Information about Asia and the Pacific Asia y el Pacífico
Chapter

VII Privatization and State Enterprise Reform

Author(s):
Ichiro Otani, and Chi Pham
Published Date:
May 1996
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Information about Asia and the Pacific Asia y el Pacífico
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In the late 1980s, the Government, responding to increasing concerns about the weak performance of the state-owned enterprises, began to formulate a strategy for privatization and state enterprise reform. At first, during 1988–90, the emphasis was on granting greater managerial autonomy to state-owned enterprises, and the privatization program was limited mainly to small enterprises. Starting in March 1991, the program's emphasis shifted to include more of the larger enterprises, and a more articulate plan was announced whereby all but a handful of “strategic enterprises” had to be privatized within three years.

Overall, the privatization program, although slower in developing than originally envisaged, was quite successful; out of some 200 centrally managed enterprises existing in 1989, 65 were privatized by December 1994. However, the excessive reliance on leasing—as opposed to selling or hire purchasing—enterprises may need to be corrected to encourage longer-term investments and reduce the burden of administering such contracts.

State Enterprises Before 1990

At the end of 1989, the state enterprise sector comprised about 640 enterprises and accounted for virtually all the modern industrial sector.30 State enterprises employed an estimated 16,000 workers (about 10 percent of the nonagricultural labor force). About two thirds of these enterprises—mainly the largest—were centrally managed, while the rest were managed by provincial and district authorities. Three fourths of the state enterprises were engaged in manufacturing, and the others in construction, electricity, and mining.

Prior to the introduction of the NEM in 1985, enterprises had no operating autonomy; they obtained allocations from the budget for their working capital, investment outlays, bonus payments, and welfare expenditures. In turn, as mentioned above, they were obliged to transfer to the budget all of their operating surpluses and to reimburse loans that they received from the Government for their fixed investment.31

In March 1988, the Government granted operating autonomy to state enterprises. Most of these—including the largest—became free to determine their production levels, wage and price policies, and investment plans. Subsidies and capital transfers to state enterprises were discontinued. In that connection, several state enterprises in 1989 substantially increased wages in cash for their employees, breaking with the previous system, under which they mainly issued payments in kind (with rice coupons) and then financed the losses with bank credit. Although the old system ceased in 1990, several state enterprises had already accumulated substantial overdue debts to the banking system.

Strategy for Privatization

The March 1988 decree on privatization clearly aimed at reducing the role of the Government in production and strengthening private sector activity. That decree, however, made no mention of criteria for privatization, such as the selection of firms to privatize, asset valuation procedures, and bidding standards. It was only in late 1990 that the exercise became more systematic. The enterprises to be privatized had to be ranked on the basis of the following criteria: (i) cost to the budget; (ii) need for capital; (iii) scope for attracting investors; and (iv) ability of workers to manage or own, or both, the enterprises. In practice, a number of other factors were also important: the size of the enterprises (smaller ones were preferred); the ability to conduct an acceptable valuation;32 and the expected employment impact.

While a list of enterprises to be retained in the public sector has yet to be published, the Government outlined the broad criteria for this selection. According to Article 2 of Decree No. 17, enterprises “to be kept under state control are those having importance to the national economy, society, defense, and internal security.” The decree specifies as strategic areas “electricity generation and distribution, waterworks, post and telecommunications, pharmaceuticals, domestic and international commercial airline flights, banking and insurance, the bulk purchase and sale consortium, mining of ore resources, logging, and the national defense industries.”33 However, owing to the lack of public capital, recent privatizations have included areas previously considered strategic, namely, road and bridge management and hydroelectricity. Indeed, the Government is considering allowing private participation in all areas of interest to the private sector except forestry and defense.

Results of the Privatization Program

Between the start of the privatization program in 1989 and December 1994, 64 centrally managed slate enterprises were privatized out of a total of about 130. (See Table 11 for data on the privatization of centrally managed enterprises.)34 The number of privatized enterprises grew each year between 1989 and 1992 before leveling off in 1993 and 1994. During 1989–92, 39 enterprises were privatized, with a total value of $41.4 million; during 1993–94, 25 additional enterprises were privatized, with a total value of $26.8 million. The number and value of privatized enterprises declined in the past two years because the most attractive and important investment opportunities had already been offered in response to strong demand by foreign investors.

Table 11.Privatization of Centrally Managed State-Owned Enterprises1
Mode of PrivatizationContractNumber of Employees
Enterprise Name and Year PrivatizedLeaseHire purchaseSaleOrigin of investorPeriod (in years)Value (in thousands of U.S. dollars)TotalRetainedDismissed
1989
Sheet metal factoryx15175
Tobacco factoryx514,0001,03793998
1990
Tha Ngone Mechanical Workshop No. 1xDomestic1050
Dong Doh Poultry FarmxDomestic101512626
First of May SawmillxForeign101,82021114962
1991
Rattan and bamboo factoryxDomestic10216311912
Lao Plywood FactoryxForeign158,40037834929
Wood Product Factory No. 2xForeign156202362306
Irrigation Pump Repair
Workshop at Km 14xForeign101212020
Lao-Czech Pig Farm at Km 1 3xDomestic10571818
Lao-Swedish
Mechanical Work shopxForeign15473107107
Tha Ngone Fish FarmxDomestic10109
Veune Kham Agriculture
Technical Service CenterxDomestics7841401
Parquet Factory No. 1 at Km 14xDomestic102,245
Wood Product Factory No. 1xForeign101,055
Paske People's BuildingDomestic20200
Inter-Lao TourismxJoint65
1992
Lao-Hungarian Poultry Farm2x222
Thanaleng Warehouse and FerryxForeign152,67812210022
Latkhouay Pig FarmxDomestic202412727
Lao-Cuban Poultry FarmxDomestic53227261
Tha Ngane Agriculture Mechanical WorkshopxDomestic5284444
Car Rental Company No. 1x1579874047
Car Rental Company No. 2xDomestic1521
Champassak Peoples Buildingx20400
Praksab Sugar FactoryxDomestic153,2003131
Savannakhet Buildingx60
Nabong Cattle BreedingxJoint203093333
Electrical wire and plastic bag factoryxForeign1525381792
Detergent factoryxForeign157638181
Tha Ngare Vegetable CenterxForeign20108
Phou Vao Hotel at Luang PrabangxJoint35700
Na Phank Seed Production CenterxForeign20232
Animal feed factoryxDomestic155238989
Baby food factoryxDomestic1531
Tha Ngone FerryxDomestic511566
Lao-Australian Heavy Mechanical Workshop at Tha NgonexJoint1,5301101110
Borikharnsay SawmillxForeign155403030
Lane Xang HotelxJoint3,500
1993
Lao BreweryxJoint10,200197197
Sikhay SawmillxForeign15346926527
Parquet Factory No. 2 at Km 14xJoint152,26319067123
Tannery factory, prefecturexjoint251,250
Pancheng Sugar FactoryxForeign35125
Phonehang Production Unit at Km 62xDomestic20123
Phousy Hotel, Luang PrabangxJoint30252
That Khoa Garment FactoryxDomestic1563
Lao Soft Drink CompanyxJoint2,380107107
Cultural Product Factory (wood sculpture)xDomestic2042
Muang Lao HotelxForeign30881
Lao Textile Factory of the Women's FederationxJoint304,500
Garment Factory No. 1
Pharmaceutical factor yxForeign
1994
Lao-Russian Workshop at Dang ChongxDomestic10665
Expert Service BuildingxJoint301,350
Lao-Hungarian Poultry Farm2xDomestic10
Building Construction No. 2x5215
Building Construction No. 3x585
Laovieng Textile Factory, prefecturexJoint40150
Construction Company No. 21,035
Agricultural Transport Company1062
Agricultural machinery11
Forestry Enterprise No. 283
Autotransport No. 1xDomestic735
Total of privatized enterprises6468,24933,45933,02934303
Sources: Lao authorities; the World Bank; the Asian Development Bank; and IMF staff estimates.

As of December 1994.

This enterprise was first privatized in l992. The lease was renewed in 1994.

Total for enterprises for which data are available.

Sources: Lao authorities; the World Bank; the Asian Development Bank; and IMF staff estimates.

As of December 1994.

This enterprise was first privatized in l992. The lease was renewed in 1994.

Total for enterprises for which data are available.

Of the 58 privatized enterprises with data on the mode of privatization, 78 percent were leased, 19 percent sold (outright), and 3 percent hire purchased.35 The average value of leased state enterprises (about $40,000) was higher than that for those sold (about $23,000) or hire purchased (about $3,000). Overall, for the 50 firms with data on the origin of investors. 42 percent of them were divested to domestic investors, 26 percent to joint ventures, and 32 percent to foreign investors. The average value of state enterprises privatized through joint ventures (about $28,000) was higher than the average value of those that were fully sold to foreign investors (about $18,000) or domestic investors (about $4,000).

Before privatization, the 28 state enterprises with employment data employed 3,459 workers; immediately after privatization, employment fell to 3,029, as 14 percent of the workers were made redundant.36 However, evidence from a recent urban labor force survey suggests that the unemployment impact was minor. Only 2.6 percent of the total urban labor force of almost 200,000 was unemployed in July 1992.

Data on the privatization program also indicate that the average size of the workforce taken over by foreign investors and joint ventures was significantly larger than that if the workforce taken over by domestic investors. Interestingly, job losses were lower for firms divested to foreign investors, possibly suggesting that foreign investors were less knowledgeable about individual skill levels, better able financially to bear excess employment, and more pressed by the Government to absorb excess labor.

While results of the privatization process at the provincial level are hard to gauge owing to the lack of adequate data, it appears that progress has been about as rapid as that at the central level in terms of the number of enterprises privatized. Sales of state enterprises, rather than leasing, dominated at the provincial level. At least 52 provincially managed enterprises were sold between 1988 and mid-1993, and at least 29 were leased.37 The prevalence of selling as the mode of privatization reflects, among other things, the fewer legal restrictions on the sale of state assets at the provincial level than at the central level. The average value of enterprises privatized at this level was much smaller, mainly because of the lower average value of provincially managed state enterprises in general.

Although line ministries were central to the privatization process, they did not have direct responsibility for supervising the process. Before February 1992, responsibility for the privatization program lay with the New Economic Mechanism financial Committee, headed by the Ministry of Economy, Planning and Finance.38 In February 1992, the responsibility for formulating the program was transferred to the Privatization Committee of the Committee for Planning and Cooperation (CPC), and the responsibility for executing the CPC's decisions was assigned to the Permanent Office of the Privatization Committee (POPC) in March 1993.39 However, owing to the lack of resources and information, the executing agency delegated to the line ministries the tasks of identifying, classifying, valuing, and prioritizing enterprises for privatization, with the executing agency merely supervising the process. Line ministries also recommended the mode of privatization and often identified potential transferees.

Problems with Privatization and Remedial Actions

Despite the overall success of the privatization process, several problems emerged in its methodology. The most important of these problems were the prevalence of leasing; weak accounting practices; the insufficiency of resources for the POPC; the lack of clear ranking criteria; and, more generally, the obscurity of the privatization process.

Prevalence of Leasing

The prevalence of fixed-term leasing was the major problem with the privatization process. Leasing has emerged as the main mode of privatization, reflecting the Government's reluctance to part completely with state enterprises and the legal prohibition of the selling of state land. In addition, leasing has been probably more politically acceptable than selling outright because of the public concern that the nation's holdings will be entirely sold. Furthermore, because of uncertainty about the value of state enterprises and the permanence of the economic reforms, the private sector may have preferred the less risky option of leasing rather than buying. Joint ventures were chosen as leasing agents when state enterprises were relatively large or required more sophisticated technology than the Lao public and private sectors were able to provide. Contracting out or leasing to workers' collectives was chosen when alternative modes of privatization were not practical.

Overrelying on leasing does, however, cause problems. Leasing does not change the ownership structure; it merely changes the management structure—and then only for a limited period. Because ownership is unchanged, leasing does not appear to stimulate investment. Indeed, leasing tends to encourage decapitalization because, with an average leasing length of 15 years, the owners have a limited horizon. Moreover, government monitoring of the leased state enterprises is costly and difficult. More recently, government policy has started to favor the sale of state enterprises, as buyers are being sought for expiring lease contracts.

Weak Accounting Practices

Weak accounting practices have also hindered the program. State enterprises lack reliable data on financial history, net worth, and profitability. Many of them have only recently (since 1990) started using international accounting methods, rather than the “unified” system prevalent in centrally planned economies. Similarly, enterprises offered for privatization are not independently audited, a factor that has adversely affected the private sector's confidence in the privatization process. Against this background, a system of regular, independent audits of slate enterprises is being carried out by qualified personnel according to international accounting standards.

Insufficiency of POPC Resources

The POPC was not adequately staffed to perform its extensive privatization responsibilities. The POPC has a staff of only 14, even though it is responsible for coordinating the process, which includes surveying, valuing, prioritizing the privatization of enterprises, and finding bidders. The authorities plan to dedicate more resources and training to this effort, including through external technical assistance. In addition, given its limited resources, the POPC plans to concentrate on privatizing the larger (in terms of financial assets) enterprises.

Lack of Clear Ranking Criteria

As previously noted, the lack of clear ranking criteria for state-owned enterprises has hampered privatization, allowing line ministries to prioritize for privatization according to ministerial, rather than governmental, objectives.40 A clear set of criteria is being established for the Government as a whole, and the POPC will rank all centrally managed slate enterprises accordingly. These criteria will focus on the availability of a recent independent audit; the ability to establish a clear and definitive legal separation from the state; the size of the state enterprise (in general, larger ones should be given higher priority); and the expected demand from private sector investors.

Obscurity of Privatization Process

Public knowledge of the privatization program has been limited, and the overall process has been rather opaque. Information on the enterprises to be privatized has been scarce, although, invitations to bid should have been widely disseminated by decree, using newspapers, radio, and official bulletins. Indeed, the authorities have tended to favor direct contact with potential bidders rather than depend on costly and time-consuming publicity. In these circumstances, the public is not aware of the Government's privatization plans, the enterprises that are being considered for privatization, or the worth of these enterprises. To enhance the transparency of the privatization process and encourage wider private sector interest, a list of enterprises to be privatized and those to remain in the public sector has recently been promulgated.

Conclusion

Substantial progress has been made with the privatization program in the Lao P.D.R. Many enterprises of varying sizes and activity have been privatized without significant adverse impact on employment. Foreign interest has been significant, and the privatization process has been central to the economic liberalization program. However, improvements in the method of privatization could make the program more successful. In this connection, it should be emphasized that competitive, transparent, and well-defined procedures should be used throughout the privatization process.

30There were also many smaller nonindustrial enterprises, for example, in the transportation, wholesale, and external trade sectors. The total number of these enterprises is not known with certainty.
31These reimbursements were made under the provisions of “depreciation allowances” under nontax revenues in the government budget.
32The valuation process has concentrated on assets rather than the income-generating potential of state-owned enterprises.
33Notwithstanding the inclusion of banking in this list, the authorities allowed six new private commercial banks to start operations in 1993.
34Because of data problems, this discussion of results is limited to centrally managed state enterprises.
35Hire purchase denotes an agreement whereby the purchase price for an enterprise is paid in installments.
36This figure reflects only the initial employment impact of privatisation; data on subsequent job losses are unavailable.
37The total number of provincially managed state enterprises is not available.
38The Ministry of Economy, Planning and Finance was split into the Ministry of Finance and the Committee for Planning and Cooperation in 1992.
39The POPC was established at the headquarters of the CPC, with the Chairman of the CPC (who is also the Deputy Prime Minister) overseeing its activities and those of the POPC.
40Nevertheless, if the POPC and the line ministries disagree on the selection of enterprises for privatization, the Cabinet makes the decision.

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