically, Doii was the de jure general manager, but Okello was the de facto general manager. Because of Okello's age and physical condition, operationally Doii held effective control of ULATI. The process of role reversal had attained the absurd. The government of Museveni has not interfered in the affairs of ULATI, which has been returned to UDC for management. A recent study has recommended ULATI as one of the eleven mature UDC companies suitable for short-term divestment (i.e., they are in operation, have plants in reasonable condition, can find markets for their output, and do not need major rehabilitation). 8 Investment Strategies and the UDC A 1970s study assesses the UDC's investment strategy: "The UDC's attitude to investments in the early 1950s appeared to be a very simple one. Except for the business ventures that were to be inherited, there was no attempt by the Government to impose specific projects or priorities or to work to an overall plan. For both Simpson and Maini investment policy consisted of 'seeing a likely commercial opportunity, assessing it on its merits and going for it if it looked a reasonable prospect.' A 'reasonable prospect' involved the likelihood of commercial returns and preferably foreign enterprise participation." 9 Investment projects may be classified into small-, intermediate-, and large-scale investments. The average size of UDC enterprises based on investment outlay between 1955-1970 is about 1 million pounds per enterprise. 10 Thus, UDC investments fall into the category of large-scale enterprises. The investment funds were mainly generated by taxing the Uganda Peasant Export Sector (coffee and cotton). The surplus was diverted from the peasant producers. The investments supported import substitution and enterprises that were heavily dependent on imported raw materials and were shielded from open competition. The viability of these enterprises will be severely tested when they are privatized and protection removed. Alongside this large-scale sector developed intermediate enterprises controlled by Asians. When Asians were expelled in 1972 these enterprises ended up in the state sector. Numbering about seven thousand enterprises, they were entrusted to Uganda Departed Asian Properties Custodian Board (DAPCB). They have since been run down through poor maintenance. Efforts are under way to privatize them. Efforts to develop the Small Enterprises Sector have not been effective. There is a lopsided enterprises structure with a narrow, small-scale enterprises base, a bulging intermediate enterprises middle, and about 118 state-owned large enterprises at the top. It is now imperative to shift the investment strategy to pump more money into the base and invest in small-scale enterprises largely dependent on domestic raw material and directed to the export market.

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Between 1952 and 1971, partnership with private capital was an important part of UDC's strategy. Out of thirty-six companies in which UDC held shares, only twelve were almost completely (90-100 percent) controlled by government. In twelve firms the government was a minority owner, and the rest had private ownership ranging from 10-50 percent (see Table 5.1).

Table 5.1

State Share in UDC Subsidiary and Associated Companies, 1952-1971 Percentage 91-100 81-90 71-80 61-70 51-60 41-50 31-40 21-30 11-20 1-10 Total

Number of Companies 12 2 1 2 5 2 3 5 3 1 36

In 1972, following the economic war, the Amin government transferred forty-seven companies from the private sector to UDC. The sudden increase from thirty-six companies to eighty-three placed a heavy managerial and financial burden on UDC. UDC's skilled manpower and working capital were overstretched. In 1974, seventeen companies were removed from UDC: eight to direct ministerial control and nine to public holding corporations. Other firms were transferred to Amin's friends (i.e., privatized). UDC's most profitable companies were transferred, leaving it with the least profitable ones. The transfer of firms was not legally effected, and UDC was not compensated, nor was it repaid loans and advances that it had made to the transferred subsidiaries. UDC lost revenue and reputation. It had been a profit-making and self-financing institution, and now it was dependent on the Treasury. Whereas in 1971 UDC had accumulated reserves of 100 million shillings, by December 1982 these reserves had been wiped out and UDC had accumulated an operating loss of 54 million shillings.

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In 1983 the state controlled thirty-seven manufacturing firms out of eighty-five firms surveyed. In particular, the state controlled the largest firms, including 76 percent of the large firms and 37 percent of mediumsized firms (see Table 5.2).

Table 5.2

Ownership by Size of Firm, 1983 Size (in percent)

Ownership Government Private Total

Small

Medium

Large

Total

4 96

37 63

76 24

44 54

100

100

100

100

N=24

N=27

N=34

N=85

In 1986, the Museveni government dissolved three holding companies, the Uganda Steel Corporation, the National Textiles Board, and the Uganda Cement Corporation, and proposed transferring back to UDC the companies it had lost. UDC would retain the twenty companies it had, and it would receive five companies it had legally lost but without compensation. Finally, it would receive six companies it had lost without legal transfer and without compensation. In 1986, UDC repossessed most of the companies. The companies were returned to UDC in poor shape. Both the UDC and its thirty-one subsidiaries have gone through twelve years of financial and business disorganization. U D C is now expected to be self-financing, "thereby relieving the Treasury of the burden of providing annual subventions." 1 1 The source of income for the UDC will be management fees, secretarial fees, and dividends. "Before 1969 UDC received sufficient dividends to cover all costs and earn a profit. However, in 1972 it had to levy a management fee of 2 percent on sales, which increased to 4 percent in 1984. There is no clear definition of the services provided for this fee or of the methodology of calculating the percentage. As a result of the acceptance of the fee, payment is slow, and UDC is paying significant interest costs." 1 2 The goal of selffinancing will only be achieved if UDC's share capital is increased and its companies increase their earnings.

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The Performance

Politics

ofUDC

On the whole, during the period from 1952 to 1970 UDC had positive indicators of financial performance. The operating surplus—defined as gross profit minus depreciation and audit fees plus taxation and interest on loans—rose from £34,000 in 1952 to £1.8 million in 1970; the rate of return on capital employed rose from 0.67 percent in 1952 to 7.2 percent in 1970; the fixed assets rose from £1.5 million in 1952 to £20 million in 1970. Net profit rose from £14,000 in 1952 to £1.5 million in 1970. Yet it should be noted that the profitability of UDC was derived from several core subsidiaries: Uganda Cement Industry (UCI), Nyanza Textiles (NYTIL), Uganda Consolidated Properties (UCP), and Uganda Crane Industries (CRANE). Most other subsidiaries, especially those established after independence, were loss makers cross-subsidized by the core profit makers. The main loss makers were Agricultural Enterprises (AEL), Uganda Hotels (UH), Tororo Industries and Chemicals (TICAF), Uganda Meat Packers (UMP), Lango Development Company (LDC), and Uganda Livestock Industries (ULI).'3 The financial performance of UDC since 1970 has not been documented because of the upheavals and breakdowns to which UDC was exposed. For the period from 1986 to 1988, a survey of eighteen companies revealed that 5 out of 18 U D C companies made profits in the period covered by their latest available accounts. Most of the enterprises have run operating deficits over each of the last five y e a r s . . . . The financial performance of the U D C group of companies over 1986-1988 has been dismal. The ratio of profits, before tax and interest, to sales (profit margin) during 1988 for all UDC Group companies . . . is negative ( - 9 . 7 percent) compared with a positive (6.4 percent) profit margin of other comparable manufacturing enterprises in the public sector. . . . There is also concern about the solvency and liquidity of many group companies. 1 4

Case Studies Uganda Livestock

Industries

Uganda Livestock Industries Ltd. was incorporated in 1966, with 100 percent of its shares held by UDC. UDC was empowered to appoint the board of directors, which would appoint the general manager. With a loan equivalent to U.S. $2.2 million, part of a U.S. $3.0 million credit, for the First Beef Ranching Development Project granted by the International Development Association (IDA) to Uganda, the company

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established five beef cattle ranches, which it managed successfully until the early 1980s when insecurity halted operations. T h e IDA loan was paid off in 1981. In 1975 the government transferred ULI to the Ministry of Animal Industries, and in consequence of this the board resigned. Nevertheless, the general manager who had been appointed in 1970 continued to hold office. A temporary advisory committee was appointed by the minister responsible for Animal Industries to oversee the management of the company. Because the government directive had not altered the legal status of ULI, the original bylaws still applied. The legal ownership of the company became dubious, with UDC the de jure owner and the ministry the overseer. The ministry did not take part actively in company activities, and after 1975 the sale of breeding and slaughter cattle continued to be the main source of finance until 1983, when looters depleted the c o m p a n y ' s herd. Financial institutions were asked to lend money to ULI for rehabilitation, and in 1984 a loan was secured from Uganda Development Bank (UDB) under the African Development Bank ( A D B ) / U D B Ranch Rehabilitation Project. The Second Beef Ranching Development Project had been proposed by the World Bank during the early 1970s, to be financed either by IDA or any other interested creditor. The Kuwait Fund offered a loan amounting to U.S. $25 million for this purpose, but due to the prevailing insecurity this was shelved until 1985, when an agreement for a U.S. $12 million loan for r e h a b i l i t a t i o n of two ranches was c o n c l u d e d b e t w e e n the R e p u b l i c of Uganda and the Kuwait Fund. Disbursement of this loan c o m m e n c e d during 1988 following the reversion of ULI to UDC. As with most other U g a n d a n enterprises, U L I h a s g o n e t h r o u g h a period of d e c a y and decline. B e t w e e n 1969 and 1971, U L I e x p a n d e d the four ranches, which were developed to a total herd size of about forty thousand head of highly improved cattle. Between 1975 and 1985 the herd size d e c l i n e d to 4 , 7 0 0 h e a d , the m a i n c a u s e of the d r a s t i c r e d u c t i o n being the successive internal civil wars, during which soldiers looted the ranches. Commercial cattle ranching offers the government a prime opportunity to p r o m o t e the private sector. ULI can e s t a b l i s h a c o n s t a n t s o u r c e of improved breeding cattle for cattle ranchers by utilizing large areas of marginal land reclaimed from the tsetse fly (which would be unattractive to private investors acting alone), thus averting reinfestation and offering practical training and employment facilities to school graduates. During the period 1976 through 1978 alone, ULI sold 6 , 1 3 7 Boran breeding heifers, sufficient to start more than twenty medium-sized ranches and which, at the current import price of U.S. $550 per head, would represent foreign currency earnings equivalent to U.S. $3,375,350.

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Associated Paper Industries Ltd. (API) Associated Paper Industries was formed in 1963 as a joint venture: UDC held 25.0 percent of the shares, the Mehta group 37.5 percent, and Muljibhai Madhavan and Company 37.5 percent. After 1972, when the Asians were expelled, the company was supervised by UDC until 1987, when an outside chairman was chosen by the board. According to API's Corporate Plan, the other two shareholders "since their return from exile have shown no interest in the company. They are dormant shareholders. There are indications to the effect that they are indeed not interested in the company and may soon be its competitors." 15 UDC, a minority shareholder of 25 percent, provided a chairman for fifteen years (1972 to 1987). The choice of a chairman outside of UDC was a recognition of the preeminent role of private participation. It was also recognized within UDC that the chairman was taking on too much by trying to chair boards of UDC subsidiary companies. It is easy to understand the outside shareholders' lack of interest in the company. The Corporate Plan states: "The plant is obsolete and has an expected further life of 5 years. Most of the spare parts are no longer in production and are, therefore, difficult to obtain, which makes maintenance difficult. Production has obviously been very low." 1 6 Furthermore, "the company entirely depends on imported materials and, therefore, also on foreign exchange, which is not always available when needed. . . . The company's financial position is very poor. The company is heavily in debts. It has a negligible share capital and limited sources of capital. . . . On the whole, the company has been running at a loss mainly because of lack of production due to shortage of funds and a consequential lack of supply of raw materials." 17 The company has a plan for recovery, which projects that capacity utilization should double from 20 percent in 1988 to 40 percent in 1989 and 80 percent in 1990. However, these plans are not realistic. They assume that raw materials can be stockpiled to overcome delays in foreign exchange allocation, transport, and clearing, and they require replacement of obsolete equipment. Such increases in fixed and working capital will be very expensive to implement, and, given Uganda's economic situation, it is unlikely that sufficient funds will be available. A recent study by a firm of consultants has identified API among sixteen companies suitable for liquidation without further delay because of obsolete plant, lack of markets, or not being in operation. 18 Uganda Cement Industry Ltd, Tororo Uganda cement was incorporated in 1952 and was taken over by UDC shortly thereafter. It began production in 1953; by 1957 capacity had tripled. In 1970 it absorbed a nearby company that produced asbestos

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sheets and pipes. During the period from 1960 to 1971 the company was well managed—in fact, in 1969 it operated above its rated capacity—but during the period from 1970 to 1980 production declined dramatically. In 1978 production was only 10 percent of capacity, and the larger kiln broke down due to lack of spare parts. Production has not recovered because of lack of resources and obsolete equipment. The company has a subsidiary at Hima, which has been plagued by problems typical of the era. The first production line at Hima was started in 1970 and achieved 67 percent capacity utilization. A second line was under construction by Vickers of the United Kingdom. However, under the Amin e c o n o m i c war policy of 1972 all British n a t i o n a l s w e r e e x p e l l e d , so Vickers abandoned the line, which remains incomplete. K H D Humboldt Wedag of West Germany contracted to complete the line, but it too left in 1978 during the liberation war. In 1980 K H D signed a new contract to complete the line, but in 1983 it gave up, due to inadequate funds to buy spares. In the past external financing has been pursued on an ad hoc basis. With the coming of the National Resistance M o v e m e n t g o v e r n m e n t in 1986, the management of Uganda Cement Industry reverted to Uganda Development Corporation, the original owner of the company. Management has since then sought funds to rehabilitate the entire factory. F o l l o w i n g the c o m p l e t i o n of a feasibility study in 1 9 8 7 - 1 9 8 8 , a donors' conference was held in London in April 1989, at which the African D e v e l o p m e n t B a n k , the E u r o p e a n I n v e s t m e n t B a n k , and D e n m a r k ' s International Development Agency (DANIDA) pledged to finance the rehabilitation of the Hima factory. Later on in the year, the financiers visited Uganda for discussions with the government and to appraise the project. Besides rehabilitation of the plant, attention is being given to making a constant electric power supply available. In the meantime, limited production is expected to start at the Hima plant following partial rehabilitation of production line 2, carried out by KHD Humboldt Wedag of West Germany during the course of 1989. Management is still trying to interest financiers in the funding of the Tororo factory complex. The BMB and CMS study has identified Uganda Cement Industry as one of six companies that provide strategic or essential products but have no independent management capacity. These are either new projects or old enterprises that need institutional rehabilitation under UDC management until they are divested in the long run. 1 9 Ugadev Bank Ltd In early 1957 the government decided that UDC needed its own institution to finance industrial development operations. Ugadev was initially set up as a joint venture with Lombard Bank, but in 1962 it was taken over entirely

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