Privatization in Developing Countries:

What Are the Lessons of Recent

Experience?

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Saul Estrin and Adeline Pelletier

This paper reviews the recent empirical evidence on privatization in developing countries,
with particular emphasis on new areas of research such as the distributional impacts of
privatization. Overall, the literature now reflects a more cautious and nuanced evalua-
tion of privatization. Thus, private ownership alone is no longer argued to automatically
generate economic gains in developing economies; pre-conditions (especially the regulatory
infrastructure) and an appropriate process of privatization are important for attaining a pos-
itive impact. These comprise a list which is often challenging in developing countries: well-
designed and sequenced reforms; the implementation of complementary policies; the creation
of regulatory capacity; attention to poverty and social impacts; and strong public communi-
cation. Even so, the studies do identify the scope for efficiency-enhancing privatization that
also promotes equity in developing countries.

There is a large body of literature about the economic effects of privatization. How-
ever, since it was mainly written in the 1990s, there was typically limited emphasis on
issues which have come to the fore more recently, as well as more recent developments
in the evidence about privatization itself, much of it from developing economies. This
motivated us to write this paper, which summarizes the evidence about the impact of
recent privatizations, not only in terms of firms’ efficiency but also with regard to the
effects on income distribution. In addition, we are particularly attentive to the pro-
cess of privatization in developing countries, notably with respect to the regulatory
apparatus enabling successful privatization experiences.
When governments divested state-owned enterprises in developed economies, es-
pecially in the 1980s and 1990s, their objectives were usually to enhance economic
efficiency by improving firm performance, to decrease government intervention and
The World Bank Research Observer
© The Author(s) 2018. Published by Oxford University Press on behalf of the International Bank for Reconstruction and
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doi: 10.1093/wbro/lkx007 33:65–102
increase its revenue, and to introduce competition in monopolized sectors (Vickers
and Yarrow 1988). Much of the earlier evidence about the economic impact of pri-
vatization concerned these topics and was based on data from developed countries
and later, transition countries. These findings have been brought together in two pre-
vious surveys, by Megginson and Netter (2001) and Estrin et al. (2009) respectively.
The former assesses the findings of empirical research on the effects of privatization
up to 2000, mainly from developed and middle-income countries, while the latter
concentrates on transition economies including China, over the 1989 to 2006 pe-
riod.1 However, the experiences from the wave of privatizations that have occurred

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in developing countries before and since these studies warrant a new examination of
the impact of privatization in the context of the development process.
The tone of the privatization debate has evolved in recent years in interna-
tional financial institutions as privatization activity has shifted towards developing
economies, and as a consequence of the difficulties of implementation and some pri-
vatization failures in the 1980s and 1990s (Jomo 2008). As a result, more empha-
sis in policy-making is now being placed on creating the preconditions for successful
privatization. Thus, in place of a simple pro-privatization bias characteristic of the
Washington consensus (Boycko, Shleifer, and Vishny 1995), it is now proposed that
governments should first provide a better regulatory and institutional framework, in-
cluding a well-functioning capital market and the protection of consumer and em-
ployee rights. In other words, context matters: ownership reforms should be tailor-
made for the national economic circumstances, with strategies for privatization being
adapted to local conditions. The traditional privatization objective of improving the
efficiency of public enterprises also remains a major goal in developing countries, as
does reducing the subsidies to state-owned enterprises (SOEs).
This article therefore reviews the recent evidence on privatization, with an empha-
sis on developing countries. The first section presents some stylized facts. The next
section examines the effects of privatization in terms of firms’ efficiency and perfor-
mance. In the following section, we go on to examine the distributional impacts of
privatization. Policy recommendations are developed in the final section.

Privatization Trends: Stylized Facts

Privatization Trends Since the Late 1980s
The data on privatization prior to 2008 (with a regional breakdown) is sourced from
the World Bank Privatization database but unfortunately this was discontinued in
2008 and no consolidated data is available after that date. Since we have not been able
to find disaggregated data post-2008, we therefore present world aggregates, based on
the Privatization Barometer database.
The early literature focused on developed economies and Western Europe repre-
sented roughly one-third of global privatization proceeds over the period 1977 to

66 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
Figure 1. Value of privatisation transactions in developing countries by region, 1988 to 2008

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Source: World Bank, Privatization database. Note: comparable data not available after 2008.

2002 (Roland 2008). Even so, many of these deals only concerned minority stakes
of SOEs (Bortolotti and Milella 2008). There were also spectacular numbers of priva-
tizations during the transition process after 1990 in Central and Eastern Europe, with
proceeds totaling $240 billion to 2008, in addition to widespread free or subsidized
allocation of shares in former SOEs (Estrin et al. 2009). The revenues from privati-
zation have been more limited in Africa, the Middle East and South Asia, with total
proceeds below $50 billion for each (see figure 1).2 However, proceeds are on par with
or above Europe once they are expressed as a percentage of GDP.
For the rest of Asia, the picture is rather different. While South Asia has experi-
enced only a limited number of privatizations (especially India), this was not the case
in East Asia, where total privatization proceeds represented 30% of the world’s total
($230 billion) over the 1988 to 2008 period. China, in particular, stands out. Over a
25-year period, the Chinese government has encouraged innovative forms of indus-
trial ownership, especially at the subnational level, that combine elements of collec-
tive and private property (Brandt and Rawski 2008). New private entry and foreign
direct investment have also been encouraged. As a result, by the end of the 1990s,
the non-state sector accounted for over 60% of GDP and state enterprises’ share in
industrial output had declined from 78% in 1978 to 28% in 1999 (Kikeri and Nellis
2004). The OECD estimated the state-owned share of GDP had further declined to
29.7% by 2006 (Lee 2009).
Finally, in Latin America and especially in Chile, large-scale privatization programs
have been launched, especially in the infrastructure sector, starting in 1974 in Chile
and peaking in the 1990s. Between 1988 and 2008, the total privatization proceeds
in Latin America amounted to $220 billion (28% of total world proceeds).

Estrin and Pelletier 67

Figure 2. Worldwide Privatization Revenues 1988 to 2015 (billions of USD)

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Note: 2015 is an estimate as August 30, 2015. Source: Privatization Barometer Available at:
http://www.privatizationbarometer.com/.

One needs to be cautious, however, when interpreting the raw data because of dif-
ferences in the size of economies. The differences between the privatization experi-
ence of Africa, Asia, and Europe become less striking when proceeds are normalized
by GDP, though privatization revenue to GDP is high in Latin America, representing,
on average, 0.5% of GDP over the period.

Privatization Trends Since 2008

The five years to 2015 have been marked by the predominant role of China in global
privatizations, while the EU’s share has been below its long-term average of 45% of
the world’s total proceeds, running at only one-third of worldwide totals, on average.
According to the Privatization Barometer (PB) Report 2013–2014, global privatiza-
tion total proceeds exceeded $1.1 trillion from January 2009 to November 2014, with
$544 billion of divested assets between January 2012 and November 2014.3
In addition, the 20-month period beginning in January 2014 witnessed privatiza-
tions totaling $431.4 billion (PB report 2015). This is far more than any comparable
period since the beginning of the privatization programs in the U.K. in the late
1970s (see figure 2), though as noted below, a significant part of this was driven
by the unwinding of positions taken in banks by governments during the financial
crisis.
China has consistently been one of the top privatizers from 2009 to 2015; it was
the second-largest privatizer in 2009 and the first in 2013, 2014, as well as the

68 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
8-month period of January to August 2015. Aggregate privatization deals in China
totaled more than $40 billion in both 2013 and 2014 and a spectacular $133.3 bil-
lion in the first eight months of 2015 through 247 sales. The bulk of these privatiza-
tion revenues came from the public and private placement offering of primary shares
by SOEs (PB report 2015). However, the state’s equity ownership stake was gener-
ally only reduced indirectly, by increasing the total number of shares outstanding
(PB report 2015). In fact, Hsieh and Song (2015) have shown that almost half of the
state-owned firms in 2007 and nearly 60 percent of them in 2012 were legally reg-
istered as private firms. The term used in China for this ownership change is that the

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large state-owned firms are “corporatized” rather than privatized. The typical form
this “corporatization” takes is that of a minority share traded in the stock market and
merged into a large state-owned conglomerate, the controlling shareholder (Hsieh
and Song 2015).
The next-leading country in terms of privatization proceeds after China is the
United Kingdom, but it is far behind, with total proceeds of $17.2 billion in 2014
(against $7.8 billion in 2009).
In the EU as a whole, with countries addressing their government deficits post-
2008, privatization proceeds rose to a five-year peak in 2013, to $68.0 billion, and
a nine-year peak of $77.6 billion in 2014, while the annualized value of privatiza-
tions during 2015 (based on the first 8 months) reached $63.3 billion. This repre-
sents more than one-third of the global annual totals in 2014, but is only 20.0% of
worldwide totals in the first 8 months of 2015, and lower than the long-run average
EU share of about 44.6% (PB report 2015). This relative decline of EU privatization
proceeds is also reflected in the fact that China alone generated revenues from priva-
tization almost as great as did the EU countries combined during 2015 ($68.0 billion
versus $77.6 billion for China; PB report 2015).
China and India were the two top emerging countries by total privatization rev-
enues in 2015. The five largest single deals outside the developed world in 2014 were
realized in China, with the recapitalization and primary share offering of CITIC Pa-
cific Ltd, the private placement of BOE Technology Group, the primary-share initial
public offering (IPO) of Dalian Wanda Commercial, and finally the primary-share IPO
of CGN Power and of HK Electrical Investments Ltd.
In the following section, we focus on the privatization experience in Africa and
South Asia. While the privatization programs in Eastern Europe, China, and Latin
America are among the most important in terms of total proceeds, a rich literature
already exists discussing them (see Estrin et al. 2009 on transition economies and
Estache and Trujillo 2008 on Latin America). Moreover, while privatization in Latin
America and Eastern Europe culminated in the 1990s, much privatization in Africa
and South Asia is more recent (Roland 2008).

Estrin and Pelletier 69

Privatization Patterns in Africa: A Few Countries Only

Privatization programs in sub-Saharan Africa (SSA) occurred in successive waves,

with some countries privatizing much earlier than others (Bennell 1997). The first
group to start such programs in the late 1970s to early 1980s was composed of fran-
cophone West African countries (e.g., Benin, Guinea, Niger, Senegal, and Togo) but
their progress was limited. The second group, both Anglophone and Francophone
countries (Ghana, Nigeria, Ivory Coast, Mali, Kenya, Malawi, Mozambique, Mada-
gascar, and Uganda), started privatizing in the late 1980s. These programs were of-

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ten influenced by pressure from the international financial institutions (Nellis 2008)
though, as noted by Bennell (1997), no significant progress was made anywhere
except Nigeria until the late 1990s. The final group, the “late starters”, did not be-
gin to privatize until the early to mid-1990s. Among this group, Tanzania, Burkina
Faso and Zambia have shown a strong political commitment to privatization, whereas
in the other three countries (Cameroon, Ethiopia, and Sierra Leone), only minimal
progress was made in the 1990s.

Privatization in the 1990s: A Slow Start.

Only a minority of SOEs in SSA were subject to privatization over the period 1991
to 2001, and very little privatization has taken place outside of South Africa,
Ghana, Nigeria, Zambia, and Cote d’Ivoire (Nellis 2008). African states have pri-
vatized a smaller percentage (around 40%) of their SOEs than in Latin America
and the transition economies (Nellis 2008). In addition, privatization has gener-
ally concerned smaller manufacturing, industrial, or service firms. Bennell (1997)
also reports that smaller SOEs were usually targeted during the initial stages
of privatization programs in SSA because they were easier to sell. Five indus-
tries in particular were prominent in most programs: food processing, alcoholic
beverages, textiles, cement and other non-metallic products, and metal products.
These industries accounted for 60% of the total proceeds from the sale of man-
ufacturing SOEs during 1988 to 1995 (Bennell 1997), if we exclude the excep-
tional and large sale of ISCOR (Iron and Steel Industrial Corporation) in South
Africa.
Bennell (1997) explains that the slow progress in privatization in the 1990s was
due to a lack of political commitment compounded by strong opposition from en-
trenched vested interests (senior bureaucrats in ministries and SOEs themselves, as
well as public sector workers concerned about their job security). For instance, in
Cameroon, only five of the thirty SOEs scheduled for privatization were sold by the
end of 1995. In other countries such as Nigeria, the privatization program started
well but then stalled. Despite the fact that Nigeria’s program had been one of the most
successful in SSA in the 1990s, it was suspended in early 1995 in favor of a mass
program of “commercialization”. In Madagascar, the privatization program was also

70 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
suspended in mid-1993 due to serious mismanagement and its subsequent unpopu-
larity. In addition, Bennell (1997) reports that there were nationalist concerns about
the possible political and economic consequences of increased foreign ownership as
a result of privatization.
However, in the late 1990s, certain political constraints lifted. First, a growing
number of governments in SSA started to undertake significant economic reforms,
under the aegis of the World Bank and the IMF, in which privatization was an in-
tegral part. Reforms and privatization were also progressively being accepted by the
population. In addition, important political liberalization, with multi-party elections,

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broke with the previous statist policies, and created some room for maneuver to im-
plement privatization programs. Finally, the weak financial position of SOEs in many
SSA countries and their rapid deterioration, in conjunction with the fiscal crisis the
state experienced in the 1990s, also opened the way for a sell-off of SOEs to raise gov-
ernment revenues and reduce expenditures.
Despite this stronger commitment, Nellis (2008) notes that there were actually
only a few privatization deals in Africa in the 1990s, mainly in infrastructure, and
even in these the state retained significant minority stakes; around one-third of the
shares on average were retained. Between 1988 and 1999, the total proceeds from
privatization in SSA amounted to $9.8 billion, with the manufacturing and services
sector accounting for 36% of the total, infrastructure 28%, the energy sector 17%,
the primary sector 14%, and the financial (and other) sector 6% (see World Bank Pri-
vatization Database).

The Early to Mid-2000s; More Rapid Progress.

There were some important privatizations in SSA between 2000 and 2008, and to-
tal proceeds increased to $12.654 billion (see World Bank Privatization Database).
Nigeria comprised 51% of this amount, followed by Kenya (10%), Ghana (9%) and
South Africa (6%). Infrastructure4 represented 73% of the total amount of the deals,
followed by the manufacturing and services sector5 (17%), the financial sector6 (6%),
energy7 (4%) and the primary sector8 (1%; see World Bank Privatization Database).

Privatization Post-2008: A Slowdown.

Privatization activity slowed in SSA with the economic downturn after 2008. One
notable exception was Benin, with the privatization of the cotton and the public util-
ity sectors. The concession for the operation of the container terminal of the Port of
Cotonou and the majority stake in the cement company were awarded to a strategic
private investor in September 2009 and March 2010, respectively, and the privatiza-
tion of Benin Telecom was launched in 2009 (this is still ongoing; IMF 2010). Nige-
ria was also notable for its sale of 15 electricity-generating and distribution compa-
nies in 2013, raising $2.50 billion (see Megginson 2014). In Chad, the government

Estrin and Pelletier 71

announced in 2015 that it was re-launching the sale of 80% of Société des Telecom-
munications du Tchad (Sotel-Tchad), after the previous attempt collapsed in 2010.
Because the World Bank Privatization Database does not have data on privatization
after 2008, one cannot compare the aggregated privatization proceeds post-2008 to
those of earlier decades.

Privatization in South Asia: A Slow Opening

Privatizations in South Asia have traditionally been rare, despite the notable ineffi-

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ciency of SOEs (Gupta 2008). The governments’ reluctance to privatize can be partly
explained historically, with the government’s close involvement in the establishment
of an industrial base in the postcolonial era, especially in India (Gupta 2008). Partic-
ular sectors had been reserved exclusively for SOEs, such as the infrastructure sector
and capital goods and raw materials industries such as steel, petroleum, and heavy
machinery. In addition, the government nationalized many loss-making private com-
panies; more than half of the firms owned by the Indian federal government were
loss-making in the 1990s.
Following the balance of payment crisis of 1991, the Indian government imple-
mented a series of reforms under the Industrial Policy Resolution of 1991 to encour-
age private enterprise. Privatization was initiated mainly through two approaches:
partial privatization and strategic sales. However, the former was very limited, with
the government selling only minority equity stakes until 2000, and without trans-
ferring management control. Political uncertainty prevented the emergence of a
coherent privatization policy. Majority stakes sales and the transfer of management
control were only conducted after the elections of 1999, and even then, until 2004
the government retained an average ownership stake of 82% in all SOEs (Gupta
2008).
The stalled privatization program was revived in 2010 with a secondary offering
of shares in National Thermal Power Corporation Ltd (NTPC), which owns 20% of
India’s power generation capacity (Gupta 2009). However, the sale of the $1.85 bil-
lion block of shares only reduced the government’s stake by an additional 5%, leav-
ing 85% still under government control. In addition, the process of privatization was
viewed as poor, with the secondary offering subscribed only 1.2 times, and even this
after assistance from government-owned financial institutions.
In summary, between 2000 and 2008, the proceeds of privatization in South Asia
totaled $ 17.45 billion, the bulk being realized in India (see figure 3) (55%) followed
by Pakistan (43%). Afghanistan, Bangladesh, Nepal, and Sri Lanka provided the re-
maining 2% (see World Bank Privatization Database). Between 2000 and 2008, the
infrastructure sector represented 51% of the proceeds, followed by the energy sector
(26%), the financial sector (12%), manufacturing and services (10%), and the pri-
mary sector (2%) (see World Bank Privatization Database).

72 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
Figure 3. Indian Revenues from Privatization

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Source: World Bank Privatization database.

The Effects of Privatization: Efficiency and Firm Performance

Overall, as we report below, the studies on developing economies show that a move
from state to private ownership alone does not automatically yield economic gains.
Rather, a number of factors have been found to influence the success of privatization,
namely:

• Which firms are privatized; there can be a positive (or negative) selection effect.
• Whether privatization is total or partial; evidence suggests that the former is more benefi-
cial.
• The regulatory framework, which in turn depends on the institutional and political envi-
ronment.
• The characteristics of the new owners; foreign ownership has been associated with superior
business performance post-privatization, especially relative to “insider” ownership (priva-
tization to managers and workers).9
• Effective competition. This has been found to be critical in bringing about improvements in
company performance because it is associated with lower costs, lower prices, and higher
operating efficiency.10

In the following sub-sections, we introduce the estimation techniques that have

been used to measure the impact of privatization on firms’ performance, and then ex-
amine privatization experiences in three sectors (banking, telecommunications, and

Estrin and Pelletier 73

utilities) in developing countries. We also provide an analysis of the robustness of the
evidence in the literature about the impact of privatization.

Measuring Efficiency and Firms’ Performance Post-Privatization

As Megginson and Sutter (2006) note, researchers face numerous methodological

problems when they analyze the economic effects of privatization. In particular, data
availability and consistency, especially in developing countries, and sample selection
bias—occurring, for example, if the “best” firms are privatized first—represent key

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issues. Other problems arise when using accounting data: the determination of the
correct measure of operating performance, the selection of an appropriate bench-
mark and statistical tests are important challenges. These issues are germane to the
interpretation of the results of the studies surveyed below.
A variety of methods have been used to measure the impact of privatization on
firms’ post-privatization performance and efficiency, measured in a number of ways
including return on equity, output growth, labor productivity and changes in cost and
income. We distinguish between two different empirical approaches. The first con-
sists of comparing the performance of government-owned firms to that of privately-
owned firms. The second approach consists of comparing pre-and post-divestment
performance for companies privatized via share issues (public offerings; Megginson,
Nash, and van Randenborgh methodology).

Comparing Government-owned Firms to Privately-owned Firms

An obvious way to examine the impact of privatization is to compare the perfor-
mance of government-owned to privately-owned firms. Studies in this tradition com-
pare post-privatization performance changes with either a comparison group of non-
privatized firms or with a counterfactual. However, important methodological issues
arise, especially in the earlier studies. First, it is difficult to determine the appropriate
set of comparison firms, especially in developing countries where the private sector is
limited. Second, selection effects and endogeneity may bias the comparison, as factors
determining whether the firm is publicly or privately owned are also likely to affect
performance (Gupta, Ham, and Svejnar 2008).

Single Country or Single Industry Comparisons of Costs and Productivity Growth

of Private and Government-Owned Firms.
One of the first studies to compare SOE and private firm performance is that of
Ehrlich et al. (1994). These authors used a sample of 23 comparable interna-
tional airlines (18 from developed countries and 5 from developing/emerging coun-
tries) of different ownership categories over the period 1973 to 1983 for which
they have data on cost and output for comparable goods. These authors find a

74 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
significant association between ownership and firm-specific rates of productivity
growth. Interestingly, the empirics also suggest that the benefits derive primarily from
complete privatization of the firm, and that a partial change from state to private
ownership has little effect on long-run productivity growth. Other studies have em-
ployed a similar approach examining differences in efficiency between private and
government-owned firms within a specific country, such as Majumdar (1996) for In-
dian firms and Tian (2000) with Chinese firms. These authors both find that private-
sector firms are more efficient. However, these results are not highly robust from
the perspective of contemporary methods, as they do not directly address selection

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issues.
Concerning studies using a counterfactual approach, one can cite the influential
study by Galal et al. (1994), which was sponsored by the World Bank. These authors
compare the actual post-privatization performance of twelve large firms in the air-
lines and utilities industry in Britain, Chile, Malaysia, and Mexico to a counterfac-
tual performance. Further, they estimate net welfare gains in eleven of the twelve
cases considered, equaling on average 26 percent of the firms’ pre-divestiture sales.
La Porta and Lopez-de-Silanes (1999) study privatization in Mexico and find that pri-
vatized Mexican SOEs rapidly close a large performance gap with industry-matched
private firms that had existed prior to divestment. These authors find that output in-
creases by over 50% and that the privatized firms reduce employment by half, while
the remaining workers see a significant pay rise.

Cross-country, Multi-industry Comparisons of X-efficiency and Profitability Ratio

of Private and Government-owned Firms.
Another approach has been to exploit a multi-industry, multi-national cross-
sectional time series to analyze the effects of government ownership on efficiency. The
advantage of this method is that it captures differences that are not apparent in single-
country or single-industry series, and the results are therefore methodologically more
soundly based. In their seminal work, Boardman and Vining (1989) use measures of
X-efficiency and profitability ratios of the 500 largest non-U.S. manufacturing and
mining corporations in 1983 (“The International 500”; Fortune 1983). Privately-
owned firms are found to be significantly more profitable and productive than state-
owned and mixed ownership enterprises, but mixed enterprises are no more profitable
than SOEs. Another important study is that of Frydman et al. (1999), which com-
pares the performance of privatized and state firms in the transition economies of
Central Europe in 1994 using a fixed-effects model. To control for the possibility that
better firms are selected for privatization, these authors compare the pre-privatization
performance of managerially-controlled firms with those controlled by other own-
ers. Frydman et al. (1999) find that privatized firms perform better than the state-
owned firms but that the performance improvement is related to revenue improve-
ment rather than cost reduction in privatized firms.
Estrin and Pelletier 75
 As noted, governments sequence privatizations strategically, often leading the
most profitable firms to be privatized first (Gupta, Ham, and Svejnar 2008; Dinc and
Gupta 2011). To control for selection and endogeneity biases, the latest studies have
employed more advanced econometric techniques including differences in difference,
triple differences matching methods, and instrumental variable methods.
For instance, Dinc and Gupta (2011) examine the influence of political and finan-
cial factors on the decision to privatize government-owned firms in India using data
from the 1990–2004 period. They find that profitable firms and firms with a lower
wage bill are likely to be privatized early and that the government delays privatiza-

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tion in regions where the governing party faces more competition from opposition
parties. The results therefore suggest that firms’ financial characteristics have a sig-
nificant impact on the government’s decision to privatize. This raises an identification
issue for evaluating the effect of privatization on firm performance: if more profitable
firms are more likely to be privatized, we may overstate the impact of privatization on
profitability when we compare the performance of government-owned to that of pri-
vatized firms. The authors then proceed to use political variables as instruments for
the privatization decision, adopting a two-stage least squares treatment effects regres-
sion. After addressing the selection bias, they find that privatization still has a positive
impact on performance in India.

Comparing Pre-post Divestment Sales and Income Data for Companies Privatized
by Public Share Offering

This set of studies examines the effects of privatization on firm performance by

comparing pre- and post-divestment data for companies privatized via public share
offerings. Each firm is compared to itself (a few years earlier) using inflation-adjusted
sales and income data. The first study using this methodology is by Megginson,
Nash, and van Randenborgh (1994). As Megginson and Netter (2001) note, this
methodology suffers from several drawbacks, among which selection bias is probably
the greatest concern, since privatizations through share sales—Share Issue Privati-
zation (SIPs)—represent the largest companies sold during a privatization program.
Another weakness is that the Megginson, Nash, and van Randenborgh methodology
can only examine simple accounting variables (assets, sales, etc.), which is an issue
when comparing accounting information at different points in time and in different
countries. Most of the studies in this tradition also imperfectly account for macroeco-
nomic or industry changes in the pre- and post-privatization window (see Megginson
and Netter 2001, for a critique). These studies also cannot account for the impact on
privatized firms of regulatory or market-opening initiatives that are often launched
in parallel with privatization programs. However, the Megginson, Nash, and van
Randenborgh methodology allows the analysis of large samples of firms from
different industries, countries, and time periods and, while carrying the risk of

76 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
selection bias, SIP samples contain the largest and most (politically) important
privatizations.
Most of these studies do identify a significant improvement in company perfor-
mance, post-privatization, though methodological reservations remain. Research in
this tradition has focused on specific industries (banking [Verbrugge, Owens, and
Megginson 2000] and tele-communications [D’Souza and Megginson 2000]); has
used data from a single country (Chile [Maquieira and Zurita 1996]) and employed
multi-industry, multinational samples. However, the significance of many of the op-
erating and financial improvements is not robust to adjustments for changes experi-

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enced by other firms over the study period.
A very recent work by Li et al. (2016) overcome the empirical limitations of the
previous SIPs studies mentioned above by employing a triple difference approach.
The authors are able to separate the pure privatization effect from the listing ef-
fect, using a database of 204 Chinese SIPs from 1999 to 2009 matched with other-
wise comparable state-owned enterprises and privately-owned firms. The first double-
difference compares the performance change of SIP firms before and after listing with
the performance change of a control group of fully state-owned and unlisted SOEs to
capture the combined “SIP effect” of going public and privatizing. The second double-
difference compares the performance change of privately-owned firms before and af-
ter their listing with the performance change of a control group of privately-owned
firms that remain unlisted. This captures the “pure listing effect”. These authors ob-
tain the “pure privatization effect” by taking the difference between these two double
differences. Interestingly, they continue to find a positive impact from privatization us-
ing this exacting methodology: they find a significant positive increase in profitability
post-SIP in divested Chinese state-owned companies, even after the negative IPO list-
ing effect is taken into account.

Empirical Evidence to Date in Developing Countries

In this section, we summarize the empirical evidence to date about the effects of pri-
vatization on firms’ performance and efficiency in developing countries, drawing on
the discussion of methodology outlined above. The sectors covered include banking,
telecommunications, and utilities. To examine the reliability of the evidence in draw-
ing policy conclusions, we classify the papers reviewed into four categories depending
on the quality of the sample and the robustness of the methods used.

The Banking Sector

The studies reviewed by Clarke, Cull, and Shirley (2005), which focus on develop-
ing countries and employ the Megginson, Nash, and van Randenborgh methodol-
ogy or a stochastic frontier approach, find that bank performance usually improved

Estrin and Pelletier 77

after privatization. For instance, Boubakri et al. (2005), applying the Megginson,
Nash, and van Randenborgh methodology to analyze 81 bank privatizations in 22
low- and middle-income countries, find that some measures of performance improved
after privatization, but that this pattern was not common across countries; environ-
mental factors also played a role. The study by Beck, Cull, and Jerome (2005) in Nige-
ria shows that privatization can improve bank performance, even when the macroe-
conomic and regulatory environment is inhospitable and the government sells the
weakest banks. However, Beck, Cull, and Jerome argue that an adverse macroeco-
nomic and regulatory environment reduces the benefits of privatization.11 Azam, Bi-

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ais, and Dia (2004) also show (both theoretically and empirically) the benefits of hav-
ing a strong, independent regulatory agency to ensure that privatized banks play an
efficient role in financial development.
The studies surveyed by Clarke, Cull, and Shirley (2005) also find that bank pri-
vatization has a greater positive effect when it is total rather than partial. This result
has been found in transition countries (Bonin, Hasan, and Wachtel 2005) as well as
in Brazil (Beck, Crivelli, and Summerhill 2005) and Nigeria (Beck, Cull, and Jerome
2005)12 . Furthermore, there is evidence that privatization boosts competition in the
banking sector. For instance, Otchere (2005) examines share-issue privatizations in
nine countries using the Megginson, Nash, and van Randenborgh methodology and
finds that rival banks suffered abnormally negative returns following privatization an-
nouncements, which suggests that shareholders expected more intense competition
and lower returns.
Thus, evidence suggests that performance improves more when the government
fully relinquishes control; when banks are privatized to strategic investors rather
than through share issues; and when bidding is open to all, including foreign banks
(Clarke, Cull, and Shirley 2005; Megginson 2005). A more recent paper by Clarke,
Cull, and Fuchs (2009), which examines the privatization of Uganda Commercial
Bank (UCB) to the South African bank Stanbic, shows that these elements of best
practice also apply when the banking sector is concentrated and under-developed.
The government fully relinquished control to a strategic investor in an open sales pro-
cess that allowed foreign participation, and the authors found that profitability im-
proved post-privatization with no evidence that outreach declined. A similar impact
of privatization to a foreign bank has been found in the case study of the privatization
of Tanzania’s national bank of commerce to the Dutch Rabobank (Cull and Spreng
2011).

The Telecommunications Sector

One of the first telecom studies focused on developing countries, by Wallsten (2001),
used a panel of 30 African and Latin American countries from 1984 to 1997 with a
methodology similar to Megginson, Nash, and van Randenborgh. Overall, the author

78 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
finds that competition is significantly associated with increases in per capita access
and decreases in costs. However, privatization alone is associated with few benefits,
and is negatively correlated with connection capacity. In addition, privatization only
improves performance when coupled with effective and independent regulation and
increases in competition.
More recently, Gasmi et al. (2013) have examined the impact of privatization of
the fixed-line telecommunications operator on sector performance, analyzing the out-
comes of privatization reforms in a 1985 to 2007 panel dataset on a selection of 108
countries (including OECD countries, Asia, Africa, Latin America). These authors find

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that the impact of privatization on sector outcomes (fixed-line deployment, cellular
deployment, labor efficiency, price of fixed-line) was positive in the OECD countries,
Central America, and the Caribbean, and in resource-scarce coastal Africa and Asia.
However, the impact was negative in South America and in African resource-scarce
landlocked countries, and no significance was identified in resource-rich African
countries.
Gasmi et al. (2013) note that countries with successful privatizations have devel-
oped their infrastructure through the creation of appropriate institutional structures
which have improved the effectiveness of infrastructure policies, and that the cov-
erage of networks increased thanks to the additional capital available with privati-
zation. In contrast, privatization outcomes proved to be poor in South America, in
both resource-scarce landlocked African countries and resource-rich African coun-
tries due to weak contractual design and inadequate enforcement of policies in the in-
frastructure sector, as well as insufficient aggregate demand. In the absence of strong
state capacity, competition appeared to be a more effective instrument to foster per-
formance than privatization.
The extent of infrastructure privatization also diverged across regions. While al-
most all OECD countries have privatized their telecommunications utilities, the rate
of privatization is only around 70% in Latin American, Asian, and African resource-
scarce coastal countries. In African resource-scarce landlocked and resource-rich
countries, the percentage of privatized infrastructure in telecommunications is even
lower, at around 40% and 30%, respectively. Overall, the study by Gasmi et al. (2013)
shows that there were limited privatization effects on network expansion, and that
productive efficiency did not increase in all the regions post-privatization. As such,
the authors conclude that there is no unique model of reform for infrastructure sec-
tors.

The Utilities Sector

Turning to water privatization, Estache and Rossi (2002) estimate a stochastic cost
frontier using 1995 data from a sample of 50 water companies in 29 Asian and
Pacific countries. These authors find that efficiency is not significantly different in

Estrin and Pelletier 79

private and public companies. Kirkpatrick, Parker, and Zhang (2006) use a question-
naire survey on water utilities in Africa, covering 13 countries and 14 utilities that
reported private sector involvement, and undertake data envelopment analysis and
stochastic cost frontier techniques. These authors do not find strong evidence of per-
formance differences between state-owned water utilities and water utilities involving
some private capital. The authors consider that this result is related to the technol-
ogy of water provision, the costs of organizing long-term concession agreements, and
regulatory weaknesses. In particular, the authors argue that the nature of the prod-
uct severely restricts the potential for competition and therefore the efficiency gains.13

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This means rivalry under privatization must derive from the form of competition for
the market—competition to win the contract or concession agreement. But, as the
authors explain, transaction costs can be high in the process of contracting for water
services provision; for example, the costs of organizing the bidding process, monitor-
ing contract performance, and enforcing contract terms where failures are suspected.
The importance of transparent competition for the market to achieve efficiency gains
and prevent the grabbing of assets by political cronies was also evidenced by more re-
cent research by Tan (2012) in the context of private participation in infrastructure
(PPI) in water in Malaysia. The author shows that the efficiency gains of water pri-
vatization (measured by water loss and unit costs) were inconclusive over the period
2001 to 2008. Despite this, and the subsequent renationalization of water assets, PPI
continues to be promoted—it is being recast in the form of management contracts—
because it provides captive rents. This is also evidenced in the “cherry-picking” of
segments and areas for privatization: private sector participation is concentrated in
the more lucrative water treatment segment and higher income states, leaving the
less profitable segments and (more rural) areas to the public sector.
In terms of privatizing electricity, the study of Zhang, Parker, and Kirkpatrick
(2008) provides an econometric assessment using panel data for 36 developing and
transition countries over the period 1985 to 2003. These authors examine the im-
pact of these reforms on generating capacity, electricity generated, labor productivity
in the generating sector, and capacity utilization. They find that, overall, the gains
in economic performance from privatization and regulations are limited, while in-
troducing competition is more effective to stimulate performance. In particular, they
do not find that privatization leads to improved labor productivity or to higher cap-
ital utilization, or to more generating capacity and higher output, except when it is
coupled with the establishment of an independent regulator. The authors conclude
that when competition is weak, an effective regulatory system is needed to stimulate
performance, while the regulation of state-owned enterprises without privatization
is ineffective.
A more recent study by Balza, Jimenez, and Mercado (2013) examines the rela-
tionship between private sector participation, institutional reform, and performance
of the electricity sector in 18 Latin American countries over the last four decades

80 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
(1971 to 2010) This also finds that, regardless of the level of private participa-
tion, well-designed and stable sectoral institutions are essential for improving the
performance of the electricity sector. In particular, privatization is robustly associated
with improvements in quality and efficiency, but not with accessibility to the service.
In contrast, regulatory quality is strongly associated with better performance in terms
of both quality and accessibility.

Summary

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To bring together this evidence and evaluate its robustness as a basis for policy, we
classify the papers reviewed in this section into four categories depending on the qual-
ity of the sample and the robustness of the methods used. Category I: single country
data, basic statistics, or econometrics (or small sample). Category II: cross-country
data, basic statistics, or econometrics (or small sample). Category III: single coun-
try data, more advanced econometric techniques. Category IV: cross-country data,
advanced econometric techniques. The findings are reported in table 1 and taken
together, provide qualified evidence that privatization can improve company perfor-
mance, including from studies that use the most advanced econometric methods.
Thus, the evidence from empirical studies of privatization in developing coun-
tries suggests that the performance of banks improved significantly after privatization
in many cases. However, the gains from privatization in the utilities sector (electric-
ity and water) have tended to be limited. Finally, concerning the telecommunications
sector, the impact of privatization on efficiency and coverage varies by region. It has
been shown to be positive in Central America and in resource-scarce coastal Africa
and Asia, but negative in South America and in African resource-landlocked coun-
tries. Thus, the impact appears to be context- as well as sector-specific. The main fac-
tors explaining this variation are regulatory quality (and behind that the quality of
institutions), heterogeneity in effective competition, differences in the detail of con-
tractual design, and in the characteristics of the new owners.

Privatization Process: Distributional Impacts

Thomas Piketty’s recent book (2014), which has highlighted the importance of in-
come distribution in the growth process, also discussed the impact of privatization on
capital accumulation. In principle, privatization need not affect the stock of wealth
in an economy, nor its distribution. State-owned firms are public assets which earn
a return for their owners. Provided the assets to be privatized are valued in such a
way that their price represents the discounted sum of the profits to be earned from
them, then privatization means that the state is replacing an income stream with its
discounted capital value in its asset portfolio. At the same time, the private sector is
purchasing an asset which generates its full value over time from its annual earnings.

Estrin and Pelletier 81

82
Table 1. Methodology and Classifications of Empirical Papers
Authors Method Data Results Category

Banks
Azam, Measures of performance: log of bank net Africa (Benin, Burkina, Cote d’Ivoire, Mali, Positive impact of foreign ownership on II
Biais and profits/total loans and log of ratio of bad Niger, Senegal, Togo), 1990 to 1997. Small performance of banks, due to more
Dia loans/total loans. Regress the performance sample (49 observations). risk-seeking strategies by foreign owners.
(2004) of banks on the lagged percentage of lagged
foreign ownership (OLS and GLS
specifications).
Beck, Cull Measures of performance: ROA, ROE, NPL. Nigeria. Unbalanced sample of 69 banks Performance improvements following III
and Megginson, Nash, and van Randenborgh with annual data for the period 1990 privatization, but negative effects of the
Jerome methodology: period of eleven years: three through 2001, with a total of 576 continuing minority government
(2005) years before and eight years after observations. ownership on the performance of many
privatization. Nigerian banks.
Beck, Measures of performance: ROE, ROA, Brazil, unbalanced panel of 207 banks with Privatised banks increased their III
Crivelli, overhead costs/assets quarterly data over the period January performance, but not restructured banks.
and Sum- Megginson, Nash, and van Randenborgh 1995 to September 2003, with a total of
merhill method 4,864 observations.
2005 Examines four options: liquidation,
federalization, privatization and
restructuring

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Estrin and Pelletier
Table 1. Continued
Authors Method Data Results Category

Bonin, Measures of performance: cost and profit Transition countries (Bulgaria, the Czech Foreign-owned banks are most efficient, IV
Hasan, efficiency, ROA Four ownership types: Republic, Croatia, Hungary, Poland, and and government-owned banks are least
and foreign greenfield, domestic de novo, Romania); 67 different banks from 1994 to efficient. Voucher privatization does not
Wachtel state-owned, privatised. Stochastic frontier 2002 (451 observations). lead to increased efficiency and
2005 analysis (SFA) to estimate bank efficiency. early-privatised banks are more efficient
than later-privatised banks (and no
evidence of selection effect).
Boubakri Measures of performance: ROE, net interest 81 bank privatizations occurring between Profitability increases post-privatization, IV
et al. margin, credit risk. Examine three 1986 and 1998, in 22 low- and but it depends on the type of owner (higher
(2005) categories of controlling owners: foreign middle-income countries. economic efficiency exhibited by banks
investors, local industrial groups, and the owned by local industrial groups and
government itself. Megginson, Nash, and foreign owners).
van Randenborgh methodology on a panel
of banks. Period of seven years: three years
prior to privatization and three years
post-privatization, including the year of
privatization itself).

83
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84
Table 1. Continued
Authors Method Data Results Category

Otchere Measures of performance: CAMEL criteria Analyze 21 privatizations (and 65 rival Statistically significant improvement in IV
(2005) (Capital adequacy, Asset quality, banks) from middle- and low-income operating performance for the privatized
Management efficiency, Earnings ability and countries. banks in the pre- and post-privatization
Labor (employment levels and productivity). period, apart from reduction in loan loss
Stock market data. Megginson, Nash, and provisions ratio. One reason for the lack of
van Randenborgh methodology: 3 years improvement might be the continued
pre-privatization operating performance government ownership of these banks.
data and 5 years post privatization.
Examines pre- and post-privatization
operating performance of the privatised
banks relative to that of the rival banks.
Clarke, Measures of performance: ROA, NPL, total Uganda, 1996 to 2005, 555 observations Improvement in profitability and rate of III
Cull and expenses/total assets. Case study of the (quarterly data). credit growth compared to pre-privatization
Fuchs privatization of Uganda Commercial Bank for UCB.
(2009) to Stanbic (South African bank). Employ
regressions that show the evolution of UCB,
Stanbic, and the post-merger bank in terms
of profitability, portfolio quality, operating
efficiency, and credit growth.
Cull and Measures of performance: ROA, NPL. 42 banks operating in Tanzania between Sale to a foreign strategic investor III
Spreng Examines the privatization of National December 1998 and December 2006. (Rabobank from the Netherlands) resulted
(2011) Bank of Commerce. Test whether the in improved profitability and reductions in
privatization of the two successor banks to non-performing loans, along with an
the original National Bank of Commerce increase in the ratio of loans to total assets.
resulted in improved performance.

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 Table 1. Continued

Estrin and Pelletier

Authors Method Data Results Category

Telecommunications
Wallsten Measures of performance: mainline 1984 to 1997; 30 African and Latin Privatization combined with an IV
(2001) penetration, payphones, connection American countries. independent regulator is positively
capacity, prices for local calls, labour correlated with telecom performance
efficiency. Megginson, Nash, and van measures. No clear benefits of privatization
Randenborgh, includes fixed effects. alone.
Gasmi, et al. Measures of performance: Mainline 1985 to 2007 panel dataset on a selection Performance of privatization depends on IV
(2013) penetration cellular subscription, mainlines of 108 countries (OECD, Asia, Africa, Latin regional factors related to market
per employee, Monthly subscription to fixed, America). profitability, wealth, and geography.
price of cellular. Empirical analysis of the
impact of privatization of the fixed-line
activity of the traditional
telecommunications operator on
output/efficiency/price. Fixed-effect and
random-effect models, DIF-GMM.
Utilities - water
Estache and Stochastic cost frontier 1995; 50 companies; 29 Asian-Pacific Efficiency is not significantly different in IV
Rossi (2002) countries. private companies than in public ones.
Kirkpatrick, Stochastic cost frontier 2000; Africa; 76 observations, including 10 No strong evidence of differences in the IV
Parker, and private-sector operations. performance of state-owned water utilities
Zhang and water utilities involving some private
(2006) capital in Africa.

85
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 Table 1. Continued

86
Authors Method Data Results Category

Tan Measures of performance: Nonrevenue 1991 to 2010; Malaysia; 13 Malaysian No evidence of improvement in efficiency I
(2012) water (NRW), unit costs, tariffs, water states. and capital investment after privatization.
production capacity (the amount of water
treated for distribution), length of pipes.
Case study (graphs and statistics). Different
ownerships: public ownership,
corporatized, public–private, private.
Utilities - electricity
Zhang, Measures of performance: net electricity Panel data for 36 developing and Competition seems to be most effective to II
Parker, generation per capita of the population, transitional countries, over the period 1985 increase performance. On their own
and Kirk- installed generation capacity per capita of to 2003. privatization and regulation do not lead to
patrick the population, net electricity generation significant improvement in performance.
(2008) per employee in the industry and electricity
generation to average capacity (capacity
utilization). The privatization variable used
in the study was constructed as the
percentage of generating capacity owned by
private investors. Fixed effects (country and
year) to deal with endogeneity.
Balza, Measures of performance: real end-user 1971 to 2012; 18 Latin American countries Countries with higher private investment II
Jimenez, prices for residential electricity (excluding (panel of countries). Country-level analysis. tend to provide more efficient and
and taxes); percentage of households with better-quality electricity services.
Mercado access to electricity; electricity capacity
(2013) generation; and electricity loss as a
percentage of total electricity production.
Privatization measured as the cumulative
investment in the electricity sector as a
percentage of average gross capital
formation in the period 1984 to 2010.

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Hence, privatization does not necessarily entail a net transfer of wealth between the
public and private sectors.
However, the privatization process has not always followed these principles of pub-
lic finance (Estrin et al. 2009). In the extreme, as in the programs in the Czech Re-
public or Russia, significant state assets were transferred to private hands at nominal
or zero prices; in effect, a transfer of wealth from the state to the private sector. More
generally, state assets have frequently been undervalued. This may have been in or-
der to make the assets more attractive to the market, or because the SOEs were loss-
making and the short-term requirement to balance the budget dominated long-term

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state asset portfolio criteria. In some cases, ideological arguments have also played a
role; Margaret Thatcher and several of her admirers in transition economies viewed
privatization as a policy mechanism for broadening the private ownership of shares
in companies (Estrin 2002). Whatever the motivation, the undervaluation of state
assets leads to a net redistribution of assets from state to private hands. Piketty ar-
gues that this was an important element in relatively larger growth of private wealth
in Britain than in other Western European countries between 1970 and 2010. Fur-
thermore, it was almost certainly a major factor in what he describes as the “consid-
erable growth of private wealth in Russia and Eastern Europe. . . . which led in some
cases to the spectacularly rapid enrichment of certain individuals (I am thinking of
the Russian oligarchs),” (2014).
As the quotation from Piketty makes clear, the impact on income distribution of
privatization depends on how the ownership of the assets is transferred from state
into private hands; both the pricing and to whom the SOEs are privatized. In the ex-
treme case when assets are transferred by voucher to each citizen equally from the
state to private hands at a zero or nominal price, as in the Czech Republic, there is
a transfer from public to private assets equal to the value of the privatized firms, but
the impact on income distribution will be egalitarian because the process transfers
shares to all citizens equally. In contrast, if assets are freely transferred to a single
wealthy individual, the impact will be to severely worsen the distribution of income.
In practice, state-owned assets that are transferred at below their market value are
often also transferred to individuals who are already wealthy, leading to increasing
inequality.
Political factors may play a significant role in this process, with corrupt elites seiz-
ing state assets for themselves, or using them to reward their cronies or political sup-
porters. Thus, rather than being used to improve efficiency, privatization may be em-
ployed by the ruling group as a mechanism to redistribute wealth and resources.
Acemoglu and Robinson (2012) point to the transfer of state assets into the hands
of the governing elite (often associated with the deliberate continuation of monopoly
power) as a mechanism of extractive political institutions; they cite the telecommuni-
cation privatization in Mexico and the huge amount of wealth accumulated by Carlos
Slim ($47 billion in 2016 dollars) as an example.

Estrin and Pelletier 87

 But negative distributional effects may also occur for reasons of perceived efficiency
enhancement, for example because the state believes that particular private individ-
uals are those most likely to be able to improve company performance. This implies
a trade-off between efficiency and equity objectives in the privatization process. Eq-
uity is supported by processes which engender dispersed ownership, while it is usually
argued that efficiency is driven by concentrated ownership (Estrin 2002). The empir-
ical evidence highlights this trade-off; improvements in the performance of privatized
firms have been found to depend on subsequent ownership arrangements (Djankov
and Murrell 2002). Notably, privatization to concentrated owners, such as to foreign

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firms or to small groups of strategic owners, yields greater improvements in perfor-
mance than privatization to the general population via share offerings, or to man-
agers and workers (Estrin et al. 2009).
Birdsall and Nellis (2003) place the issue of the distributional impact of privati-
zation more formally into an efficiency/equity framework. The effect of privatization
on income distribution between taxpayers and the new owners depends both on the
initial price and on the post-sale stream of value produced. There is no unambigu-
ous prediction about the distributional effects of privatization, which will instead de-
pend on initial conditions, the privatization process and the post-privatization politi-
cal and economic environment. Any assessment of the effects should be dynamic and
highly country-specific, depending on the political and economic context and its his-
tory. However, they argue that there is scope for efficiency-enhancing privatization
which also promotes equity in developing countries.
We review below the distributional impacts of privatizations through their effect
on ownership, employment, prices and their fiscal effects (see table 2 for a summary).

A Review of the Distributional Impacts of Privatizations in the Last Decade

Ownership.
As Megginson (2000) notes, in countries that have privatized through asset sales,
the process has frequently been non-transparent and plagued by insider dealing and
corruption. Thus in Russia, the “loans for shares” programs enabled well-connected
financiers to obtain controlling stakes in the country’s most valuable firms for a price
well below their true value (Megginson 2000). Moreover, the distributional impact of
voucher privatizations has also been disappointing; in Russia and the Czech Repub-
lic, the returns on the vouchers were much lower than anticipated, and very small
in comparison to what a very few well-connected groups of people obtained in the
privatization process (Birdsall and Nellis 2003).

Employment.
Privatization can also affect the distribution of income through its impact on em-
ployment. As public enterprises tend to be overstaffed prior to privatization, private

88 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
Table 2. Summary of Distributional Impacts of Privatization (Spillovers)
Distributional
impact Progressive effect Regressive effect

Ownership If the sale is conducted in a transparent If the asset is under-priced and rewards political
way, with a wide distribution of cronyism. If the sale is non-transparent.
vouchers with positive returns.
Employment If newly-privatized firms become more The restructuring and consequent
efficient and dynamic, total employment disproportionate layoff of specific categories of
might recover after the initial worker.

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restructuring phase
Prices Privatization can lead to a fall in prices if Prices may increase if they were previously
it is accompanied by increased below cost-recovery level.
competition. In addition, if private
management leads to efficiency gains,
some of the savings can be passed on to
consumers.
Access Access may increase if the privatized If the private owner decreases its engagement
business is expanded through in specific market segments that are beneficial
investments. to the poor. In addition, poorer consumers can
see their access reduced if privatization is
accompanied by the end of illegal water and
electricity connections.
Fiscal If it leads to increased access by the poor Privatization may affect real income (net of
to government services funded by new taxes) if it reduces the tax burden differentially
tax flows. across households. Privatization transfers
control rights to private interests and eliminate
public subsidies, benefiting taxpayers but
reducing consumers’ surplus if costs are
increased.

ownership can lead to restructuring and consequently disproportionate redundan-

cies for specific categories of worker (low-skilled, for instance). The study by Chong
and Lopez-de-Silanes (2002) based on a survey of 308 privatized firms (covering
84 countries) over the period 1982 to 2000 showed that employment was reduced
in 78% post-privatization, likely worsening income distribution (Birdsall and Nellis
2003).
That being said, if the newly-privatized firm becomes more efficient, total employ-
ment might recover after the initial restructuring phase. In addition, government-
owned firms that do not privatize may also have to reduce workforce size. Research
by Gupta (2011) on privatization in India covering the 20-year period of 1989
to 2009 shows that privatization increases employment significantly and is not
associated with a decline in employee compensation.14 Moreover, Gupta argues
that an evaluation of the redistribution of wealth from the government to private

Estrin and Pelletier 89

owners must also take account of the cost of subsidies to government-owned firms.
However, the employment costs of privatization will be borne by specific groups of
workers, while the benefits, in terms of reduced subsidies, are distributed across tax-
payers. Hence, privatization may face opposition from organized interests who benefit
from maintaining government ownership.
While Gupta’s (2011) work is a single-country study, it has the merit of using more
advanced econometric methods to control for dynamic selection bias by applying firm
fixed effects and comparing privatized firms to a control group of firms that have also
been selected for privatization but have not yet been sold. In addition, the share of

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private ownership is introduced with a lag to reduce the possibility of simultaneity
between privatization and performance.

Prices and Access.

Privatization can also have different impacts on income groups through prices and
access to services. First, privatization can lead to a fall in prices if it is accompanied by
increased competition. In addition, if private management leads to efficiency gains,
some of the savings can be passed on to consumers. However, prices may increase if
they were previously below cost-recovery level. The distributional impact depends on
how the consumption of the firms’ goods and services varies by income levels. Ac-
cess may increase if the privatized business is expanded through investments which
could not be undertaken in public ownership. However, private owners may decrease
their engagement in specific, low-return market segments, which may disproportion-
ately affect the poor. Price increases are common following privatization in network
or infrastructure industries, along with increases in the quality of services. On the
one hand, subsidized services tend to benefit relatively wealthy consumers more than
poorer ones; as such, they may be relatively more impacted than the lower-income
segment by privatization. On the other hand, price increases following the privatiza-
tion of electricity and water will increase the burden of poorer consumers, especially
if it is accompanied by the end of illegal water and electricity connections (Birdsall
and Nellis 2003).
Several studies in Latin America have shown that utility privatization has in fact
led to network expansion and increased access to the service by the population, es-
pecially the rural poor (for Peru, see Torero and Pasco-Font 2001; for Argentina,
see Chisari, Estache, and Romero 1999, Delfino and Casarin 2001, and Ennis and
Pinto 2002; for Bolivia, see Barja and Urquiola 2001; for Mexico, see Lopez-Calva and
Rosellon 2002). This increased network coverage has often been the consequence
of market expansion enabled by private investment capital (see Clarke, Kosec, and
Wallsten (2004)).
When access has increased significantly without a steep rise in prices, privati-
zation has had positive distributional effects (Birdsall and Nellis 2003). However,

90 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
increased access has often been accompanied by substantial price increases (Estache,
Foster, and Wodon 2002). In addition, an important negative distributional impact
has been realized through the elimination of illegal connections to electricity and wa-
ter networks by lower-income people. A recent paper by Hailu, Guerreiro-Osorio, and
Tsukada (2012) on water service privatization in Bolivia in the late 1990s and early
2000s shows how tariff increases required for full cost recovery may lead to adverse
privatization outcomes; in this case, the eventual renationalization of the company.
To examine the impact of privatization on access, the authors use a difference-in-
difference approach comparing two groups: households in cities where the utility was

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privatized, and households in other cities, with two points in time, before (1996) and
after (2001 and 2005) privatization. These authors find a positive relationship be-
tween access to water and living in cities where the water utility was privatized. How-
ever, the water sector was renationalized in 2006, partly because of popular move-
ments against the tariff increases required for full cost recovery and the failure of the
concessionaire to meet targets stipulated in the contract.
Finally, Austin, Descisciolo, and Samuelsen (2016) point to the limits of privati-
zation in sectors with public goods characteristics. Examining the privatization of
healthcare in 99 less-developed nations over the 1995–2000 period, they employ
two-way fixed effects ordinary least squares regression models. The fixed effects al-
low them to deal with unmeasured, time-invariant variables that are excluded from a
regression model. They regress tuberculosis prevalence per 100,000 on the log of pri-
vate health expenditures, the log of public health expenditures and a set of controls
(economic development, education, HIV prevalence and access to water and sanita-
tion). They find that, while public health expenditures reduce tuberculosis rates in
developing nations over time, this is not the case for private health expenditures.

Fiscal Effects.
The fiscal effects of privatization on income distribution are indirect and come
through changes in revenues and expenditures. In particular, privatization may af-
fect real income (net of taxes) if it reduces the tax burden differentially across house-
holds, or if it leads to increased access by the poor to government services funded
by new tax flows. The study of Davis et al. (2000) on 18 developing and transition
countries showed that the net fiscal effects of privatization were receipts in the order
of 1% of GDP. In some countries, the main fiscal benefits of privatization have been
to eliminate subsidies. Subsidies in critical infrastructure services have often led to
the rationing of under-priced services, hardly affecting poorer households that often
had little or no access to these services, while the non-poor enjoyed the underpriced
access. To the extent that privatization stops these flows of subsidies, it produces
indirect benefits in terms of increased retained revenues (Birdsall and Nellis 2003),
which could indirectly benefit the poor.

Estrin and Pelletier 91

Policy Implications
The traditional literature, primarily concerning developed economies, argued that
privatization had largely positive effects on the economic and financial performance
of the companies involved, as well as wider spillover benefits, for example, via techno-
logical diffusion from foreign ownership of former SOEs and enhanced efficiency from
the privatization of utilities and other forms of infrastructure. Moreover, privatization
programs also frequently achieved additional objectives, including the generation
of revenues to relax state budget constraints and a broadening of share ownership

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amongst the population. On this basis, privatization became an important element of
reform programs in transition and then developing economies from the 1990s. The
experience of the past twenty years leaves some of these conclusions unchanged, but
leads us to a more nuanced evaluation of the effects of privatization in the context of
economic development.
In particular, though state sectors are often very large in developing economies, it
has been hard to establish widespread privatization programs in many parts of the
world, partly because of political opposition. This has arisen for a variety of reasons.
First, the record of privatization as it spread to middle income and then transition
economies (including China) was not always so positive as in developed economies.
The lesson of the transition economy experience was that privatization was not al-
ways a panacea: if the mode of privatization was inappropriate or the market environ-
ment not competitive, privatization might not enhance the performance of the firms
involved (Estrin et al. 2009). Moreover, privatization programs were associated with
scandals: inappropriate valuations led to the emergence of extreme inequalities of
wealth. Second, in developing economies where the institutional environment, par-
ticularly with respect to regulation of monopolies, was sometimes even weaker than
in transition economies, the benefits of privatization were even less automatic, de-
pending on the sector, and were contingent to a significant degree on the design of
the privatization program. Third, distributional issues are especially significant in de-
veloping economies, so privatization programs also had to consider distributional im-
pacts in ways that had been less relevant for developed economies; opposition rested
on issues raised by the efficiency-equity trade-off. Finally, political economy issues are
perhaps of even greater consequence for policy choices in developing economies, and
privatization programs are especially open to manipulation by extractive political in-
stitutions and elites in fragmented political environments.
This long list of concerns has meant that the spread of privatization programs
to developing countries has been limited, both geographically and with respect to
sectoral reach. The slowdown in privatization has no doubt been exacerbated by
the global recession of 2008 and the resulting flight from risk, which has particu-
larly affected stock markets in developing economies. Moreover, the evidence about
the effects of such privatizations of economic performance is quite nuanced. To be

92 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
successful, a privatization program needs to align its objectives with its methods of
privatization, taking into account the sector in which the company operates and the
national, institutional, and political context.

Necessary Pre-conditions for Successful Interventions: Regulatory Agencies and

Managerial Incentives
As Lopez-de-Silanes (2005) notes, good rules and contracts are key for a smooth and

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beneficial privatization process. However, government restructuring of SOEs prior to
their sale is likely to be fraught with political difficulties because officials may try to ex-
tract private benefits. Although restructuring could increase revenues from the sale,
Lopez-de-Silanes suggests that restructuring policies do not lead to higher revenues.
In addition, Lopez-de-Silanes (2005) notes the importance of policies to complement
privatization; of particular importance is the need to set up an appropriate regulatory
and institutional framework for the post-privatization period.
Indeed, several papers have shown how a strong and independent regulatory in-
stitution can help address the negative impact of corruption on the privatization pro-
cess. Wren-Lewis (2013) uses a fixed-effects estimator on a panel of 153 electric-
ity distribution firms across 18 countries in Latin America and the Caribbean from
1995 to 2007. He regresses the log of labor employed on a corruption indicator, in-
dependent regular authority dummies (including dummies for good and bad regula-
tors), and private ownership dummies and interaction terms. Wren-Lewis employs
firm fixed effects to control for time-invariant unobservables. Because each firm is
present in only one country or province, the corruption and regulation terms are
estimated based only on changes in these variables within countries/provinces. He
also includes year fixed effects to take into account time effects. Wren-Lewis shows
that greater corruption is associated with lower firm labor productivity, but this as-
sociation is reduced when an independent regulatory agency is present. However,
because of broader institutional weaknesses, developing countries face many chal-
lenges in establishing a strong regulator. One limit of this study is that there may be
important (unobserved) parts of the reform package that also impact productivity. As
such, it should not be assumed that the (observed) reform will have the same impacts
elsewhere.
Gassner and Pushak (2014) have examined the impact that the UK regulatory
model has had in developing and transition countries, and the extent to which
they have successfully followed its key features; competition, independence and ef-
ficiency of service delivery through incentive-based regulation. The authors note
that while regulatory agencies have spread rapidly, the success of the UK regulatory
model has been only partial in middle and low-income countries. They argue that
the context of developing countries, with below cost-recovery tariffs and continued

Estrin and Pelletier 93

state-ownership, makes it more difficult to establish truly independent regulatory in-
stitutions.
Thus, developing countries face many regulatory challenges; they often start with
important operational inefficiencies and insufficient revenue generation. In addition,
a majority of firms in potentially regulated sectors are still publicly-owned because
they are not attractive enough for private sector investors, and because governments
do not want to cede control of essential services. Under these circumstances, incen-
tive regulation for efficiency savings is difficult: given the low tariffs, not enough in-
vestment can be undertaken to improve service delivery, and without private profit

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motives there is not a strong incentive for managers to bring about efficiency. Under-
pricing and poor operational performance are serious problems: according to the
2010 Africa Infrastructure Report published by the World Bank (2010), the under-
pricing of electricity costs the sector at least $2.2 billion a year in forgone revenues
(0.9% of GDP on average).
Recently, the concept of hybrid regulatory models has been proposed as a solution
to the challenges in developing countries (Eberhard, 2007). In hybrid models, regu-
latory contracts and independent regulatory agencies coexist. In a context where the
institutional capacity is low and/or regulatory commitment is weak, an independent
regulatory agency is supplemented by contracting out or outsourcing certain regula-
tory functions. An illustration of this is the 20-year water and electricity concession
contract in Gabon, which requires external experts to monitor the service provider’s
performance in achieving coverage targets. The experts are paid from dedicated funds
set aside from the concessionaire’s revenues and produce only nonbinding studies.
This monitoring mechanism is aimed at strengthening the independence and com-
petence of the ministerial department responsible for supervising the contract. Pol-
icymakers may also obtain regulatory assistance from regional regulators or from
other countries through twinning arrangements. For example, the Eastern Caribbean
Telecommunications Authority (ECTEL) serves the member countries of the Organ-
isation of Eastern Caribbean States as a shared regulatory body (Tremolet, Shukla,
and Venton 2004).
Taking into consideration local management and incentives is also important for
successful privatization. Liu, Sun, and Woo (2006) identify the motives of local gov-
ernment leaders and the constraints that they face during a privatization process.
These authors conclude that local governments’ motivation to privatize their SOEs
depends on whether the ownership transfer sufficiently stimulates the growth of lo-
cal tax revenues without sacrificing bureaucrats private control benefits. In addition,
Dinc and Gupta (2011) in their study of privatization in India observed that no firm
located in the home state of the minister in charge is ever privatized, which highlights
the importance of local political factors in the privatization process.

94 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
What about Remaining SOEs?

To a certain extent, the recommendations about regulation and managerial incen-

tives also apply to remaining SOEs. In fact, Bartel and Harrison (2005) argue that
public-sector inefficiency is due to the softness of budget constraints and the degree
of internal and external competition. This implies that efficiency gains in SOEs could
be achieved by reducing or eliminating government financing for public enterprises,
and/or increasing import competition.
Regarding agency-type problems, Hsieh and Song (2015) observed that one of the

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key reorganizations of state-owned “corporatized” firms in China was that the par-
ent company (the controlling shareholder) of the firm incorporated as Limited Liabil-
ity Corporation was to monitor the firm and be responsible for the compensation of
the firm’s senior managers. These managers were held accountable for the firm’s bot-
tom line, which reduced agency-type problems. The senior executives of the parent
company, in turn, were directly appointed by the local government or by the Central
Organization Department of the Communist Party.

Privatization to Foreign Owners

Work on transition economies established that when SOEs are privatized to foreign in-
vestors, the efficiency gains are particularly pronounced. The results on foreign own-
ership do seem, however, to be replicated in the developing economy context. Thus
Du, Harrison, and Jefferson (2014) have found that foreign equity participation is
associated with an improvement in productivity which is greater for SOEs than for
non-SOEs in China’s manufacturing sector, suggesting that foreign firms can play an
important role in improving SOE performance. The benefits of privatization via trans-
fer to foreign firms have also been observed in the case of banking in Africa (see Clarke,
Cull, and Shirley 2005).
Part of the reason that foreign ownership improves productivity can be found in
the relation between foreign ownership and corporate risk-taking. Boubakri, Cosset,
and Saffar (2013) found that foreign (state) ownership is positively (negatively) re-
lated to corporate risk-taking, and that this relation is stronger in countries with bet-
ter institutions. To the extent that corporate risk-taking is an important driver of eco-
nomic growth, privatization via the transfer of ownership to foreign owners should
yield important economic benefits through a reorganization of prevailing incentive
structures and changes in the degree of risk aversion. Jaslowitzer, Megginson, and
Rapp (2016) also observe that risk aversion and financial conservatism are one of the
reasons that state ownership is associated with inefficiency. Using a matched panel
of 624 firms, these authors find that state ownership curtails firms’ responsiveness
to investment opportunities. Despite these findings, in some developing countries the

Estrin and Pelletier 95

sale of state assets to foreigners, which carries overtones of colonial legacies, can be
a politically charged subject.

Concluding Comments
Privatization involves the transfer of productive assets from the state to private hands.
Such transfers are, by their very nature, politically sensitive and subject to potential
corruption and abuse. We outline below some important issues that policy makers in
a developing country should consider when examining a proposed privatization. In so

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doing, we assume that the primary purpose of privatization is to enhance economic
growth.
First, policy-makers need to examine and establish the preconditions for success, in
terms of the business environment for competition, governance, and entry. The evi-
dence suggests that privatization has greater benefits on firm performance in stronger
business environments because the success of the process relies on effective corporate
governance of the privatized entity, as well as effective market competition. Key issues
at the national and sectoral level include:
• Depth and liquidity of the capital market (particularly important for privatization via IPO).
• Barriers to new domestic firm entry (formal entry costs, bureaucratic costs, possibilities for
incumbents to restrict entry by the use of political relationships).
• Quality of the legal system concerning corporate governance, for example company ac-
counting procedures, rules on minority shareholders, etc.
• Quality of business support, for example, legal firms, accounting firms, management con-
sultants, recruitment firms.
• Openness to foreign direct investment, both via acquisitions (via privatization) or via green-
field (to create competition), and access to foreign portfolio capital.
• Depth and competitiveness of managerial market (pool of qualified managers).
• Strength and effectiveness of competition, and competition agency.
• Independence of anti-monopoly agency from state.

The quality and independence of the state’s administrative apparatus is particu-

larly important. Privatization makes considerable demands on the capability of the
state, both in ensuring that the process is not captured by local elites, and in man-
aging the relationship between the government and the firm at arm’s-length post-
privatization, for example, via regulation. Successful privatization requires competent
government with low levels of corruption.
Turning to the privatization process itself, there is strong evidence that openness
of bidding to all, including foreign firms, is a key factor of success.
Policy-makers also need to determine the appropriate privatization methods. Re-
lated to this, the pricing of the assets to be privatized are a crucial issue with respect
to the transfer of assets from public to private hands, and the likely impact on the
distribution of income and wealth. The chosen methods depend in part on the pre-
conditions noted above. Countries with poorly developed capital markets are unlikely
to be able to privatize through IPOs. The main methods of privatization, listed on the

96 The World Bank Research Observer, vol. 33, no. 1 (February 2018)
basis of the evidence of the literature in order of likely favorable impact on economic
growth and development are as follows:

• Sale to high-quality foreign firms.15

• Sale on domestic capital market via IPO.
• Sale to domestic businesses or business groups (trade sale).
• Sale to existing managers and/or workers.
• Free distribution of shares to the population (mass privatization).

There are obvious trade-offs. Free distribution ensures equality in the allocation

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of assets around the population, but is likely to lead to weak corporate governance.
Selling to foreign owners, with appropriate safeguards, can raise company efficiency
but may lead to job losses.
Privatization seeks to improve company efficiency via corporate governance. How-
ever, as we have seen, a number of side-effects may impact other key policy targets and
these need to be considered in advance.
Social and Economic Side Effects. Higher efficiency/profitability may be obtained
through lower levels of employment, lower wages, reduced public service provision
and higher product prices, with negative distributional and social effects.
Competition Side Effects. Especially if the government is concerned with selling to
foreigners and/or maximizing revenues, competition effects may be negative and se-
rious.
Global Impact. Selling key assets such as banks or resource companies to foreign
firms may restrict the range of domestic policy and hinder long-term development.
Political Side Effects. Selling assets to elites may concentrate political power and eco-
nomic wealth into fewer hands.
Effects on Distribution of Income. An enhanced focus on the profitability of firms
may lead to increased prices of important products for poor households, as well as
reduced pay, worse employment conditions, and fewer job prospects.
Effects on Fiscal Balance. In principle, this should be unchanged because if the as-
set is priced correctly, the price should reflect the future expected earnings from the
company. In practice, pricing may be set low to achieve distributional targets or to
support elites and friends. This would worsen the government’s balance sheet. At the
same time, the new owners may be more productive than the state, and hence raise
activity and profits, with a positive effect on GDP and government revenues.

Notes
Saul Estrin is a professor of management at the London School of Economics; correspondence to be sent
to [email protected]. Adeline Pelletier is a lecturer in strategy at the Institute of Management Studies,
Goldsmiths College, University of London. This work was supported by the U.K. Department for Inter-
national Development and the Overseas Development Institute. The authors would like to thank Tim

Estrin and Pelletier 97

Green, Alberto Lemma Deborah McGurk, Anne McKinnon, Bill Megginson, John Nellis, Jon Stern, and
Jan Svejnar.
1. Kikeri and Nellis (2004) have also conducted a wide-ranging assessment of privatization.
2. Each of these three regions representing between 3% and 5% of total world privatization proceeds
over the 1988 to 2008 period.
3. The privatization barometer database provides world aggregate data on privatization and a coun-
try breakdown for developed countries. We are not aware of an alternative database providing such in-
formation. This was also confirmed by several academic and practitioner experts on privatization whom
we contacted during the course of this research.
4. Infrastructure includes transportation, water and sewerage, telecommunications, natural gas
transmission and distribution, and electricity generation, transmission, and distribution.

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5. The manufacturing and services sector includes agribusiness, cement, chemicals, construction,
steel, hotels, tourism, airlines, maritime services and other sub-sectors that are not infrastructure or
finance related.
6. The financial sector includes banks, insurance, real estate, and other financial services.
7. The energy sector includes the exploration, extraction, and refinement of hydrocarbons, oil, and
natural gas.
8. The primary sector includes the extraction, refinement, and sale of primary minerals and metals
such as coal and iron ore.
9. The ownership pattern resulting from privatization often depends on the mode of privatiza-
tion chosen. Thus, private sales usually lead to concentrated strategic owners, while mass privati-
zation usually generates widespread ownership, at least initially. The impact of mode of privatiza-
tion on national economic performance in transition economies is explored in Bennett, Estrin, and
Urga (2007).
10. Note, however, that in the utilities sector (particularly for water), the technology and the na-
ture of the product restrict the possibility of competition in the market and therefore the efficiency gains
following privatization. In this case, competition for the market (to win the contract or concession agree-
ment) has to be organized. Given the ambiguous results of privatization in noncompetitive markets in
terms of improving economic performance (Megginson and Netter 2001), regulation may prove to be
more effective (Kirkpatrick, Parker, and Zhang 2006).
11. The performance of privatized banks in the seven countries of the West African Economic and
Monetary Union from 1990 to 1997 improved in the first year after privatization, but not after that.
12. Improvements in performance in Nigeria were observed in fully-divested banks, but not in the
ones where the government retained minority shareholdings.
13. Whereas competition is feasible in telecommunications markets, it is usually cost-inefficient in
the market for water services, given the scale of the investment in network assets required to deliver the
product.
14. Privatization is also not associated with the profitability and efficiency of government-owned
firms.
15. Note, however, that this method may suffer from a trade-off with competition objec-
tives since foreign firms may seek local monopoly power. Such sales may be accompanied
by conditions with respect to technology transfer, domestic content of inputs, employment,
environment, etc.

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