PURPOSE
In the last chapter we started to examine the reform process by considering what could be done to improve the efficiency of agricultural service delivery without actually decentralizing the services. We argued that in certain circumstances quite a lot could be done through improving their internal efficiency and improving the competitive environment in which they operate. In this chapter we assume that the decision to decentralize has been made. The questions that this raises are: What institutional or organizational changes are required? How should the reforms be phased? Is the reform process working effectively? Each of these questions in turn raises a host of issues and we provide guidelines to assist this analytical process.
KEY POINTS
5.1.1 Introduction
In Chapter 4 we argued that it is appropriate to consider the possibilities of internal reform of the organization to improve its efficiency and the strengthening of the competitive framework within which it operates before actually moving to decentralization. At this stage the actual form of decentralization needs to be decided. In Chapters 2 and 3 we considered some of the theoretical and practical issues relating to this choice and in Section 4.2.2 we discussed some of the political implications. We now recap some of the economic and administrative factors that can influence this decision.
Criteria for framing questions
Decisions about decentralization of agricultural service functions need to take into account major policy objectives such as efficiency, accountability, transparency and equity. Four major general criteria are relevant in framing the questions that need to be answered in making these decisions:
Legitimacy: What is the nature of the output of the function? Should it be retained in the public sector or decentralized to the voluntary or private sector? What is the legal origin of the entitlement to perform the function? What guarantees that the interests of ultimate users are taken into account? If the function is retained in the public sector, can it be equally well performed at a lower administrative level?
Accountability: Is the actor accountable for performance? To whom? Are ultimate users among those? Are effective users’ participation and accountability mechanisms established? Are they enforced or enforceable?
Competence: Does the actor have the required technical and administrative skills? Or the resources/willingness to acquire such skills? Are adequate training programmes envisaged to develop such skills for all actors in their respective domains?
Financial sustainability: What sources of finance are available to actors competing to take over responsibility to perform a function? Can the actor mobilize sufficient resources to guarantee that adequate services are supplied on a sustainable basis? If the private sector is unwilling to mobilize the resources, should government provide finance, rather than produce and deliver the service?
5.1.2 Would deconcentration be appropriate?
Conditions for deconcentration
There are several factors that might favour deconcentration of agricultural services. It might be appropriate where most or all of the following conditions apply:
The central government wishes to maintain control over some or all of the components of provision, including financing
There are no major economies of size requiring centralized production and/or delivery
There are variations in local needs that require flexibility in delivery
There is little or no disincentive effect of maintaining civil service terms and conditions of employment and administrative procedures.
The questions that need to be addressed when contemplating deconcentration mainly relate to the competence of the existing field units. For instance:
What functions are being deconcentrated, and to what level (provincial, district, village, etc.)? What methods and forms of control from Headquarters to the field are being envisaged?
Can local officers cope with the increased responsibilities?
What strengthening or capacity building is required?
Is training required in terms of budgeting, plan preparation, etc.?
If cost recovery is being introduced as part of the decentralization measures, are there adequate financial procedures in place to cope with this?
Some personnel issues also need to be considered, such as:
Does deconcentration require staff to be relocated from Headquarters or to be retrenched? Have the procedures for these events been put in place?
Will additional staff need to be recruited at local level?
Furthermore, deconcentration may also influence the quality or the quantity of the service being offered, particularly if cost recovery is being introduced.
Have farmers or other consumers been sensitized to these changes and their likely consequences and asked for their views on the services being offered?
What autonomy or flexibility do local officers have in varying the service being offered to suit local requirements?
Obviously, other questions will be raised depending on local circumstances and this checklist will need to be expanded or modified to take these into account.
5.1.3 Would delegation be appropriate?
Conditions for delegation
The situations that might make delegation the appropriate choice on economic and administrative grounds would be those where most or all of the following conditions apply:
The central government wishes to maintain a measure of control over some or all of the components of provision, perhaps including the provision of subsidies
There is a need to allow the service agency greater flexibility in employment, administrative, of financial policies and procedures than is available within the civil service.
Questions that would need to be raised when considering the delegation of responsibilities for service delivery include:
Are there agencies already in existence that could assume these responsibilities or would a new agency(ies) need to be established?
If a new (public sector) agency is established, what procedures will be put in place to ensure that it operates in a cost-effective manner?
Would only public sector agencies be considered or could voluntary or private sector organizations be considered?
Would a competitive framework be created or would one agency assume all responsibilities?
Which functions would be delegated and which would the central government retain?
What form(s) of contract would be developed to ensure that the agencies meet the governments’ objectives in a cost-effective manner?
Do the proposals have implications for existing personnel in terms of relocation, retrenchment, etc.?
Have farmers been consulted on, or sensitized to, the proposed changes and their implications?
5.1.4 Would devolution be appropriate?
Conditions for devolution
Devolution of service provision to local government administration would be appropriate when most or all of the following conditions apply:
Central government is content to allow local government to take control of service delivery, either choosing the priorities itself or providing them in line with central government requirements by means of a conditional grant
There are no substantial economies of size that would markedly reduce the cost-effectiveness of devolved service delivery
Jurisdictional spillovers are minimal at the proposed level of devolution so that the beneficiaries are mainly a sub-set of those financing, or responsible for, service provision.
Many of the questions that need to be addressed when considering devolution are similar to those already considered regarding deconcentration. These include:
What functions are being considered for devolved delivery and to what level (provincial, district, village, etc.)? What methods and forms of control from Headquarters to local government are being envisaged?
Will there be potential conflicts of interest between central government staff located in the field and local government service providers and how can these conflicts be minimized and/or resolved?
Can local government staff cope with the increased responsibilities?
Can local government itself decentralize some of its existing or proposed new responsibilities to other levels of governance such as the private or voluntary sectors and does it have the managerial and administrative capacity to arrange and monitor such activities?
What strengthening or capacity building is required to ensure that service delivery is done effectively?
Is training required in terms of budgeting, plan preparation, etc.? Does central government intend to play a role in providing this training?
If cost recovery is being introduced as part of the decentralization measures, are there adequate financial procedures in place to cope with this?
What is the capacity of local government to raise the revenue required to finance this service? What type or level of IGFT will be required and what types of monitoring or supervision will be required to ensure that the IGFT is used effectively?
As with other forms of decentralization, devolution is likely to raise questions about the future employment of existing personnel that will need to be addressed.
5.1.5 Would partnerships be appropriate?
Participation with CSOs
Decentralization of service provision to CSOs serving communities or groups below the local government level, perhaps through partnership programmes, would be appropriate when most or all of the following conditions apply:
Central (or local) government is content to allow CSOs to take control of service delivery, either allowing them to choose their own priorities or determining the types and levels of services through contractual arrangements
There are no, or minimal, jurisdictional spillovers at the level of CSOs delivery. As a result there is a greater possibility that the services assume the characteristics of club goods. This may make local people more willing to partially or wholly finance the services themselves. This may be through voluntary contributions in cash or labour, by borrowing from agricultural development banks or through networks of decentralized financial service institutions
Local organizations already exist that have shown, in a tangible form, a commitment to their stated objective.
The role of government in partnerships with CSOs
Although it is preferable for government to work with existing organizations, there are several measures that government in partnerships with CSOs can take to strengthen their performance. Broadly speaking the function of government may include the following:
Formulating, and providing information on, a policy which encourages CSOs to come forward with proposals for medium-term programmes aimed at achieving stated government objectives which coincide with the CSOs’ independently set objectives. The policy would encourage the formation of associations of local grassroots organizations and NGOs. These associations should possess the minimum critical mass required to handle effectively government contributions to fund medium term programmes on a joint financing basis. Government would specify what share of the cost of the specific initiatives funded under the partnership programme would be eligible for central government support and what would be the local partners’ mandatory contribution required to obtain the public funds
Establishing the conditions for CSOs’ networks or associations to qualify for a partnership agreement. These conditions might include a minimum level of acceptable administrative capacity as well as transparent and adequate procedures for decision making, procurement, expenditure accounting, and audit. Interested existing CSO networks would be appraised for compliance with those conditions. New associations of CSOs established in response to the policy would be at the level that makes it possible for representatives of grassroots associations to play an effective role in the general assembly where they are expected to have the majority of votes
Providing technical assistance, if required, to help the associations, particularly new ones, to formulate and manage their own programmes
Negotiating with the associations regarding the general features of an indicative medium-term activity plan presented by them, which provides the basis for formalizing the partnership agreement. The agreement would commit the government to provide the agreed financial resources under the medium term plan to be disbursed in accordance with an agreed annual schedule
Exercising strict control over the expenditure of the associations, by regular inspections of their procurement procedures, accounts and frequent auditing
Renegotiating the programme in case of breach of the law, misappropriation of funds, or inadequate performance with respect to the programme objectives and disbursement schedules
Undertaking impact evaluation studies of the programmes.
Delegating responsibilities to CSOs
When contemplating delegating responsibilities for service delivery to CSOs, several questions need to be addressed regarding CSOs and the government’s intended relationship with them. For example:
What types of CSOs exist at the moment? What are there memberships and roles? Are agricultural production and a demand for agricultural services a high priority for them?
What are the current relationships between traditional authorities, local governments, local representatives of central government and CSOs?
What type of relationship with CSOs would the government prefer? Possibilities include:
- direct partnership agreements with a multitude of CSOs
- working with a limited number of ‘umbrella’ organizations that would each deal with many partners
- devolving the responsibility and resources for partnership development with CSOs to local government.
Does central government envisage a role in coordinating the activities of CSOs and those of local governments or in monitoring the activities of CSOs?
What is the potential for CSOs to raise their own resources and what financial instruments does central government envisage using to support their activities?
5.1.6 Would privatization be appropriate?
Private sector alternatives
Where the public sector has been producing ‘private’ goods it may be relatively easy to decide on the most efficient post-reform organizational form providing there are economically and financially viable methods of production available. For example, where there are no economies of scale and risk levels are low, there is unlikely to be any justification on cost-effectiveness grounds for continued central government production. In these situations private individuals or organizations such as small private firms or cooperative organizations can instead undertake production. This also has the potential benefit of spreading ownership and possibly creating a competitive environment.
Economies of scale
However, as economies of scale become important and/or the degree of risk increases, the minimum size of organization may need to increase substantially. If private sector alternatives to parastatal production are being considered, questions of obtaining adequate financing then arise. In some circumstances this may limit the range of owners to larger companies using equity finance from domestic and/or foreign investors. In some circumstances there may be political resistance to overseas involvement of what are seen as ‘strategic’ sectors of the economy. There are, however, more innovative forms of financing which allow for a range of ownership forms incorporating a wider spread of stakeholders. These are discussed in more detail later.
Collusion
Potential problems of collusion between a limited number of competitors also have to be considered in these situations. For traded goods these can often be overcome by liberalizing trade, but for non-traded goods and services the government may need to consider strengthening its competition laws and/or ensuring that a variety of types of organizations are encouraged to provide the service. There are circumstances where central government may be justified in retaining control and/or ownership of part of the parastatal’s assets as a means of generating competition and providing the government with information for regulatory purposes.
Natural monopoly
In some circumstances the reason for public provision was the existence of a natural monopoly arising from substantial economies of scale relative to the size of the market. In these situations the two main alternatives to continued parastatal provision are through the use of management contracts to control the assets (see later) or through sale of the assets to the private sector. Both routes harbour risks relating to the government’s inability to effectively monitor and regulate the situation and avoid its own exploitation and that of consumers and these problems need to be confronted.
Externalities
The reform of public sector organizations producing services with ‘collective’ properties can prove more difficult if the ‘free rider’ problem prevents a privatized organization making a reasonable rate of return on its capital. Agricultural research organizations are a good example of this situation. There are, however, potential solutions. One is to ‘internalize’ the externality, for example by devising organizational structures so that all potential free riders take a share in the ownership of the organization and hence in its success or failure. Another is for the government to accept that the externalities provide a positive benefit to certain groups in society and to financially compensate the organization for providing this public service.
Yet again, appreciating the ability to disaggregate ‘provision’ into its component parts markedly widens the potential organizational forms available when restructuring occurs, especially when one is dealing with ‘collective’ and/or ‘merit’ goods. This approach allows the comparative advantages of parastatal and non-parastatal organizations in providing different functions or various combinations of functions to be analyzed. On cost-effective grounds one might expect the role of the parastatal to change depending on:
The strength of the institutional infrastructure supporting the private sector
The quality of governance of parastatals
The instruments available for financing the provision of public goods and regulating pricing and output policies in the presence of externalities.
Paradoxically however, even if the private sector is strong it requires effective government machinery for financing and regulating the provision of public and merit goods before the role of agricultural parastatals can be fully replaced.
Divesting the ownership and/or control of parastatal assets
If the examination of the relative roles of parastatals and the private sector leads to a decision that the role and/or ownership of the parastatal should change then the choices are to reduce:
The role of parastatals in the expectation that private or voluntary sectors organizations will replace their activities
Government involvement through divestiture of the ownership, or control, of parastatal assets.
Each of these strategies could be used in isolation or together. For example, it may be decided to recapitalize a parastatal and improve its performance as a prelude to introducing competition or to selling the assets. Again, the relative merits of these different approaches are likely to vary according to different circumstances and many of the factors influencing this choice are discussed below.
The prelude to divestiture
From a legal and administrative viewpoint, divestiture of assets can be an extremely complex procedure and a failure to appreciate this can lead to frustrations with the pace of divestiture and/or ill-advised privatizations being undertaken in haste. As Adam et al (1992) comment:
“it is one of the ironies that the management of privatization can in fact involve an extensive call on the time and resources of the public sector. This is manifested in a variety of ways, and governments have generally underestimated the extent to which the details of individual privatization transactions have to be dealt with before asset sales can go ahead.” (p.51).
Guislain (1997) provides a detailed guide to the many legal, institutional and management factors that need to be considered before a successful privatization can be implemented. Only a brief indication of these questions can be given here. In some countries the constitution of the country may need to be modified to allow privatization in general, or of certain types of activities. Similarly the current constitution may prohibit foreign investment in certain sectors such as land ownership. Again, in some countries prior approval of parliament may be required before the privatization process can proceed. International laws and treaties may also affect some aspects of intended privatizations.
Who owns the assets?
As privatization entails the transfer of ownership of certain assets from a public entity to a private one, clearly defined private property rights are of vital importance (Guislain, 1997). It is equally important to establish clearly who owns assets that are to be privatized and who has the legal right to agree to the divestiture of assets. This particularly applies to assets that have been confiscated, expropriated or nationalized in the past. In some instances there may be more than one group of stakeholders with some form of claim on assets. These claims have to be investigated and settled before privatization can occur. Again, this may require legislation to solve seemingly intractable problems. Legislation to ensure a level playing field and to avoid anti-competitive practices may also need to be enacted.
Do laws need changing?
Guislain (1997) also demonstrates that contract law, company law and shareholders’ rights, accounting law and laws relating to liquidation and bankruptcy may all need to be reviewed and strengthened to deal with successful privatization. Securities legislation may also be required to encourage capital market development and share dealing. Similarly, financial legislation dealing with banking laws and regulation, collateral and sureties, credit, leasing, insurance, etc. may all need to be revised to allow successful divestiture and private sector development. Taxation law, particularly as it relates to parastatals, may need to be clarified.
A whole range of social legislation may also need to be addressed. This may include labour legislation, pension provisions and social safety nets. Parastatal employees may have extremely favourable employment terms such as enhanced redundancy and pension rights that private sector employers would be unable to afford. Legislation may be required to change these terms before the parastatal is divested. There may also need to be pension fund reforms for workers who are to be transferred from the public to the private sector.
There are also institutional and management issues that will need to be resolved. In many instances parastatals may need to be financially restructured before divestment of assets occurs. This may include cleaning up the balance sheet, writing off or taking over part of the debt, renegotiating credit and loan arrangements with commercial banks and donors, setting up suitable financial accounting systems, etc. If the existing management are opposed to privatization, or are unable to adapt to a commercial environment, it may be necessary to replace them as a prelude to privatization.
Is the current legal status OK?
The legal status and organizational structure of the public sector organization may also need to be changed. For example, divestiture through a sale of shares will entail a change in status to that of a company organized under private law (Guislain, 1997). It may also be decided to break up the assets to encourage competition or to make the parastatal easier to sell. In some cases liquidating the parastatal and selling the assets may prove to be the easiest means of divestiture.
Even when careful consideration has been given to these various legal, institutional and administrative aspects, experience of actual divestitures, and learning by doing, may call for amendments to the procedures. It is thus very important to build sufficient flexibility into the original proposals that this can be done with the minimum of inconvenience and delay in the procedures.
The sale of assets by the state
The divestiture of assets by the state is increasingly viewed as the most desirable method of parastatal reform by many donor agencies. Indeed, they would view any attempt to improve the internal efficiency of public sector organizations as a waste of time. This reflects a growing view that the governance problems associated with parastatals are such that good performance is impossible, and also that the state should withdraw from as many activities as possible. It also has the advantage that it may yield a one-off fiscal gain from the sales proceeds, although Guislain (1997) cautions that the net proceeds of divestiture have been disappointingly low in many situations. The actual sale of assets is a political as well as an economic process and its successful implementation involves many facets and detailed procedures that need to be fully considered before privatization occurs. Some of the issues that need to be addressed are examined below as a series of questions.
How should the assets be valued?
One of the many difficult issues is to establish the value of enterprises or assets that are to be divested. If the divestiture occurs through a transparent, competitive process with well informed buyers then a ‘true’ market value would be established through the bidding process. However, even with well-informed buyers there can be large uncertainties surrounding the future prospects of the enterprise so that the valuation made at the time of sale may appear to be wildly inaccurate after only a short period of time. Often the sale is made at a pre-determined price and it is in these circumstances that accusations are frequently made that assets have been disposed of too cheaply to favoured purchasers. For this reason it is desirable that independent and qualified experts using a range of generally accepted valuation principles carry out valuations, rather than the existing managers or others expected to benefit directly from the sale.
Who will be allowed to purchase the assets?
As with earlier strategies, another political consideration is the range of actors that are permitted to engage in the privatization process. On efficiency grounds it might be argued that the range should be as large as possible, but in reality some bidders may have better access to financial resources than others. Political and social factors also have to be considered. For example, potential purchasers may be restricted to the existing management and/or workforce and/or clients. This is most likely when these groups represent a strong constituency and the government wishes to protect their interests. Alternatively, the government may be concerned to establish a local capitalist or rentier group and divestiture may be limited to national organizations only, or to alliances of one or more of the stakeholder groups. However, there are several instances where the inability of local individuals or organizations to raise finance to purchase privatized assets has seriously retarded a privatization process. On the other hand, ownership or control may be extended more widely to embrace foreign organizations and multinationals either in their own right or in alliances with national firms and/or stakeholder groups. The advantages of this wider constituency are that it widens the range of potential bidders and includes those who are likely to possess the most resources.
What is the most appropriate method of sale?
Problems can also arise in deciding the appropriate public or private method for the sale of assets, although the type of sale and the range of permitted purchasers tends to be linked. As indicated above, lack of local finance can be a serious impediment to the sale of agricultural parastatals to nationals of a country. Guislain (1997) indicates that two general methods of overcoming this are through deferred payment schemes (seller financing) and credit provision (bank financing). Public flotations of shares in parastatals require a proper functioning stock exchange (Bennell, 1997). In countries without stock exchanges, privatization trust funds (PTFs) can be established that allow governments to keep parastatal shares in trust until such time that they can be sold to the public. In their survey of seven developing countries, Adam et al. (1992) stated that most countries used public share issues through a formal stock exchange for major divestitures. However, the single most common method involved the direct sale of an enterprise to a domestic or foreign purchaser, or to a joint-venture consortium of both. Bennell (1997) surveying divestiture in sub-Saharan Africa states that there are three basic types of private sales:
Competitive bidding using an open-tendering process (this is generally regarded as the most effective and transparent form of divestiture);
Pre-emptive sales where existing shareholders have a legal right to exercise first option to purchase; and
The sale/auction of assets.
Leasing arrangements
An alternative to outright sale is to lease the assets to a private organization for a stated period, normally for a fixed rent. This may be an appropriate strategy where the government is uncertain whether it wishes to lose complete control of the assets or their output. For example, the conditions of the lease may specify that certain services must continue to be provided. Another advantage of leasing over outright sale is that this allows the lessee to finance only working capital requirements rather than having to find finance to purchase fixed assets. This can increase the number of competitors willing to bid to use the assets by lowering barriers to entry substantially. It also allows the government to find new lessees if the terms of the lease are not met. The most effective method for initiating the lease is probably by competitive tender. Long term leases, and an ability to bid for subsequent leases, are likely to encourage more investment by the lessee and act as a disincentive to mining the assets, particularly towards the end of the contract.
Management contracts
Contracting out parastatal management to the private sector (Box 5.1) can be used as a way to improve parastatal performance or to prepare it for full privatization. In the agricultural sector, the World Bank survey (1995) found that management contracts are sometimes used for running plantations and agro-processing facilities for products such as tea, rubber, sugar, etc. There tends to be a ready supply of private management services in these areas from multinational organizations with their own production and processing facilities.
Box 5.1 Management contracts
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The World Bank (1995) define a management contract as an agreement between a government and a private party to operate the firm for a fee (usually performance related but it may be fixed). The government remains responsible for fixed investments and holds majority ownership, ceding control only via an explicit contract, although the private contractor may provide working capital and/or may own a minority equity share. The management contract contrasts with the lease where the lessee pays a fixed rent. |
Information, rewards and penalties and commitment
The World Bank (1995) use three criteria, namely information, rewards and penalties, and commitment in analyzing whether management contracts are likely to succeed or fail. They consider that competition plays an important role in increasing the availability of information, both in terms of a transparent bidding process for the management and the presence of competitive forces in output and input markets. However, the Bank argues that competition only reveals information; this needs to be used to shape rewards and enhance commitment if it is to improve performance. As might be predicted from principal-agent theory, in the World Bank survey profit-based fees or equity stakes were associated with successful contracts (improved productivity and profits) and fixed fees with no, or a relatively small, performance related component with failure. Another factor linked with success was managerial autonomy and the power to take decisions such as setting wage levels and hiring and firing workers.
Commitment from both the contractor and the government is also a factor affecting success. As with leasing, longer-term contracts with the possibility of renewal generate greater commitment from the contractor. The World Bank (1995) also state that for multinationals involved in substantial contracting work, maintaining their reputation is a strong stimulus to commitment. Governments, for their part, can signal their commitment by investing in the costs of finding a contractor and engaging in detailed negotiations, making new investments, taking politically sensitive steps such as retrenching workers or giving partial equity to the contractor (World Bank, 1995). It was noticeable that in most of the least successful contracts government commitment was reduced when donor agencies assumed many of the costs and risks associated with the contract.
Management contracts
Although management contracts can be successful, there are limits to their applicability. The World Bank (1995) consider that they are likely to work most effectively in sectors where technology is not changing rapidly, the output is a single homogeneous product such as sugar, or the supplier has an international reputation to protect. Whether management contracts are preferable to outright sale of assets obviously involves a blend of economic and political factors that will differ in varying circumstances.
Safety nets
One important area that has been neglected in many reform programmes relates to the provision of safety nets for the losers from the reform process. For example, in terms of food security there may be groups of low-income consumers who are seriously disadvantaged by the loss of food subsidies. Small farmers, particularly those in remote areas, may also find that they can no longer access marketing channels for inputs or outputs. There is also the problem that retrenchment of parastatal workers can cause considerable hardship for the individuals and households involved. This is an area that has been sadly neglected in many reform processes, particularly where the emphasis has been placed on reducing the fiscal deficit or where it has been assumed that the private sector will rapidly fill the vacuum left by parastatal withdrawal. Issues that need to be considered are whether safety nets should be provided, be permanent or temporary, and the form they should take.
5.2.1 Government capacity
Pace of reforms
Decisions also have to be made regarding the pace of reforms. One school of thought would argue for a steady pace to allow a smooth transition. One factor to consider here is the capacity of the government to manage the reform process. As we have seen, decentralization either within the public sector or to the private and voluntary sectors raises a considerable number of issues. There are technical, administrative and legal matters to resolve. In particular, preparation of assets for divestiture can be a very management-intensive process. There are also political concerns. There is the need to build up a political constituency in favour of reform, to reduce opposition to the reforms and to act at an appropriate time. A second factor to consider is the strength of the private or voluntary sector and the steps that can be taken to improve it.
Another school of thought would argue for rapid reforms as a slow pace gives vested interests more opportunities to delay or derail it. Typically, this resistance is likely to be most visible when there is a lack of political commitment to reform and attempts by donors to rush the reform process are likely to exacerbate the situation.
5.2.2 New competitive pressures
Nature, extent and phasing of competition
We have argued that, wherever feasible, part of the decentralization reform process should be to strengthen the competitive framework within which agricultural services are delivered. The nature, extent and phasing of new competition can vary according to circumstances. One argument is that all barriers to entry should be removed at once to expose public sector providers to the full force of competition. There may be circumstances where such an approach may be justified, particularly where the market infrastructure is well developed or where the public sector organization has been extremely ineffective. But there are other situations, for example where the government requires a parastatal to cross-subsidize the provision of public goods from its commercial operations, where a parastatal would not be competing on a level playing field with unfettered competition. This may call for a delay in introducing competition in those functions until a hard budget had been introduced that made the cross-subsidization transparent and an appropriate subvention was being paid to the parastatal for performing this function.
Even with the removal of barriers to entry, competition may not appear immediately. For example, with parastatals engaged in marketing activities, reducing barriers to entry may lead to substantial competition in retail functions, but entry may be much slower into other functions where there are economies of size or high degrees of risk, such as wholesaling and inter-seasonal storage.
Another form of phasing is where barriers to entry are initially only lowered for certain ethnic groups or nationals of the country. One reason for this is to give a ‘first mover advantage’ to groups in society that have been excluded from, or who have not fully participated in, business activities in the past. However, if entry is tightly restricted it can also be a way of allowing favoured groups to share economic rents previously enjoyed by the parastatal. At later stages or in other contexts foreign organizations, perhaps including multinational companies might be allowed to compete.
5.2.3 Financing issues
Who should pay?
As mentioned earlier, financing issues also need to be considered in deciding on the pace and nature of the reform process. There are three aspects to this. First, there are the issues relating to ‘who should pay’, the level and phasing of cost recovery procedures and the development of suitable contractual arrangements and/or IGFTs.
Strenghtening the financial sector
Second, when decentralization involves encouraging private sector providers to compete with public sector providers, the ability of the private sector to compete or to assume functions previously provided by the parastatal, is going to be markedly affected by their access to finance for fixed and working capital. This is why financial reforms and strengthening of the financial sector are of such importance to the success of market liberalization programmes and why the neglect of financing issues may help to explain the poor or mediocre performance of many previous reform efforts. The government may find it desirable to adjust the pace, or structure, of reform to the strength of the financial sector.
Government’s divestiture choices
Third, if reform involves divesting assets, lack of domestic finance and banking facilities may make it difficult for nationals to purchase them on terms that reflect the assets’ potential earning power. This then restricts the government’s divestiture choices to:
Selling the assets to foreign companies or individuals
Disposing of the assets at prices that do not reflect their true earning power (in effect bestowing a potential economic rent on the new owners)
Leasing the assets until the domestic financial position improves
Retaining the assets under government control but perhaps contracting out the management.
Phased approach to reform
The presumption in this Sourcebook is in favour of adopting a phased approach to reform wherever possible, the pace being influenced both by the ability of the government to manage it and of local government and/or the private and voluntary sectors to take up functions previously undertaken by the parastatal. It has been argued already that reform is unlikely to succeed unless there is political commitment to it. Once this is attained, pressure can be put on a parastatal to improve its performance by introducing hard budgets, liberalizing trade, and reducing barriers to entry to domestic competition while ensuring that a level playing field exists. Encouraging private and voluntary sector participation in the provision of private services at market prices is likely to be much easier to achieve than the provision of public or merit goods. As government and/or parastatal regulatory expertise powers improve, private and voluntary sector organizations can be funded to produce services on contract as alternatives to parastatal production. This in turn will generate more information to improve the regulatory process. However, parastatal involvement in the provision of certain goods and services, for example agricultural research, may still be the most cost-effective alternative available even when the government’s regulatory expertise improves.
This presumption in favour of a phased approach also applies to the divestiture of assets. There seems no point in delaying the sale of assets where:
The government has decided that it has no strategic interest in retaining ownership of the assets
There are no concerns over either the exploitation of monopoly power or the cessation of services
Sufficient market liberalization has occurred that a reasonable assessment of the potential value of the assets can be obtained
There are buyers willing and able to pay the net present value of the assets.
But each of these assurances can take time to achieve and this may delay the optimum time of finally disposing of those assets that the government intends to sell.
Monitoring the reform process
It is surprising to find how little attention appears to be paid to monitoring the reform process once it has been implemented. There is, however, a learning curve involved in most reform processes and providing a feedback mechanism allows mistakes to be remedied and the lessons incorporated in the next phase of the reform process. Typically the commission, ministry, committee or unit responsible for administering the reform process will not be equipped to collect and analyze the types of information required for this feedback process. Given the importance that donors place on parastatal reform it is perhaps surprising that they have not provided the funds to ensure that effective monitoring of the process occurs. This could be done either within the unit responsible for reforms or by being contracted out to research organizations and then fed back at regular intervals to the policy makers.
Once the decision has been taken that decentralization of the provision of agricultural support service is required, a range of political, economic and administrative factors need to be considered in deciding the appropriate form it should take. Four major general criteria are relevant in framing the questions that need to be answered in making these decisions are legitimacy, accountability, competence and financial sustainability. A general checklist of questions can be devised for each form of decentralization but this will require modifications and additions for particular situations.
From a legal and administrative viewpoint, divestiture of assets can be an extremely complex procedure and can absorb considerable managerial time. Choosing the appropriate form of divestiture, the range of potential purchasers, the method of sale and of payment all need careful consideration. Contracting out management to the private or voluntary sector can be used as a way to improve parastatal performance and to prepare it for full privatization.
Given the complexity of the reform process, the presumption in this Sourcebook is in favour of adopting a phased approach to reform wherever possible. It is important to monitor the reform process so that adjustments can be made and lessons learned from the experience.
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[50] This Chapter relies
heavily on material previously published in Smith (1999). |
