Privatizing management of state-owned enterprises

Governments can often increase the operating efficiency of their state-owned enterprises while retaining ownership by using management contracts and leases to the domestic and foreign private sector where these have strong technical and management skills. Even if private operators are unable to manage an entire enterprise, it may be feasible to hive off certain parts. Leases are often used as an intermediate step toward eventual transfer of ownership from the public to the private sector.

The privatization of the management of a PE through the granting of a management contract, a lease or an operating concession to a private sector business operator can be used as an end in itself or as a preparatory step to divestiture. The granting of operating concessions can also be used, together with build-operate-transfer schemes, to raise private financing for the development of infrastructure and thereby to reduce the financial burden on the state as well. This kind of arrangement, combining both capital and management privatization, is a useful option when the state is faced with budgetary constraints for the development or modernization of infrastructure.

There have been many cases of commercial success combined with political acceptability in management contracts for state-owned hotels. Management contracts in Sri Lanka transformed the financial performance of state-owned textile mills. In the Côte d'Ivoire, a joint venture company comprising local and foreign interests provides water and sewerage services of a high standard. Partial private management for port services might include stevedoring, transit, container and other activities - the Kelang Port Authority in Malaysia initially arranged for private management of its container terminal through a lease.

Contracted managers can be efficient only if they are given autonomy in day-to-day operations. However, management fees may be payable regardless of performance. It is therefore useful to initiate incentives to reward managers for increased profitability.

Management contracts are used in various sectors, including hotels (as in Niger and Togo), agro-industries (Cameroon, Côte d'Ivoire, Senegal) and manufacturing and mining (Ghana). They are also used for plantations in Sri Lanka, where contracts are awarded to private sector operators through competitive bidding and where strict performance criteria are applied in order to avoid asset stripping or short-term profit maximization at the expense of long-term development. In China, where management contracts are used widely and subject to competitive bidding, potential managers are required to submit a business plan, together with their bid for a management contract, with the business plan playing an important role in the awarding of the contract.

Leasing is often used where it is difficult to attract large amounts of capital for the rehabilitation or sale of PEs. It is used in various sectors, including electricity and water supply (Cote d'Ivoire), steel mill and refineries (Togo), manufacturing (Ghana) and hotels (Cote d'Ivoire, Niger). A particular form of leasing is the transfer of the leasehold of state-owned property, including hotels and farm holdings (Jamaica), which gives entrepreneurs with limited capital access to productive assets. In Jamaica, it has engendered many new entrepreneurs who have turned hotels round, upgraded their facilities and services and transformed idle land into productive agricultural areas, including for export crops.

In a number of countries in transition, the state is using investment funds as holding companies to provide management expertize and effective corporate governance for their PES. In the eastern part of Germany, the Treuhandanstalt has also developed solutions involving transfer of management. The model for medium-sized firms is to establish a management company as the o wn er of the firms with the task of managing 5 to 15 firms. The Treuhandanstalt holds 99% of the capital of the management company, its management organ holds the remaining 1%. The latter is a limited liability company owned by the private managers. Another method is to transfer firms to venture capital corporations, either refinanced by the state and/or by private finance companies such as banks or insurance companies. So far, two state-financed venture capital corporations have been formed, and more are expected to follow.