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Sudan’s Privatisation Experience 1990-2000 – Khalid Hassan Elbeely

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[Published in Leeds African Studies Bulletin 66 (2004), pp. 47-57]

Sudan’s Privatisation Experience 1990 – 2000: Implementation, Constraints and Impact

by Khalid Hassan Elbeely [1]

Introduction

The June 1989 coup in Sudan brought a new party, the National Islamic Front (NIF), to the forefront. It enabled the NIF for the first time in Sudan’s history to implement its ideology without any opposition from traditional political parties (the Umma and the Democratic Unionist Party) or secular groups (like the Sudanese Communist Party). The new regime declared that reform of the ailing economy was one of its most urgent priorities. A set of economic measures including the introduction of liberalisation and privatisation policies were announced in 1990 as part of the government’s Three-Year National Salvation Economic Programme (NSEP). The aim of the present article is to review the implementation process of the privatisation programme during the period 1990 – 2000.

The Implementation of the Privatisation Programme

The introduction of the privatisation policy was carried out in several stages. It started in October 1989, when the National Conference for Economic Salvation (NCES) stated clearly that the state should not intervene in directing economic activities except in certain circumstances, i.e. the state’s role should include providing essential commodities, setting profit margins and determining a minimum wage. The conference also stressed the importance of relying on market forces to determine the prices of various goods and services.

In accordance with the recommendations of the NCES, the government designed and announced its National Salvation Economic Programme (NSEP) for three years, 1990-93. The programme called ‘for fundamental reform of the parastatal sector through liquidation, privatisation or turning public enterprises into joint ventures with domestic and private sector participation’. The announcement of the three-year NSEP was accompanied by the issuance of the Disposition of Public Enterprises Act in August 1990. The Act specified the duties of each of the bodies responsible for the implementation of the programme, i.e., the High Committee for Privatisation (HC), the Technical Committee for the Disposition of Public Enterprises (TCDP), and the Chairman of the Public Corporation for Investment.

The final step in the implementation process of the privatisation programme took place in August 1992, when the HC called for a general meeting that would outline the basis to be adopted when privatising state-owned enterprises (SOEs). The discussion was focused on two main points with regard to the privatisation of SOEs, specifically the effectiveness of their financial performance and their strategic importance. Regarding the effectiveness of the SOEs’ financial performance, the participants considered it to be the main indicator to be used when evaluating the general performance of these enterprises. Nevertheless, they called for other indicators to be taken into consideration such as profitability, contribution in the area of labour employment, foreign exchange, international competition and equality of distribution.

In relation to the concept of ‘strategic importance’, the participants agreed on the explanation of the term suggested by the HC for Privatisation. The HC stated:

”an enterprise may be considered as strategically important although owned by the private sector. Therefore, any enterprise could be transferred to the private sector if it was thought that this would lead to improvements in its efficiency and financial performance.”

After agreeing this, the HC indicated that most SOEs could be privatised in the long run. Moreover, enterprises that were to remain in the public sector should be run on a commercial basis. Nevertheless, the committee realised that it would be difficult to transfer all these SOEs to the private sector at the same time. Furthermore, the committee pointed to the huge amount of investment needed for some of these enterprises, which might be beyond the capabilities of the domestic private sector (TCDP, 1995).

In the light of the above-mentioned shortcomings, a gradual privatisation schedule consisting of three phases was recommended:

i. Enterprises that should be disposed of immediately, during the financial year 1992/93, in which case preparation for their privatisation should start immediately;

ii. Enterprises that should be disposed of in the medium term, i.e., two to three years, and whose privatisation should start by determining the suitable forms to be used, followed by the evaluation of their assets and the offering of their shares according to a specific timetable;

iii. Enterprises that should be disposed of in the long term, i.e. in more than three years; the meeting called for them to be rehabilitated as a first step towards their full privatisation.

After classifying the SOEs offered for privatisation into three different categories – short, medium and long term – the High Committee issued its final report, which specified eighty-eight enterprises as possible candidates for privatisation, and proposed a suitable mode of disposal for each of them. However, due to the several difficulties that impeded the implementation of the programme, only sixty-four enterprises were privatised during the period 1992/1997, while the privatisation of the remaining twenty-four was scheduled to take place in the second phase, 1998/2000.

Enterprises Privatised by Sectors, the First Phase 1992/97

 

Sector
FormUsed
Industrial Sector Agricultural Sector Communications, Transport &Tourism Banking Sector Energy Sector Commercial Sector Total %  of Total
Sale 8 2 2 1 1 1 15 23.4
Participation 1 0 1 0 0 0 2 3.1
Leasing 0 0 2 0 0 0 2 3.1
Liquidation 0 6 0 0 0 0 6 9.4
Restructuring 0 3 0 0 0 0 3 4.7
Formation of PLC 0 0 1 0 0 1 2 3.1
Al-Aylola 5 10 6 0 2 11 34 53.1
Total[1] 14 (9) 21 (2) 12 (5) 1 (5) 3 (1) 13 (2) 64 (24)
%  of Total 21.9 32.8 18.8 1.6 4.7 20.3 100

[1]The figures in brackets refer to the number of enterprises which were to be privatised in Phase Two

Source: TCDP Report, February 2000 and Researcher’s computations

The implementation of the first phase of the privatisation programme was characterised by several features, arguably the most important of which was the widespread adoption of the Al-Aylola formula, whereby 53.1% (or thirty-four) of the newly privatised enterprises came to be owned either by state governments or by the Martyr Organisation. Six of these thirty-four enterprises were owned by the Martyr Organisation, which had been established by the government in 1990 in order to look after the families of those people who had lost their lives during the war against the Sudanese People’s Liberation Army (SPLA). Al-Aylola was initiated when the President was approached by the governor of a certain state, who requested him to allow his state to have control over the ownership of an enterprise located within the state’s boundaries. The President, without deigning to consult the HC (as happened many times) took the decision to transfer the ownership of this enterprise to its new owner, which was the state government. The HC had no option but to hand over the enterprise to its new owner and subsequent cases indicated clearly the lack of co-ordination between the different government bodies and highlighted the various difficulties associated with running the state, since the HC for Privatisation was not consulted on an issue that clearly fell within its remit. Interestingly, the Chairman of the TCDP made no bones about his opposition to the implementation of this formula. He commented:

”Al-Aylola is an imposed form and it was used to transfer enterprises from a capable public sector (the federal government) to incapable ones, which are those state governments and the Martyr Organisation. I believe political rather than economic factors may lie behind this decision” (Atta Al-Manan, Interview, 22 August 2000).

By this he presumably meant that the President’s decision was intended to benefit those people whose political support the government was seeking to secure. By giving them control of these enterprises instead of selling them to foreign or domestic investors, the President was in effect buying their goodwill towards the federal government. Thus it can be argued that the formula represents one of the various mechanisms of the patron-client relationship. Only an election can indicate whether this policy has been perceived as successful.

Another feature that characterised the implementation of the first phase of the privatisation programme was its total negligence of the sugar sector, since none of the fourteen privatised industrial enterprises included a sugar factory, even though this sector had always been regarded as one of the main buttresses of the industrial sector. The reason for this apparent policy of negligence may have been that sugar belongs to the category of mass consumed goods, and so any increase in its price would generate considerable revenue for the treasury.

Furthermore, the slow acceleration of the programme with regard to the banking sector was another significant feature, since only one state-owned bank was privatised during the whole period of the programme. This tardiness is hard to explain, especially when one considers the state-owned banks’ weak performance. The Sudanese banking system suffered greatly from weak management, inadequate supervisory capacity, poor staff quality, poor reporting systems and an inadequate internal control mechanism, as well as the under-staffing of regulatory agencies and a lack of qualified auditors. What were the reasons for the government’s delay in privatising the banking sector? The delay may have occurred because the banks have always been regarded as a part of the state’s resources, which the government can draw upon to finance its transactions. This phenomenon was especially evident during the early years of the regime, when the government faced severe shortages in foreign exchange and resorted to the banking sector for help. Moreover, by controlling the mechanism by which these banks appointed their boards of directors and managers the government may have sought to ensure consistency in the implementation of its financial and monetary policies. In addition, the fear of the staff (especially senior executives and managers) that they might lose their jobs and hence the various incentives that they enjoyed, led them to oppose any attempt to transfer these banks to the private sector.

It should be noted that although the government scheduled the remaining twenty-four enterprises (most of them large and complex units like Sudan Airways and Sudan Railways) to be privatised during the second phase of the programme 1998/2000, the programme is still on-going (as of June 2003), and has been extended indefinitely.

The Impact of Privatisation

When introducing its privatisation policy in 1990, the Salvation Government declared that the policy was intended to achieve certain objectives. These included increasing government revenue and reducing government expenditure, especially subsidies, attracting more domestic and foreign investors, reducing the balance of payments deficit, providing more employment opportunities, improving the standard of living and widening the range of share ownership. This section discusses the various impacts of the policy, especially its impact on government revenue, employment, and share ownership.

The Impact of Privatisation on Government Revenue

A major reason for the introduction of the privatisation policy according to the Government of Sudan was to generate more revenue for the treasury. This could take place either through the sale proceeds which could accrue to the government as a result of selling public-sector enterprises, or through halting government subsidisation of the losses of public enterprises. In addition, the payment of different types of taxes by the newly privatised enterprises would add to government revenue, provided of course that they managed to utilise their resources efficiently. Nevertheless, the total sale proceeds from the privatisation programme during the period 1992/2000 amounted to only SDD 554.5 million (approximately $2.13 million).

These low sale proceeds can be attributed to several factors, the most important of which is the application of the debt-equity swap procedure and of the Al-Aylola formula. With respect to the former, three enterprises, namely the Port Sudan Textile Factory, the Gezira Tannery and the Friendship Palace Hotel, were sold to the Korean company Daewoo for $48 million to cover part of the government’s debts to the company. Moreover, the Sata Company and the Blue Nile Packing Factory were sold for $9 million to the Sudanese African Company for Development and Investment, which was owned by a Saudi investor. Additionally, the Khartoum Tannery was sold to the Hijra Company, owned by another Saudi investor, for $7 million. Thus the total debts cancelled due to the sale of these six enterprises amounted to $64 million.

The 1997 report issued by the TCDP called for the abolition of this procedure for a number of reasons:

”It is feared that its implementation may cause the country to forgo real resources, as well as allowing foreign investors to control essential economic sectors. It is also possible that these debts may be cancelled or reduced in the future, especially if the government manages to improve its relationship with the international financial institutions” (p 109).

The widespread application of the Al-Aylola formula was also regarded as being one of the factors contributing to the small privatisation sale proceeds, since thirty-four enterprises (more than half the number) were transferred from the federal government to other state governments and the Martyr Organisation without receiving any money in return. Thirteen of them were valued at a total of SDD 19.4 billion, while the remaining twenty-one were transferred to their new owners without even being evaluated. The total sale proceeds of the whole privatisation programme amounted to SDD 554.5 million, which represented only 3% of the value of the thirteen enterprises. Only seventeen enterprises in total came to be owned by foreign and domestic investors combined, representing 27% of the total number privatised during the first phase of the programme, 1992/1997.

The amount of sale proceeds could have been expanded by offering these enterprises for sale in public auction, as well as avoiding any delay in the payment of instalments. The lack of an efficient capital market, and of expert accountants and brokerage houses, made it difficult to estimate the value of these enterprises’ assets and thus greatly reduced the anticipated revenue from their sale price. Furthermore, offering a large number of enterprises for privatisation in a short period of time (in 1992/93 43 enterprises were privatised) was likely to reduce the anticipated revenue, especially in the light of the small capacity of the domestic market.

The government also claimed that the privatisation of SOEs would increase its revenue through the taxes paid by the newly privatised enterprises. Nevertheless, this claim can hardly be supported, especially in the light of the poor performance records achieved by privatised enterprises in the agricultural sector and by enterprises owned by state governments and the Martyr Organisation. In addition, a large number of the newly privatised enterprises were granted tax exemptions for a specific period of time, which was likely to restrict their positive contribution to government revenue.
The Impact of Privatisation on Employment
Statistics show that 8,934 workers (15.1% of the total public sector employees) lost their jobs following the implementation of the first phase of the programme in 1992/1997. The TCDP expected another 18,213 workers to lose their jobs after the implementation of the second phase of the programme, 1998/2000, which, however, has not yet ended. These enormous redundancies urge us to investigate whether any government policy has aimed at absorbing or reducing the impact of the privatisation policy on redundant employees. In fact, no action was taken to establish a social safety-net programme until August 2000, when a fund was set up to tackle the problem of the redundant employees of privatised enterprises.

The government failed to persuade the new owners of the privatised enterprises to give priority in recruitment to their former employees, or at least to keep them for a short period of time to be agreed between the two parties. Why did the government adopt such a passive role? Trying to justify the government’s inactivity in this area, the Chairman of the TCDP has argued that ‘the qualified labourer will always make his way in the labour market, and so his finding work is just a matter of time’. This response raises the obvious question: does the government intend to do anything to help the unqualified or unskilled labourer? These workers have, it seems, been abandoned, because the government has no specific policy designed to deal with them, though their numbers are large.

The failure of the government to deal with the problem of retrenched employees was accompanied by its reluctance to allocate to their former employees some of the shares of the public enterprises offered for privatisation, even though the 1990 Disposition Act regarded employees’ buyouts as one of the possible forms of privatisation. Moreover, this Act had been reinforced by a presidential decree that allowed workers to buy up to 30% of the share capital of the privatised enterprise. In reality the outcome was disappointing, since while sixty-four enterprises were privatised during the first phase of the programme, only one successful instance of employee ownership occurred. This was the case of the Sudan Railways Corporation (SRC), where the SRC workers’ trade union won the bid to provide catering services on all routes.

The main reason for the limited progress of employee ownership schemes can be attributed to the dominant belief among government officials that ‘the existence of militant trade unions may discourage investors’, an opinion expressed by the Chairman of the TCDP (Atta Al-Manan, Interview, 22 August 2000). Therefore the government, in its desperate efforts to attract potential investors – who would not be willing to tolerate labour disputes following privatisation – thought that the easiest solution to a potential problem would be to retrench the employees of these enterprises before handing the enterprises over to their new owners.

The privatisation policy also severely limited workers’ representation on the enterprises’ boards of directors, and so their participation in decision-making was restricted. Workers’ representation on boards of directors was introduced for the first time by the 1976 Public Corporation Act. Although this Act was revoked in the early 1980s as part of the restructuring of the public enterprise sector, the tradition of having worker representatives on the board of directors was continued in most of the public enterprises on a voluntary basis. After privatisation this right was revoked in practice, because the 1925 Company Act stated clearly that only shareholders could sit on the boards of directors of private companies. Since employee ownership was extremely limited, as explained in the previous section, their representatives could no longer sit on the boards of privatised enterprises.

The Impact of Privatisation on Share Ownership

Although the major objectives of the government’s privatisation policy were to increase the size of share ownership and to activate the operations of the country’s stock exchange market, the policy achieved only partial success in these areas.

After its establishment in 1994 as part of the government’s effort to attract foreign and domestic investors, the Khartoum Stock Exchange’s (KSE) performance record never rose above poor, as evidenced by the small number of companies registered in the market and the low value of shares traded. Only forty-four companies were registered in the market, and, of these, only twenty-five traded shares. The value of shares traded reached its maximum in the year 2000 with an amount of $23.01 million. The Chairman of the Board of Directors of the KSE attributed the poor performance exhibited by the market to three major factors. He stated:

”The overall poor performance of the economy and the shortages in the money supply have negatively affected people’s ability to buy and sell shares. I should also mention the prevailing ignorance about the mechanism and operations of the market, since the public still tends to focus on traditional financial operations. These factors together have had a negative effect on the market’s performance” (Interview, 28 August 2000).

Only two privatised enterprises have joined the market since its establishment in 1994, the Sudatel Company and the Oil Seeds Company. The poor performance exhibited by most of the privatised enterprises, as indicated in the previous section may explain why so few privatised enterprises have managed to join the KSE. Given these circumstances, it is difficult to argue that the privatisation programme has succeeded in increasing the size of share ownership. Worth mentioning, however, is the success of Sudatel in increasing the number of its shareholders from 37 at the time of its establishment in 1994 to 828 shareholders by the end of 1999.

Constraints on the Privatisation Programme

The implementation of the privatisation programme was constrained by several factors, such as the huge power of the President’s Office, the weakness of the implementing bodies, the inadequacy of the timetable, and a lack of transparency, in addition to the inherited weakness of the domestic private sector and the effects of the political and economic sanctions imposed on the country in the early 1990s. This section will discuss each of these constraints, starting with the President’s Office.

The President’s Office

The inordinate power of the President’s Office can be clearly seen in the widespread adoption of the Al-Aylola formula, which accounted for 53.1% of the implemented privatisation forms. As has been argued in the previous section, the evidence suggests that the HC for Privatisation, the body responsible for the implementation of the programme, was not consulted before the President ordered this. This situation shows clearly the lack of consistency in government policy towards the private sector. Moreover, the President’s decision cast doubts upon the government’s commitment to the free market economy in general and the privatisation policy in particular.

Defects in the Implementing Bodies

In the early years of the programme the two committees (HC and TCDP) held joint meetings every month in order to review the programme’s implementation process. These meetings became less frequent, however, as the pace of implementation began to slow, especially during the period 1996/1999. In this regard, the Supervisory Administrative Committee accused both the HC and the TCDP of not following up the implementation process carefully enough. It specifically referred to their failure to submit regular reports to the Council of Ministers about the performance of the newly privatised enterprises.

The failure of both committees to monitor the implementation process precisely can largely be attributed to shortages in both the quality and quantity of their employees. The picture was complicated by the proliferation of agencies and bodies dealing with the implementation of the programme: the HC, the TCDP and its General Secretariat, and the sub-committees set up by the TCDP. As a result the responsibilities assigned to each of these different bodies were likely to overlap, especially when coupled with the absence of clear lines of demarcation.

Inadequate Timetable

The adequacy of the timetable may be called into question, since it is known that forty-three enterprises (67%) were privatised in 1992/93, the first year of the programme, while the remaining twenty-one (33%) were privatised during the period 1993/1997. This disparity may have jeopardised the outcomes of the programme, especially given the small capacity of the domestic market and the lack of an efficient financial infrastructure. It should be noted that this situation occurred despite the call for the gradual implementation of the programme by the HC at the Friendship Palace Hotel Meeting in August 1992. A major reason may have been the urgent need for revenue in order to cover the substantial deficits in the government budget at that time.

Lack of Transparency

Some MPs claimed that they were unaware of the HC’s efforts to disseminate necessary information about the implementation of the programme. They therefore called on the HC to improve its record in this area, especially with regard to announcing the names and numbers of potential bidders, as well as the prices they were offering. They argued that the lack of transparency with respect to the implementation process had led to many allegations that the value of the enterprises’ assets had been underestimated. They were convinced that if transparency had been secured, none of these allegations would have been raised. Indeed, even the Rapporteur of the HC was persuaded that the HC should make greater efforts to explain the programme to the general public.

In fact, some progress has been achieved in this field, especially during the last few years (after 1998); the TCDP started to disclose some of the necessary information about the privatisation programme to the media. This change in the government’s attitude was accompanied by a remarkable improvement in the freedom of expression enjoyed by the national newspapers, perhaps as a direct result of the issuance of the country’s Constitution in 1998, which opened the door to the establishment of different political parties for the first time since the Salvation Government seized power in June 1989.

Political and Economic Sanctions

The economic and political sanctions imposed on the country in the early 1990s can be identified as one of the major obstacles hindering the flow of foreign direct investment into the country. The IMF declared Sudan to be a non-co-operative country in 1990. Three years later the Fund decided to suspend the country’s voting rights. As a result, neither Arab investors (especially investors from the Gulf countries), nor foreign investors were inclined to risk investing their money in Sudan. Only investors who sympathised with the Islamic slogans proclaimed by the government agreed to invest in the country at that time.

Furthermore, the civil war in the south was incurring huge costs in terms of both people and resources. At the same time the government was struggling to establish friendly relations with its neighbours, especially Eritrea, Uganda and Ethiopia and, above all, with an American Administration under pressure from right-wing Christian fundamentalists. Consequently, instead of focusing on improving the performance of the deteriorating economy the regime was forced to fight for its survival and to confront all these difficulties at the same time. These external constraints were aggravated by the existence of a weak domestic private sector, which was still suffering from its inherited disadvantages, especially domination by family businesses and a concentration on projects designed to yield huge profits in a short period.

In the end, the patchy impact and the continuing constraints of the privatisation programme cast doubt on its ability to produce the anticipated results.

Khalid Hassan Elbeely is a lecturer in the Department of Economics, Sudan University of Science and Technology, Khartoum. He received his PhD from Leeds University in 2003.

Footnotes

1. This is a shortened version of a paper presented to the conference on ‘Africa: Partnership as Imperialism’, Birmingham University, 5-7 September, 2003. Bibliographic references have been omitted.

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