WASHINGTON, D.C., Sep. 28 -- The International Finance Corporation (IFC) released today Privatization: Principles and Practice, a study that examines IFC's experience with nearly 150 privatization advisory projects and investments in 54 developing countries.
The study identifies key principles that guide successful privatization programs, including: balancing political and economic objectives; using flexibility in designing privatization programs; and maximizing transparency, which is crucial to securing popular support for the process.
"The study shows that privatization is overwhelmingly positive -- it delivers benefits for national economies, privatized firms, and local consumers in the vast majority of cases," said Mr. Wilfried E. Kaffenberger, Vice President of IFC. "This is why IFC emphasizes getting transactions completed in its privatization work. Once initial privatizations are carried out, it becomes easier for governments to build a political consensus for further reform," he added.
In 70 percent of the privatization transactions in which IFC has been involved, there have been clear economic benefits for the privatizing countries. In Chile, the transfer of ownership from public to private hands has resulted in a doubling of the telephone network in four years. Privatization has dramatically reduced railroad subsidies in Argentina, expanded export earnings for Poland, and widened the range of banking services in the Czech Republic and Egypt. The newly privatized companies have generally benefitted as well: Two-thirds of the companies in the IFC study saw profitability improve after privatization.
IFC focuses on developing models for privatization that can be replicated elsewhere. In Russia, a successful model program for privatizing agricultural land in Nizhny Novgorod province has since been expanded to three additional provinces. Similarly, IFC's Russian model for privatizing small shops has been replicated in Ukraine and Belarus.
Four out of five IFC privatization projects have been pioneering efforts, such as the first privatization in a country or a key sector. For example, IFC invested in the first privatized water system in the developing world -- in Buenos Aires, Argentina -- which, in two years, has expanded and improved service significantly. Similarly, in Pakistan, the Corporation invested in the country's first private port terminal, in Karachi.
IFC's privatization efforts have taken place in the context of challenging, high-risk markets, many of which have only recently been opened to private finance. IFC has also played a unique role in that it has been involved both as advisor to governments prior to privatization and as investor in newly privatized companies. Seventy-two advisory assignments and 86 investments in privatization projects are examined in the report.
IFC's report complements a forthcoming World Bank privatization study entitled "Bureaucrats in Business: The Economics and Politics of Government Ownership," which examines public enterprise reform and privatization in developing and transition economies. The Bank study also underscores the central role of political factors in achieving successful reform. The Bank plays a major role in working with governments to promote privatization; IFC assists by using successful transactions to broaden the constituency for reform, enabling political goals to be met and barriers to be overcome.
In its finding that privatization is beneficial in the majority of cases, the IFC report helps explain why privatization continues to gain momentum in developing countries. However, there is still much unfinished business. The World Bank study notes that state-owned enterprises account for nearly as large a share of economic activity in the developing world today as they did two decades ago. Given the large number of productive enterprises still in public hands, privatization work will remain an IFC priority for many years to come.
The IFC study was written by David Donaldson and Dileep M. Wagle of the Corporate Planning Department and is the first volume in IFC's new Lessons of Experience publications series. IFC is a member of the World Bank Group and is the largest multilateral source of equity and loan financing for private sector projects in developing countries.
