Reforming Public Sector

The Reform of SOEs can cost a government

its support base, because reforms almost
invariably involve eliminating jobs and cutting
long established subsidies. Not surprisingly,
the politicians carefully weigh any change in
SOE policies, naturally preferring policies that
benefit their constituents and help them
remain in power over policies that undermine
support and may cause them to be turned out
of office.
While some exceptional leaders may be able to
change their support base and mobilize new
constituents for reform, most are inherently
responsive to the supporters who put them in
office.

• How have the countries that reformed

successfully overcome the political obstacles to
reform?
In considering the above question,
we found that there are three
necessary conditions for reform:
1. Reform must be politically
desirable to the leadership and its
constituencies. Reform becomes
desirable to the leadership and its
supporters when the political
benefits outweigh the political costs.
This usually happens with a change in
regime or coalition shift in which those
favouring the status quo lose power. It
may also happen when an economic
crisis makes SOE subsidies so costly
that reform becomes preferable to the
status quo.
It is also important to note that if
the groups opposing reform
constitute an important part of the
ruling politicians' support base,
then privatisation or public
enterprise reforms are bound to be
stalled.
2. Public sector reform becomes
politically feasible if the ruling
politicians have the means to
implement policy and to withstand
opposition to reform.

3. Reform must be credible. A reform

becomes politically credible only when
the investors believe that government
will not re-nationalise the already
privatised firms.
• From nationalisation to privatisation—mode,
dynamics and political economy of public sector
reform in Bangladesh
The AL which formed the first government after
independence in 1971, announced a
nationalisation policy on 26 March, 1972. It
nationalised all Pakistani-abandoned industrial
units with assets above Tk. 1.5 million, all
Bengali-owned units in jute, textile and sugar
as well as banks, insurance companies, inland
water transport and large sectors of trade.
Many argued that during the period of
Pakistan, the industrial sector was
essentially the monopoly capitalism of
twenty two families who controlled the
economy. Nationalisation of industries
would enable the people to have
access to the profits which were
previously appropriated by a few
capitalists
• The owners were, however, offered
compensation on their industrial units, but they
were surprisingly apathetic towards realising
the compensation claims. The main reason was
that an acceptance of compensation was seen
as prejudicing their right to repossess the whole
property.
• The Bengali owners were also offered positions
of chief executives in their respective industrial
units. They saw their presence in their
nationalised enterprises as an advantage in
preserving the continuity of their role and
promise for future demands for privatisation.
• It was argued that the decision to nationalise
was Mujib’s considered response to the radical
forces within and outside his party.

• it was also argued that the decision was based

upon Mujib’s judgement that conservative
forces on the right were relatively weak and
had no organised alternative leadership to fall
back upon.
• The nationalisation of Bengali-owned industries,
however, created deep resentment within the business
community, particularly the severely affected Bengali
industrialists. Many had ties with the AL, but had
become disillusioned with Mujib and his party. Within
the party, for instance, the Commerce Minister M. R.
Siddiqui strongly objected to the concept of
nationalisation of Bengali-owned industries (M. R.
Siddiqui was a long standing supporter of Awami
League and was married to the daughter of A. K.
Khan, owner of the largest Bengali owned business
group during the pre-liberation period. After his
objection to the draft nationalisation policy it was then
again sent to the cabinet for debate).
There existed little real consensus within
the AL on basic issues like the type of
broad economic model to be followed. The
party was thus remarkably factionalised.
The factionalism was reflected among
Mujib's cabinet members. Some members
supported private-sector development,
some demanded socialist transformation,
some were uncommitted centrists and
many were simply opportunists.
• Maniruzzaman observed that the dominant
members of the AL had been divided into two
camps since the liberation over the issue of the
introduction of “pure socialism” or a “mixed
economy”. While one group led by the Finance
Minister Tajuddin Ahmed argued for the
introduction of “pure socialism”, the other group
led by the Minister for Industries Syed Nazrul
Islam advocated a “mixed strategy” of
economic development.(Maniruzzaman, T.,
Bangladesh Revolution and its aftermath,
p.162.)
• Significantly, the conservative
elements in the party--consisting of
the trading classes, aspiring
industrialists and the ex-owners or
shareholders of the nationalised
enterprises-- were all pressing for a
revision of the policy. On the other
hand, the radical wing of the party,
consisting of the militant factions of
the students and trade unions, were
pulling in the direction of a further
extension of public ownership.
• A senior Minister in the government declared;
“It shall not be permitted to help grow a
capitalist class in Bangladesh.....The AL
government is determined as pledged to
establish socialism in the country.” However,
there was a significant faction within the party
which had been overtly criticising the
government for nationalisation of industries
• E. Khan maintained that the AL was just responding to
the pressure from the radical partymen. The vast
majority of the middle class and the business interests
within the AL leadership would have liked to grab the
nationalised enterprises, if they could.

• A senior Minister of the right wing stated that,

....The government should abstain from nationalising
Bengali-owned industries, mill, factories. The party is
already divided on the issue and the decision of
whole-sale nationalisation will lead to further chaos
within the party, and this will be politically suicidal for
us.
• The economic situation of the country became
critical from the beginning of 1974 due partly to
the global inflation which hit the world in 1973
and partly to the sharp decline of production,
and large scale smuggling of jute and food
grains to India. The public sector significantly
failed to contribute to the country's economic
growth due to mismanagement, in fact, in most
of the public enterprises the production went
down and the cost went up. The prices of
consumer goods rose by about 600 percent
over the 1969-70 price level and there was a
famine condition in the country.
The economy was on the verge of collapse. A
group of radical elements in the party criticised
the government for unlimited patronage
provided to many of the party leaders and
workers for political and private gains. A group
of radicals decided to break away from the
party as they thought the party was irrevocably
committed to the pursuits of “bourgeois goals
• Mujib was beginning to become increasingly
dependent on the rightist wing, as he was
disillusioned with the dismal performance of the
nationalised sector and the economic condition
of the country as a whole. Under the
circumstances, the government also
desperately needed foreign aid.
 Process of Private Capital
Accumulation
• An extended state sector meant access to
control over imports made by the state
sector through political patronage.

• In this context, the emerging Bengali

capitalist class in a new nation were not
absolutely put out by nationalisation, they
had opportunities for making money in
trade and indenting.
• The new and rising trading class managed to
get into indenting purely under the state
patronage, as distinct from those of the
established capitalist who were disillusioned
and demoralised because of the pursuance of
nationalisation policy. But soon they wanted a
share of those economic activities within the
public sector. In fact, the extension of the public
distribution systems served the material interest
of the new bourgeoisie in the first instance and
they were later joined by the old and
established business elite
• Most commodities imported or produced by
public enterprises for sale to the public had to
be marketed through the private sector. It thus
became a major vested interest of the dominant
groups to secure the entitlement to wholesale
distribution of state produced or supplied goods
at below their market price so that the
premiums could be retained. A group of new
rich people were created by the regime who
had access to political power and utilised it to
make their fortunes by working as middlemen
between business and the government
 Capital Accumulation and Lobbying for
Privatisation Nationalisation of Industries

• Capital accumulation through smuggling, black-

marketeering and other illegal means
• Capital accumulation through business, trading and
Indenting
• Malpractices by party leaders and workers
• Malpractices by trade unions’leaders
• Malpractices by Political Appointees
• Emergence of new groups of wealthy people
• Old members of business groups
• Strong Privatisation Lobby
• The old members of the business groups either
covertly or overtly opposed the nationalisation
policy. Those who were within the party or
close to its leadership tried to get the Bengali-
owned mills excluded from nationalisation.
These elements within the party were always
part of the lobby for privatisation and spared no
occasion to denigrate the state sector. At no
stage did they abandon hope or pressure on
the leadership to privatise industries. These old
business and industrial elites were joined by a
new generation of wealthy people who
accumulated considerable surplus through their
links with and access to the ruling party.
• A campaign was mounted by the private sector
lobby to discredit public sector enterprises so
that a majority of them could be returned to
private ownership. Once the militant radical
elements had in effect left the party, the
balance within the party tilted in the direction of
the right wing elements. These elements in the
ruling party, anxious to realise their material
interests, were better positioned to exploit the
state sector. However, in an earlier move the
government decided to remove the owners
from the management of the nationalised mills
as many of them joined the groups engaged in
surplus extraction
• As a result, the lobby for privatisation and increased
opportunities for private sector began to raise its voice
more frequently and in a more organised manner,
particularly after the Bengali owners were removed
from the management of the mills. The Chairman of
the Bangladesh Jute Mills Entrepreneurs Society, an
association of the previous owners of the nationalised
mills stated that;
Nationalisation had caused enormous losses and
damage in most spheres of our economy......On the
whole nationalised sector was performing
dismally......Losses were piling up to the detriments of
the national economy.... Privatisation would help
capital formation......The only way to
restore.....(entrepreneurs) confidence was by positive
steps such as privatisation.
• The pressure for privatisation and raising the
ceiling on private investment exerted by groups
of new rich within Bangladesh was strongly and
consistently supported by the foreign aid
agencies. They also advocated a larger role for
the private enterprise in the industrial sector.
For example, the World Bank recommended
raising the private investment ceiling to Tk. 10
million or removing it altogether. Within the
government there was a strong group of
bureaucrats in favour of an upward revision of
the private investment ceiling
• A situation of unbridled plunder was created in
the economy in general and that of industry in
particular during the AL regime. In this respect,
the large-scale nationalisation of industries was
the chief instrument of the policy. It was a
mechanism through which industrial capital
rapidly began to melt away and accumulate in
the hands of certain people who began to get
organised as ‘a class of commercial capitalists’.
According to Lawrence Lifschultz, since the
accumulated resources represented illegal
income, those who possessed it had been
searching for ways to legitimise their new
fortunes.
• It was obvious that those who had accumulated
financial resources were pressing the government to
commit itself to a more substantial and permanent role
for the private enterprise in the economy of
Bangladesh by raising the private investment ceiling.
There was pressure not only for raising the ceiling on
investment but also for declaring a moratorium on any
action against money earned through illegal
transactions such as smuggling, black marketeering
and avoidance of taxation. All hidden wealth was to be
exempted from penalties for past violations of foreign
exchange and tax laws, provided these funds were
invested in industrial ventures in the priority areas as
prescribed by the government
 Public Enterprise Reform between 1975-81

• The regime had inherited a major economic

crisis from the earlier era.

• Just after coming to power, Zia reversed the

Awami League’s socialist approach because he
considered that a radical socialist agenda
would polarise society and sharply reduce
desperately needed Western financial aid and
support.
• In response, there was an explicit and clear
policy statement from him in favour of a mixed
economy with an emphasis on privatisation and
private sector- led development. He
immediately withdrew bans on private
investment, and decided to privatise those
industries which had been nationalised in 1972.

• In that atmosphere of politico-economic crisis,

the protagonists of the private sector made
themselves visible. Zia came under pressure
from the Bangladeshi business elite, the World
Bank, and a section of senior members of the
newly restored bureaucracy to expand
opportunities for the private sector.
• This new industrial strategy received
considerable support of the civil and military
bureaucracy and the economic elite in general,
because the vast bulk of those officers came
from rich rural or urban family backgrounds.
• Zia also realised that without the support from
the civil bureaucracy he would not be able to
implement any policy, let alone privatisation.
Thus, he attempted to rehabilitate senior
Bengali members of the old central superior
services of Pakistan who had been dismissed
by the AL government for maintaining intimate
connections with the Pakistan government
during the liberation war.
Zia relied on former army officers, and anti-
Awami League professionals and technocrats.
One of his chief economic advisers was Shafiul
Azam, a senior CSP officer who had been
dismissed by the AL government. Azam was
determined to rehabilitate the industrial sector
and advised the government to privatise public
enterprises, and restore private sector
development. He convinced Zia in 1975 and
Ershad in 1982 to institute their two major
privatisation initiatives. The ceiling on
investment in the private sector was raised
from Tk. 30 million to 100 million and then
finally abolished in September 1978.
• During the five years of Zia' rule, a total of 255
public sector industrial enterprises were
privatised.
• It was also declared that loss-making and non-
monopolistic industries would also be handed
over.
• The businessmen and industrialists were given
all possible support; foreign exchange was
provided at less than its market value through
import licensing, and capital was provided at a
cheaper rate of interest through nationalised
commercial banks.
• In 1978, General Zia became politically
ambitious and set out to civilianise his rule. He
formed a political party called Bangladesh
Nationalist Party (henceforth BNP). At this time,
Zia needed to mobilise a civilian support base,
having received active backing from the
coalition of political factions opposed to the
Awami League. His new party received support
from a section of senior civil servants, the
urban middle class, affluent traders,
industrialists, ex-owners of nationalised
industries, the rural rich and parties and groups
opposing the AL's socialist policy.
• This was a very different support base
from the AL’s lower middle class backers.
These diverse interests were held
together by political patronage from Zia in
the form of bank loans, licenses, and
permits and through selling the public
enterprises at throw-away prices.
Consequently, the private business
extended substantial financial support to
the BNP.
• Many businessmen formally joined the
new political party formed by Zia. For
instance, C. Tanvir Ahmed Siddiqui,
former president of Bangladesh federation
of chamber of commerce and industries
became treasurer of the BNP and Minister
for Commerce and Trade, Moyeedul
Islam, owner of a big industrial house,
became a minister and took charge of the
financial management of the 1981
presidential election. Zahiruddin Khan,
president of Chittagong chamber of
commerce and industries, and A.K.M.
Ziauddin president of Khulna chamber of
commerce and industries, became MP’s
• PE Reform during the Ershad Era, 1982-90
• Having deposed an elected president in
March, 1982, H.M. Ershad desperately
needed to justify his regime. Muhit pointed
out that the new rulers had to take dramatic
action on the economic front to legitimise
the take-over. Within months of taking
office, he announced a New Industrial Policy
(NIP) to spur economic growth. Ershad
followed the path of Zia and extended the
process of privatisation further.
During Ershad era a total of 186 industrial
enterprises were privatised. The most dramatic
element of the new policy was the decision to
return former Bangladeshi-owned jute and
textile mills to their old owners and the
expansion of the free list of investments where
no sanction was necessary. As reported in a
national newspaper, “What Mujib had failed to
do, what Zia could not dare to do, this regime is
apparently doing that.” The businessmen
openly supported the regime and its new
economic policy, and in return the regime
promised to extend all possible support needed
by private entrepreneurs.
• During the Ershad era, the patronage
distribution system to party cronies through
privatisation was so deeply rooted that in
some instances a buyer’s demand-driven
approach was adopted by the government,
instead of the government selecting the
industrial units to be sold or transferred,
purchasers were given unlimited flexibility
to choose the units they wanted to buy
• The prices paid for those enterprises were
surprisingly low. It is widely held that
large-scale under-pricing occurred upon
political considerations. One estimate
suggests that the total sales price of fixed
assets of 498 industrial enterprises until
1984 amounted to Tk. 1733 million.
Sobhan and Ahsan estimated the net
value of 162 privatised industrial
enterprises they looked at to be Tk.
8500.5 million.
• During this period, senior civil and military
bureaucrats distributed patronage to
friends and relatives. Many helped
business groups obtain industrial credit
from DFIs. Much of this was not re-paid,
and many debts were written off. As of
June 1990, defaults on loans from the
DFIs stood at Tk. 10.5 billion. 20 business
houses owed Tk. 457.5 million to BSB and
24 houses, mostly with the same owners,
owed about Tk. 670.4 million to BSRS.
 PE Reform during the K. Zia Era, 1991-95

• The BNP formed the government in 1991

under the leadership of Begum Khaleda Zia.
In 1991 election, out of country's 300
parliamentary seats, the businessmen and
industrialists managed to capture about 177
seats which constituted approximately 59
percent of the total. The dominant presence
of industrialists, businessmen and traders
in the ruling party and parliament had given
the private sector a stronger voice.
• Soon after forming the government, Khaleda Zia
announced that her government was committed to
free market economy, and as a part of that
privatisation process would go on. While addressing
country's businessmen and industrialist in 1991, she
stated that privatisation was the only way to achieve
rapid industrial and economic growth.
• Interestingly, BNP won the 68% of the total urban
constituencies in 1991 election and among the 300
elected members of the parliament 75% were
permanently based either in the capital or in the other
major cities of the country. A majority of the MPs came
from business or industrial background, they all were
in favour of privatisation in general. Similarly, the
Finance Minister expressed his strong support to
privatisation and private sector development.
• The Finance Minister disclosed that the
amount of defaulting bank loans was Tk. 81.53
billion, representing about one third of the total
outstanding bank loans. But the government
actually did not take any adverse actions
against bank loan defaulters. It instead of
trying to recover the overdue loans, issued a
notification to NCBs and DFIs to reschedule
these loans further. Upon the government's
order, NCBs and DFIs waived interest on
outstanding industrial loans on 2632 “sick”
industrial units.
 Public Enterprise Reform
Strategies
a. Sales of Assets or Equity
(Divestiture)
Divestiture is the total or partial
sale of public sector assets to
the private sector. Divestiture
involves an actual change of
ownership from public to
Selling shares can be a better
strategy to adopt for the developed
countries where capital market is
developed and people have buying
power. For instance, Margaret
Thatcher carried out this form of
privatisation in Britain under which
equities of British Aerospace,
British National Oil, Jaguar,
Amersham were sold.
However, the sale of equity in whole
or in part, is a very tedious task
and a very sensitive issue in the
developing countries where capital
markets either are non-existent or
underdeveloped. Within the
developing world Bangladesh,
Chile, Zaire, Algeria, Brazil and
Argentina have mainly privatised
through both total and partial
divestitures.
 b. Denationalisation
This form involves the return of
nationalised enterprises to their
original owner or shareholders. For
instance, In Bangladesh, a number
of public enterprises were returned
to the original owners during 1975-
95. This particular form often leads
to severe economic and political
tensions within the economy.
 c. Liberalisation or Deregulation
This form removes some or all
restrictions on entering a particular
market in order to increase
competition, hence giving more
choices to the consumer. This
particular form has been adopted
by many developed and developing
countries.
However, in many developing
countries, in practice government
officials refuse to liberalise the
economy fully, because this helps
them, their friends, relatives and
business associates to maintain
their monopoly on these
businesses. The cases of
Bangladesh, Zaire, Mozambique,
Tanzania, Kenya, Zambia, Peru,
Indonesia, Benin, Angola
constitute the good examples of
this.
 d. Contracting Out
This is considered to be the
simplest form of privatisation and
is thus widely used. Under it, the
private sector is involved in the
provision of certain goods and
services, but the government
remains in charge of all major
activities.
This is the principal form of
privatisation in the United States. The
advantage of this form of privatisation
is that it allows entrepreneurs to
compete in the market place.
Contracting out creates jobs in the
private sector. The disadvantage is
that in developing countries,
government officials and ruling
politicians often tend to give the
contracts to their business
associates, friends and relatives.
 e. Voucher Privatisation
This form of privatisation is not
commonly used in the developing
countries. It has been used mainly by
Russia and other East European
countries. A voucher is just a way of
transferring income to a citizen in order
to increase that individual's ability to
purchase a good or service. In other
words, the consumer is authorised to
purchase earmarked goods or services
from the private market.
 f. Subsidies
Subsidies are designed to provide profit
opportunities to private enterprises by
cutting the cost of some of their production
inputs--those the governmental sector
would like to see being used. The major
drawback of this form of privatisation is that
it drains scarce government funds adding to
budget deficits. This form may invoke
corruption in the form of bribery between
the ruling politicians and private
entrepreneurs. Bangladesh used this
strategy on a limited scale during both Zia
and Ershad era.
 g. User Fees
Under this form, the
government is still the provider
of services. User fees are the
means by which the partial or
full cost of the service is paid
by the general public. The major
problem with private payment is
that the public will wind up
paying more for the service.
This strategy was never used in
Bangladesh, while many
developing countries such as
Indonesia, Kenya, Zaire, Peru,
Chile and Cote d'Ivoire, Ghana
used this during 1980s and
1990s.
 h. Load Shedding
• Load-shedding involves the
government abandoning some
activity, which may or may not
be picked up by the private
sector, depending on the nature
of the activity and the need in
the community
The main pitfall of this form of
privatisation is that it increases
the inequalities in income and
wealth in a society. It widens
the gap between the haves and
the have-nots in general. This is
a popular form of privatisation
in many Latin American
countries, but in Bangladesh
this form was never used.
 i. Management Privatisation
Under this arrangement, the
private sector, with its expertise
and know-how, is invited by the
government to take over the
management of a particular
public enterprise.
However, under the agreement the
government still retains complete
ownership of the concerned state-
owned enterprise. This form of
privatisation is a popular one in
Malaysia. Many other developing
countries have also tried this form
of privatisation. Recently, the
Bangladesh government has
contracted out the management of
a few services of Bangladesh
Railways to the private sector.
• The disadvantage is that
conflicts between the
government and the private
sector may produce negative
consequences. Besides, the
private sector may also pay too
little heed to the quality of the
goods and services.
• While Public Enterprise Reform has
different meanings and forms in the
academic literature, in Bangladesh, it
has mainly taken the form of
disinvestment, denationalisation and
liberalisation in terms of policy
measures. Disinvestment generally
means the sale of shares of a
company with a view to the transfer of
ownership. Denationalisation sees
public property transferred to private
ownership through open or negotiated
sales. It entails the sale of shares to
• In the context of Bangladesh,
however, disinvestment is used
to designate the process
whereby nationalised properties
are divested, whereas
denationalisation refers to
return of enterprises
nationalised after 1971 to their
Bangladeshi owners.
It is to be noted here that in
Bangladesh disinvestment has
taken place in the form either of
100% transfer of ownership or
partial transfer in the form of
disposal of 49% of shares of
ownership while majority (51%)
shares remain with the
government.