Privatization in Tunisia

S3a 101 CFS Discussion Paper Series FILE COPY Report No.:11645 Type: (PUBi TitlE: PRIVATIZATION IN TUNISIA Autho,-: SAGHIR, JAMAL m: Dept.: Privatization in Tunisia Jamal Saghir Janumry i Recent Discussion Papers from CFS: Beyond ndcated Loans, 1992, John D. Shilling, Editor (World Bank Technical Paper No. 163) Japanese National Railways IAivatization Study 1992, Koichiro Fukui (World Bank Discussion Paper No. 172) Nippon Telegraph and Telephone livatization Study 1992, Yoshiro Takano (World Bank Discussion Paper No. 179) Copyright @ 1993 The World Bank, Cofinancing and Financial Advisory Services (CFS) 1818 H Street, NW Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First Printing January 1993 To present the results of its research with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and CFS and the World Bank accept no responsibility for errors. The findings, interpretations, and conclusions expressed herein are entirely those of the author, and should not be attrib- uted in any manner to CFS, the World Bank, or to members of the Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication, and accepts no responsibility whatsoever for any consequence of their use. ABSTRACT This paper is an attempt to provide a comprehensive overview of the privatization experience in Tunisia to date, focusing upon the respective roles ofthe publicand privatesectors, the relationship between them, and how this has changed over time. First, a historical background is presented to give perspective on the rationale for and the specific difficulties encountered in privatization in Tunisia. Issues discussed include key factors accounting for the growth of public sector enterprists which took place during the 1960s and 1970s, the country's overall economic performance and problems, the debt crisis and decline in the terms of trade during the 1980s, and the need for structural p adjustment of the Tunisian economy. Tunisia's currentaccount deficit reached 109% ofGDP in 1984 while agriculture declined from 22% ofGDP in 1965 to 14% in 1989. To set the stage for renewed growth, the Government ofTunisia embarked on a major economic structural adjustment program in 1986. In this context, reducing the role of the public sector became a specific government objective. This paper details how this was accomplished through a multi-phased program for economic and social development. Specific objectives of the deficit reduction program are noted, as well as the government's strategies for achieving them, including restructuring and privatizing the public sector. To create an environment in which substantial reforms could be introduced, legal and organizational chang-s were necessary. The paper discusses the relevant laws passed by the Government of Tunisia in support of the privatization effort, demonstrating the vital role that the government played in promoting the transition from public to private ownership. Law 89-9 created a privatization commission under the leadership of the Prime Minister, giving it clear direction as to its role and responsibilities, and providing an efficient organizational vehicle to implement the privatization program. The process ofprivatization in Tunisia is a complex one, involving eight steps which are discussed in the report. The Governments success in implementing these steps has been evaluated. Detailed analyses are presented on such aspects as current status, costs of restructuring, marketing campaign, sales process, labor issues, broadening ownership participation, incentives, and use of privatization proceeds. So far, privatization has taken place on a case by case basis and covered only small and medium-size enterprises. To deepen the program, the government will need to draw up and publish a comprehensive annual privatization plan. This is essential, considering several key constraints confronting the privatization program: private sector attitudes, concentration of capital, taxation and labor issues, and capital market development. Each of these constraints is examined in detail. * Finally, the paper examines the major factors affecting the success of the privatization process in Tunisia and identifies lessons that can be applied to other countries. Paramount among these is the sustained commitment to privatization at the highest levels of government that was undertaken in Tunisia. Although Tunisia has successfully achieved the privatization ofsmall and medium enterprises, this program will now have to tackle large enterprises and the utilities sector whose privatizations pose more complex problems. -i- W Ф � �� � � � � � �� � т � �� ��� � �х � � � �� о� л �� � , �� � й: � � � �' �3. � п , � �. �°�► �' " п � �. �� � �� � �� о �" 'о а, �. � а° � � � � �' �- 5' � � n � � � � , . � FOREWORD As a central department, one of CFS' most important functions is to act as a clearinghouse on worldwide experiences in the area of privatization and private sector finance and development. CFS Management has them-fore undertaken this Discitssion Paper Series to provide a forum for Bank staffto present their recent study findings and operational work in these areas. The series will disseminate such information across the Bank as quickly as possible, assuring that staff who are engaged in similar tasks can benefit horn these lessori learned. Becatue the topics under consideration are relatively new both for the Bank and for our member countries, CFS management believes that it is important to build up an inventory ofbest practice case studies and to share 10 this inbrmation as widely as possible within the Bank. Current topics in privatization and private sector development address the increase in private sector participation in sectors that were once reserved exclusively for state ownership throughout the developing world-such as power, telecommunications and other infiastructure concerns. Bank staff are engaged in fkilitating this transition, which involves a host ofcomplex regulatory and financial issues. Ile sharing ofcountry and sectoral experiences through tools such as the CFS Discussion Paper Series will be critical for building up skills to accomplish these complex tasks. AD Bank staffare encouraged to submit appropriate material to the Managing Editor for the CFS Discussion Paper Series. Shyamadas Banerji Inder Sud Managing Editor, Director, CFS Discussion Paper Series CFS Table of Contents ABS T ACT ............................................................................................................I.................................................... i ACK NO W .EDGE ENTS............................................................................................................................................ FORE WoRD ............................................................................................................................................................... ii CHAPTER ONE Introduction- Expanding Privatization............................................................................... The Public Enterprise Sector ............................................................................................................... Reducing the Role of the Public Sector ................................................................................................ 2 Start of Privatization ............................................................................................................................ 2 Future Privatization ...... .............................................. .................................................................. -3 Structure of this Cae Study ................ ............................................................................................... 3 CHAPTER TW O: Role and Size of the Public Seetor ...................................................................................... 4 Backgro und4 .......... ............................................................................................................................ .. 4 Tab 1: Tunisia-PE Sector M acroeconom ic Indicators ................................................................ 5 Poli cy Re ve rsal ......................................................................................... 4............................................ 6 Size of the PE Sector ....................................................Sc........................................................................ 6 Table 2.Aggregate Data on 40 M ajor PEs ................................................................................... 6 Nonproductive Activities of the PE Sector .................................................................................. 7 Changing Definitions of the PE Sector ...................................................................................... 7 Structure and Activity of the PE Sector .............. ................................................................................ 7 CHAPTER THREE: Overall Objectives and Scope for Privatization ............................................................... 8 O bjectives and Scope of the Prgogrram .................................................................................................. 8 "Strategic" PEs ............................................................................................................................ 9 Role of the PE Sector in the VIIth and V IIth Plans ................................................................... 9 The Legal Framework for Privatization .............................. ............................................................. 10 The W ill to Privatize: Law 8747 ................................................................................................ 10 A Framework for Privatization: Law 89-9.................................................................................... 10 CHAPTER FOUR: Organizational Framework for Privatization ................................................................... 12 Institutional Fram ewerk ......................Fk................................................................................................ 12 Role of the Prim e M inister ......................................................................................................... 12 CAREPP ..................................................................................................................................... 12 C TA REPP .................................................................................................................................. I12 General D irector for PEs (D GEP) .............................................................................................. 13 Chat 1 :Tunisia Privatization O rganization Structure.................................................................... 13 The Role of the Sector M iniisttriies ................................................................................................ 4 Participation by PE Boards of D irectors ...................................................................................... 14 Public Enterprises' Responisibbilties .............................................................................................. 4 The Interdepartm ental Com m ission ........................................................................................... 14 The D i,estiture Proa s 1s ....................................................................................................................... I4 Governm ent Circular 33 of June 21, 1989.................................................................................. 14 The Process of Privatizatin ........................................................................................................ 14 Chart Z Privatization Processss-Taisia ........................................................................................... 5 -iv - Table of Contents Continued CHAPTER FIVE Implementation of the Tunisian Privatization Program ....................................................... 16 O vera ll S ta tus ...................................................................................................................................... I16 Labor Issues and Use of the FREP ....................................................................................................... 17 Implem entation ................................................................................................................................... 17 Cost of Restructuring ......................................................................................................;........... 17 Valuation .................................................................................................................................... 17 M arketing ................................................................................................................................... 8 Sales Process................................................................................................................................ 18 Labor Is1sues ................................................................................................................................ 8 Broadening Participation ...........................................................................................................B I8 Incentive1 .................................................................................................................................... I9 Table 3: Effect of Privatization on PE Employees ......................................................................... 19 Privatization Proceeds ................................................................................................................. 19 Support and Cooperation between International Agencies................................................................... 19 T PPt Prospects ..................................................................................................................................... 20 CHAPTER SIX Constraints to Privatization .................................................................................................. 21 Private Sector Attitudes........................................................................................................................ 21 Concentration of Capital ..................................................................................................................... 22 Confidence-Building M easures ............................................................................................................ 23 Capital M arket Development .............................................................................................................. 23 Labor ................................................................................................................................................... 24 CHAPTER SEVEN: Conclusions: Lessons Learned ... ..................................................................... ............... 25 BIB OGRAPHY.......................................................................................................................................................... 27 Chapter One Intrwducon After several years of steady progress, the Tuni- The Public Enterprise Sector sian Privatization Program (TPP) has moved into a new phase. First begun under President Habib The PE sector in Tunisia dates from indepen- Bourguibain 1987, the restructuringandprivatiza- dence in 1956, when goveinment intervention tion' ofthe public enterprise (PE) sector in Tunisia helped to preserve che companies inherited from has benefited from support at the highest echelons the colonial private sector and set the foundations of government, continuing into the Ben Ali Presi- for future economic development. Several contem- dency. The first phase ofthe TPP was characterized porary factors prompted the creation of the PE by small- and medium-sized divestitures of enter- sector, including insufficient national private mana- prises in the tradable sector. The target audience gerial expertise, undeveloped capital markets, and was mainly Tunisian investors. The second phase the need to expand the range ofdomestic economic of the TPP will involve larger and more complex activities. transactions, which will test public support in the After 1956, GOT inherited control of key sec- face ofsuch factors as increased unemployment and tors of the economy--such as utilities, mining, the public's willingness to invest in a growing transportation, and banking-and used them to private sector. develop the country's natural resources, notably The government of Tunisia (GOT) will priva- phosphates and petroleum. GOT also de,eioped tize larger and healthier PEs through a variety of the agricultural sector and successfully established tools developed in the courseofthe first phase ofthe new sectors in tourism and textiles. The PE sector public sector reform program. These tools include was able to undertake enterprises that were beyond employee stock ownership plans (ESOPs), em- the scope of the post-independence private sector, ployee-management buy-outs (EMBOs), private includingregionalindustrialdevelopmentandcor- placement, and the sale of shares on the still- struction of important capital-intensive projects in emergingTunisStockExchange(BoursedesValeurs sectors such as cement and oil refining. The PE Mobilieres de Tunis or TSE). TSE sales are de- sector also had the power -o pursue significant signed to replace private sales of assets to single socioeconomic goals relating to employment, pur- owners or families, which characterized the first chasing power, and income distribution. years ofthe TPP. Second phase transactions will be From inception through the 1960s, the public more complicated and will require greater sophis- sector continued to grow, accounting for 55 to 60 tication, as GOT must mobilize adequate capital 1. privatization is defned in this report as the transfer of through private placements while expanding the ownership, entirely or in pat, from the public to the ownership base by encouraging wider participation private sector, accompanied by a corresponding change and attracting foreign investors. in control and management. 2 PHvatization in Tunisia percent ofall investment in Tunisia.' In the 1970s, problems of the PE sector. The CIM also examined development of the private sector was encouraged the issue of privatization, but took no concrete through a series of incentives and exemptions, but actions.' More progress was made when the GOT the number ofPEs was also augmented through the formally announced its Structural Adjustment Pro- creation of affiliates. gram (SAP) in 1986-87, an integral component of As late as 1985, the PE sector absorbed nearly 40 which was a parallel approach to public sector percent ofall investment in the Tunisian economy reform based on the restructuring and privatization and-at its peak in 1983-the PE sector's total of the PEs. employment reached 174,000, or 30 percent of.:" formal sector employment. While it is important to Sart ofPrivatization note the variability in definitions and therefore official numbers of PEs, as of 1990 GOT identified The first phase oftf.: TPP involved a number of 189 PEs. transactions that were initiated before the finaliza- tion and announcement of the restructuring pro- Reducing the Role ofthe Public Sector gram. These preparatory steps resulted in some significant successes, despite delays in formulating Reducing the role ofthe public sector in Tunisia a privatization strategy. became a GOT objective as the costs of maintain- The first companies to undergo divestiture and ing the PEs in the 1970s began to outweigh the restructuring were in the tourism (SHTT: initial economicandsocial benefits de- privatization transaction completed 1/1/86), tex- rived from government inter- tile (SOGITEX: sale date 4/88), and construction e oestiture ar vention in competitive sectors. materials (SOTIMACO: sale date 8/1/89) sectors. In addition, the debt crisis and These were companies whose restructuring and privatizatgon w nf decline in the terms of trade privatization took place on a case by case basis tOudSm, W618W, a i during the 1980s rapidly te- beforethecurrentlegalandorganizational framework cons ction matedals duced the resources available to was in place.4 sectors the government for new invest- The VIIth Plan (1987-1991) and other suc- ment and for financial rehabili- ceeding legislation clarified Tunisian privatization tation of existing PEs. The GOT found itself policy, as well as the strategy by which it would be financially squeezed by reduced petroleum prices implemented. The VIIth Plan established objec- while the demands of PEs on the budget continued tives for diminishing the role of the public sector to grow. Massive public investment through the and restructuring incentives to promote growth in 1960s and 1970s had preserved and expanded the private sector. It also supported reforms to sectors of the economy, created large numbers of make the economy more outwardly-oriented jobs, and promoted technology inflows, but de- through reduction of administrative controls, re- cades of poor financial performance on the part of form of the tax system, elimination of quotas, the PEs ultimately resulted in unsustainable fiscal reducing tariffs, and improvements to the effi- burdens for the GOT and a reduction in the ciency of financial intermediation. country's private sector growth and activity. This GOT commitment to structural adjust- The GOT VIth Plan for Economic and Social ment received significant support from the World Development (1982-1986) proposed reductions Bank, the International Monetary Fund (IMF), in the public investment rate and the establishment and other multilateral and bilateral development of a PE restructuring program that identified the agencies. A determined and consistent high level of limits of state participation and intervention. Sig- support, a flexible approach, and the evolution of nificant movement toward such a public sector reform program began to take place in 1984, when 2. Bouaouaja. Mohammed,"Privatiation In Tunisia." in the GOT established the Interministerial Commis- Pivatisation and StaturalAdjustewnt in the Arab sion (CIM) to target state-owned enterprises par- Countries Said E-Naggar, ed., 1989, p. 235. ticularly in need of restructuring. The CIM's 3. Villemain, Aylette, The ivarization Program in Tunisia: 4n Assesment, International Consultant for Economic mandate was an outgrowth of the failure of short- Development, Unpublished report prepared for U.S. term financial remedies to rehabilitate the PEs in Agency for International Development/Tunis, 1991. p. 7 the 1970s, and a recognition of the structural 4. Bouaouaja, ibid pp. 242-244. ivatisation in Tunisia 3 an effective public sector framework for reform Future Privatiwion have been the key elements in Tunisia's steady progress in the privatization of the PEs, reducing The VIIIth Economic and Social Plan (1992- the burden they place upon Tunisia's budget. The 1996) specifies further improvements in the imple- restructuring and rationalization ofenterprises such mentation of the TPP, including the generalized as the SNCFT (the state railway) and Compagnie use of performance contracts to rationalize enter- des Phosphates de Gafia (CPG) have also reduced prise management and enterprise-state relations in their losses and decreased GOT transfers to these the course of restructuring. The main objectives of key industrial enterprises. the VIIIth Plan include income growth targets, From the end of 1987 through September of unemployment and poverty reduction, and an 1991, 23 public sector enterprises underwent total improved education and training structure. or partial privatization-including 83 operations GOT will continue to encourage decreased gov. involving sales of assets-for a total amount of ernment intervention and increased private sector US$104 million. Most of these enterprises were in -er ;n the economic development ofTu- hotels, fishing companies, industrial companies, nisig 't J envisions labor law reforms that will and businesses proeucing construction materials. foster 2roc. :tivity incentives, encouraging private Moreover, another 10 PEs were privatized entirely or investment in former PEs. Investment incentives in part through the sale of shares, totaling US$30 that target an increase in private investment from million. Most ofthe enterprises sold by shares were in the 1991 level of US$226 million to a 1996 goal of the tourism sector or in the production of construc- US$415 million are planned. GOT also intends to tion materials. In a few additional cases, privatization gradually reduce its holdings in sectors where its has taken the form of liquidations, mergers, and the dominance is regarded as monopolistic, such as opening of share capital to private partnets. public utilities. Total sales proceeds realized so far amount to about US$134 million, with these receipts used to Strvctre ofshis Case Study make severance payments and to pay outstanding social security contributions. Consequently, no The following chapters will explore the struc- revenue accrued to the budget from these sales. ture, evolution, and future of Tunisia's public The level of leadership and participation by the enterprise privatization program in depth. These government in developing and expediting the pub- derailed discussionsoftheTPParestructured around lic sector reform policy has been high. The Presi- the following main themes: dent and Prime Minister are key players and the * Role and size of the public sector driving force behind this overall reform. The sec- * Overall objectives and scope for privatization ond, more challenging, phase of the TPP, which * Organizational framework for privatization will involve larger PEs, presupposes the continua- * Implementation of the TPP tion, if not the strengthening, of the government's * Constraints to privatization commitment to the program. * Lessons learned Chapter Two Role and Size of the Public Sector Backgp=und The exploitation of Tunisia's natural resources of agricultural land, mineral, and energy resources Tunisia is a small country of approximately 7.8 has shaped the country's economic development. million people which achieved a per capita income Phosphates were discovered in Tunisia in 1885, of US$1,260 in 1989, and with a limited resource and the CPG was founded in 1897 especially to base composed of declining petroleum reserves, mine this resource. Through the 1920s, Tunisia phosphates, and natural gas. Although one of the enjoyed a near monopoly on phosphate produc- mostmodern oftheArab states, Tunisia's economy tion. In the 1930s, phosphate mines were devel- hastraditionallybeenbasedon agriculture-largely oped in the United States, the former USSR, and concentrated in cereals, olives, and grapes. Morocco, the latter possessing higher quality phos- From 1881 to 1956, Tunisia was a French pro- phate deposits than Tunisia. Tunisian phosphate tectorate and French influence molded thecountry's production was 3.3 million tons in 1930, but by the elites, institutions, and economic development. Un- mid-1950s had declined to 2.2 million tons and der French direction, considerable attention was accounted for only one-sixth of the total value of paid to infrastructure investments and legal re- Tunisian exports. By 1988, Tunisiawas producing forms that facilitated European commercial opera- only 1.2 million tons of phosphates for export, tions and provided Tunisiawith a relatively modern although an additional 5 million tons were sold on economic and social service infrastructure. Domes- the domestic market.6 Currently, the phosphate tic tax revenues financed development of railroads, and fertilizer sector PEs are a focus ofGOTs public port facilities, a modern agricultural sector, sanita- sector reform efforts because of the high levels of tion projects, hospitals, and schools. However, the government expenditures required to maintain these companies which built these facilities and that central industries. benefited disproportionately from the income gen- As in many Arab countries, the Tunisian PE erated were generally French.' sector was established at the time of independence Before the protectorate, French companies had in 1956. With the exodus of most French colonists invested heavily in Tunisian land, establishing a and the absence of adequate domestic managerial significant economic role predating formal politi- expertise and investment capital, GOT be'ieved it cal control. These holdings were modern, capital- necessary to establish control over Tunisia's natural intensive agricultural operations specializing in olive and grape production for export, and ger erating 5. N Harold. ed., Tanisix A Counny Studx 1978, pp. limited domestic benefits for the Tunisian popula- tion in terms of employment, income generation, 6. Pelletreau, Pamela. Devdkpperntdu Secur Pri e pr ia or reinvested profits. Rtmturaion du Searur Pubique.4 1989, p.10. PiHi atio n Tunisia5 resources and key economic activities in order to the 1970s, GOT had decided to move from a preserve them. Through nationalization, GOT socialist approach to a policy of promoting private gained control of most businesses in the transport, enterprise in a mixed economy. In a conflicting mining, and energy sectors. By 1961, GOT had fashion, however, GOT allowed continued devel- decided on a socialist model for its plans to develop opment ofthe PE sector and granted it such powers the economy and implement government policy. as the ability to set wages and below cost price levels. The government's high levels of public sector in- Changes in the level of oil revenues played an vestment were intended to establish tourism and important role in the pace and timing of eventual other new sectors, promote industrial and regional PE reform in Tunisia. The first Tunisian crude oil development, carry out capital-intensive projects field, El Borma, came into production in 1966, that could not otherwis: take place in the embry- with additional oil fields coming into production onic Tunisian capital markets, and support an in 1968 and 1972. From the late 1960s until the oil ) extensivelistofsocial and distributional objectives. price declines of the mid-1980s, petroleum was a During the following decade, GOT's socialist majorsourceofTunisianexportearnirg,account- experimentation involving government ownership ing for 55 percent ofall exports through the 1970s; and control of agricultural and commercial opera- annual gross domestic product (GDP) growth av- tions was forced to give way to a more market- eraged 7.4 percent in real terms for the same period. oriented economic policy. This transition was High levels of foreign investment in Tunisia in the marked by abrupt reversals ofpolicy. For example, 1970s allowed it to finance an average current President Bourguiba announced the nationaliza- account deficit of 5 to 6 percent of GDP with little tion without indemnity of 275,000 hectares of difficulty. Growth supported by the oil boom and farmland owned by foreign companies and nation- high levels of foreign investmen also cushioned the als in 1964-and incorporated these holdings into PE sector in Tunisia through most of the 1970s. the agricultural cooperative movement that GOT GOT budgets were able to meet or finance PE had established in 19568 - and nationalized and losses despite their poor management and operat- cooperativized all privately held lands and agricul- ing inefficiencies. In parallel, announced GOT tural and commercial establishments in 1969. By objectives to promote private sector development late 1969, however, this accelerated policy was and limit government intervention made little quickly reversed as the impact of popular unrest, a progress before the early 1980s, when net oil rev- dismal harvest, and production decreases caused by enues began to decline. the nationalizations were felt. A liberal economic policy was quickly instituted, and GOT returned 7. 64 p. 234. many commercial operations to their owners. By 8. Nelson, ibid p. 54. Table 1: TunisMa-PE Sector Macroeconomic Indicators (Tunislan Dinarmillions) 1983 1984 1985 1983 1964 1985 A. GDP D. External Debt (US$) PES 3,190.6 3,712.5 4,035.2 PEs 1,172.3 1,084.3 1,198.9 Total Economy 10,270.5 11,899.7 12,852.0 Total Economy 3,800.8 3,752.0 4,380.1 PE share of total 31.0% 31.2% 31.4% PE share of total 30.8% 28.9% 27.3% B. Investment E. Employment (workers) PEs 582.4 722.0 770.9 PES 174,266 na 140,961 Total Economy 1,728.8 2,101.3 1,953.7 Total formal sector 590,342 na na PE share of total 33.7% 34.4% 39.4% C. Domestic Credit PEs 1,027.8 1,234.9 1,349.9 Sources: Insute National de Statisliques (Tunisia) Total Economy 2,711.9 3,284.0 3,774.0 External Debt: World Bank Debtor Reporting System PE share of total 37.9% 37.6% 35.8% Doestic Cre: Central Bank (TunS8) 6 Pivatization in Tunisia Rather than shrinking as the market-based policy gram (SAP) in 1986. Its objectives were reduced adopted in the 1970s would have dictated, the PE public expenditures; phased removal ofcontrols on sector grew during the oil boom years with the prices, imports, and investment; devaluation of the establishment of new PEs and the creation of PE Tunisian Dinar (TD); and privatization ofmany of alfiiates, During the 1970s and early 1980s, the PE the PEs. These policies were followed in 1987 by sector accounted for roughly 30 percent of GDP the VIIth Plan, which purposely promoted an (see Table 1). Overall PE investment represented outward-oriented strategy of increased trade, price 57 percent of total investment in the industrial liberalization, removal of foreign and local invest- sector during the VlIth plan, with the sector's share ment restrictions, and fiscal reforms. Some of the in total investment in the economy increasing from -esults of the VIIth Plans have already been real- 33 percent in 1983 to nearly40 percent by 1985. At ized, with PEs experiencing tariff reductions and the same time, budgetary transfers to the 40 major diminished budgetary transfers. By restoring a PEs including subventions (operating and invest- market-oriented economy, GOT has sought to E ment), equity, loans and debt/equity conversion encourage the private sector to develop new areas of rose from TD17.3 million in 1972, to TD108 in economic growth and to improve efficiency, while 1982 and TD135 in 1985 (see Table 2). decreasing its own fiscal burden. Tunisia's economic performance during the 1980s declined sharply, especially compared with Size ofthe PE Sector the more prosperous years of the 1970s. External factors added to the legacy ofyears ofexpansionary From inception through the 1960s, the public public sector investment policies. The poor 1986 sector continued to grow, accounting for 55 per- agricultural season, accompanied by a decline in cent to 60 percent of all investment in Tunisia." tourism and a substantial decrease in world oil The 40 largest PEs show a sharp deterioration in prices, only worsened the deteriorating economic profitability (aggregate net profits of TD 39 mil- situation. Over 1980-85 the cur....t account defi- lion, or US$43 million) to 1986 (aggregate net cit averaged 7.9 percent ofGDP, while the budget losses ofTD 168 million, or US$187 million) with deficit averaged 5.6 percent. their total debt increasing from TD 1.67 billion to TD3.17 billion, or US$1.85, US$3.52 billion (see Poliy Reversal Table 2). Total assets accounts reached US$18 To set the stage for renewed growth, GOT embarked on a major Structural Adjustment Pro- 9. Bouanuaja. ibid Table 2: Aggregate Data on 40 Major PEs (Tunisian Dinar millions) 1981 1982 1983 1984 1985 1986 Employment (workers) 104,057 107,004 109,293 109,408 108,086 107,346 Value Added 554.8 570.2 702.2 816.6 796.6 798.7 r Revenue 1,198.8 1,388.4 1,672.8 1,842.2 1,984.8 1,950.6 Exports 299.3 332.3 373.4 411.1 408.0 397.2 Net Profit (LoSS) 39.3 (12.2) (50.2) (6.8) (31.6) (168.3) Excluding Oil Pe (11.9) (71.1) (103.2) (84.8) (122.5) (221.5) Cash Flow 176.5 138.3 124.5 200.5 180.0 61.9 Total Debt 1,676.8 2,037.3 2,495.7 2,722.4 2,837.9 3,165.8 Short-term debt 858.1 1,029.4 1,295.4 1,438.4 1,534.0 1,763.1 Long-term debt 818.7 1,007.9 1,200.4 1,284.0 1,303.9 1,402.8 Investment 267.9 453.1 376.3 468.5 355.1 279.9 Transfers to PEst 88.8 107.7 100.5 124.7 135.1 117.3 TaxesDuties 71.5 76.4 94.3 112.6 113.0 111.9 rSoure nistry of Plan and Finance f Subventions, loans, and equity. Privatization in Tunisia 7 billion and employment in the PE sector peaked at constraints, the financial performance of these PEs 174,266 in 1983, accounting for some 30 percent did not improve. It became obvious that further oftotal estimated formal sector employment in the attention needed to be directed to the privatization country (see Table 1). process and that further legislative action was re- Nonproduaive Activities of the PE Sector: Job quired. creation and income distribution have always been Like earlier legislation, Law 89-9 of February key objectives of the PE sector in Tunisia. As 1989 subsequently reduced the numbers of PEs previously noted, the PEs accounted for more than that were subject to state control by requirin, state 10 percent of Tunisian employment and played a ownership of at least 50 percent of theil -apital significant role in fighting chronic unemployment before such control could be exercised. Public by diminishing the impact of population growth. participation was also defined under Law 89-9 as According to 1990 figures, the PE sector is over- shares or equity owned by GOT, statutory bodies, staffed by approximately 20 percent, or approxi- or enterprises controlled completely by the state. mately 30,000 of 150,000 workers."o Under Law 89-9, a PE was defined by fulfilling one in general, the PEs are also widely perceived as or more of the following classifications: providing low-priced consumer goods that benefit * Statutory public bodies not of an administra- the poor. It is clear that the PE sector has played a tive nature; role in subsidizing both consumergoods and public * Corporate bodies whose stocks are entirely services. In cases such as that of CPG, large PEs owned by the government; have also provided housing, hospitals, schools, and * Corporate bodies, local government, statutory other services in the communities in which they bodies, and corporate bodies (individually or operate. jointly) 50 percent of whose stocks is con- While the cost of these non-production-ori- trolled by the government. ented functions has contributed to the structural Under the strict application of these standards, inefficiency and the high expense of maintaining GOT officially identified 175 PEs in 1989. How- the PEs, they have fulfilled many social functions. ever, Law 89-9 also identified cei.,ain "strategic" Because of popular resistance to the privatization PEs, in which GOT was allowed to remain a program, careful consideration was given to em- minority shareholder pending the restructuring of ployment issues in the formulation ofthe privatiza- their capital. This loophole raised the official num- tion policy and the negotiation of individual ber f Tunisian PEs to 189. transactions. Changing Definitiom ofthe PESector: Changing StrucaumandActivity ofhePbikEnterpriseSctr definitions of the public sector have progressively reduced the number of PEs under GOT control Among the 189 designated PEs, 140 are enter- from approximately 500 during the period before prises of a commercial nature, including utilities, 1985, when 10 percent state ownership was the railways and other public transportation systems, criteria, to 307 under Act 85-72, passed in Febru- oil and phosphate industries, and numerous manu- ary 1989. Under the latter act, the definition ofPEs facturing and assembly plants. The balance are was based on state ownership of34 percent or more offices and agencies that are extensions of public of the capital of a company, or a combined owner- administration activities. GOT is also a minority ship of 50 percent or more through direct or shareholder in several hundred other enterprises. indirect means. Ofthe 189 PEs, more than 75 percent are under Act 85-72 in particular played an essential role in the supervision (rutelle) of five GOT ministries: organizing GOT's PE portfolio. The law was en- Economy and Finance 68 acted in an environment of growing dissatisfaction Agriculture 26 with the performance of the PEs and represents an Transport 26 early effort in the restructuring of the PE sector. Equipment 13 However, according to this law, companies defined Tourism and Handicraft 10 as PEs were subject to a variety of legal and admin- Other ministries 46 istrative controls, including government supervi- TOTAL 189 sory requirements and conditions placed on the signing of contracts. Because of these operational 10. Villemain, ibid p. 34. Chapter Three Overall Objectives and Scope for Privatization Olyective and &ope ofthe Program flexible sales terms for PE assets, allowing for a range of divestiture modalities (sale of assets and The TPP was an important part of the SAP shares, ESOPs, EMBOs,lease-to-buyarrangements, announced in 1986. SAP's objectives included the etc.) Social concerns, such as staff redeployment, restructuring and privatization of publicly owned were also deliberately integrated into the process. A enterprises; the reduction in public expenditures; social fund Fonds de Reaucturadon des Entreprises the phased removal of controls on prices, imports, Publiques (FREP) was established to cover worker and investment; and the devaluation ofthe TD. To redeployment and/or compensation costs, settle- address these objectives, the government stated its ment of outstanding PE liabilities not covered by intentions to progressively divest itselfofall PEs in sale proceeds (notably to the social security organi- competitive sectors where the private sector was zations), and technical assistance necessarytoeffec- capable of assuming its role, to promote transpar- tively implement the program. ency and orientation to market mechanisms in The GOT strategy ofprivatization of nonstrate- these sectors, and to ensure the efficiency of natural gic PEs operating in acompetitiveenvironment has or public service PE monopolies. Such divestiture come to incorporate three major elements: was not limited to enterprises in which the state is * Sale of assets of small- and medium-scale en- majority owner, but also included those in which terprises experiencing difficulties, either com- GOT was a minority shareholder. Hence, the im- ponents of enterprises or whole enterprises; portance ofdealing with the minority cases as well. * Privatization of government shareholdings in The main components of the TPP included public and joint stock companies; and legal reforms, such as those described in Law 89-9 * Privatization of larger nonstrategic PEs operat- that identified PEs, clarified their administration, ing in competitive markets. and streamlined the restructuring and divestiture Given the government's ongoing involvement process. Furthermore, institutional reforms per- in industry, the generally poor performance of the mitted a rationalization ofsupervisory agencies and PEs, and the social implications, the privatization improved accountability of PE management. Bud- process has been implemented gradually. To date, getary reforms were also directed toward increasing GOT's privatization program has focused on the discipline in allocations to PEs and instituting an first elements ofthe strateW. most ofthe small- and approval process for ell significant transfers to medium-scale PEs have been privatized. These PEs commercially-oriented PEs. were largely sold free ofliabilities and almost exclu- The program of divestiture id restructuring sively to Tunisian purchasers. The revenues from was designed to address factors limiting the mo- these sales equaled approximately half of the total mentum of the TPP. It developed realistic and liabilities of the PEs. The other halfwas paid offby Privatdation in Tunisia 9 FREP and through cancellation or conversion of pact of these enterprises would continue to be debt to equity. The second element of the privati- significant. The plan stated that "the unique char- zation strategy has also been increasingly used and acter ofthe State as shareholder makes certain other is due to continue in the years to come. The third considerations necessary to understand the rela- phase of the privatization process will date from tionship of these enterprises with the State as well 1992 on. It will generally be applied to the larger as the latter's disengagement from certain sec. PEs-such as cement plants, food manufacturers, tors."" Therefore, GOT included consideration of shipbuilding industries and construction materials the following points in its approach to the goals of businesses-for which international buyers will be the VIIth Plan with respect to PEs: the target group in many cases. It is predicted that * Relations between the state and the PEs: Giv- these PEs will be sold with both their assets and ing enterprises more autonomy (but with liabilities and will result in net sales revenue, unlike accountability) by reconsidering their relations the sale of the PEs during the privatization's first with the state; . phase. * Internal control of the management of the PEs: StraegicP£s:A number of PEs have been desig- Restructuring intern-l organization, informa- nated "strategic," and therefore are not targeted for tion systems, and methods of cost analysis to privatization. Despite the understandingthat GOT improve the viability of the PEs; participation in competitive sectors in general is no Productivity in PEs: Improving the effective- longer justifiable, GOT has stated that it will ness and productivity of the PEs by making neither forego its role in activities that deal with decisions based on public utilities nor separate itself from sectors that the evaluation of are crucial to the economic safety of the country. their economic and The VIth Plan was desgned While embracing privatization, GOT policy also social profitability, fora progressive but very stares that a number of enterprises are, defacto and thereby helping to defnite GOTdsgagement dejure, of a monopolistic nature, preventing their ensure the success of from PEs in competive, transfer to the private sector under current condi- investments; and tions. The GOT has stated its intention to carry out * Restructuring the PEs: nonstrategic sectors privatization of these state-owned enterprises over Restructuring those time. It will institute aprocessofdemonopolization PEs in competitive sectors that often suffer in which it will authorize and encourage the emer- from financial difficulties and require special gence ofprivate enterprises in these sectors (includ- attention before the disengagement process ing, for example, transportation). can be successfully undertaken. RoleofthePESectorin the VthandIlKMPlans: The VIIth Plan was designed for a progressive The VIIth Plan for Economic and Social Develop- but very definite GOT disengagement from the ment (1987-1991) incorporated the issue of the PEs in competitive, nonstrategic sectors, with sub- reform of the PE sector as a key element of the stantial attention paid throughout the process to ongoing GOT SAP. In setting GOT policies and the economic, financial, and social effects ofdives- priorities for the upcoming five-year period, the titure. Restructuring the PEs into viable private VIIth Plan emphasized the need to reform PEs, sector businesses is an integral part of this transi- 9 reduce the size of the public sector in favor of the tion. The GOT also is undertaking the rationaliza- private sector, and remove distortions in incentives tion and reform of those strategic enterprises in in order for an active and efficient private sector to which it will continue to maintain control. Accord- emerge. ing to the VIIth plan, the GOTs main goals in the The VIIth Plan explicitly supported competi- area of restructuring and privatizing the PE sector tiveness and the efficient allocation of scarce re- are as follows* sources, while recognizing the special role of the PE * Assuring greater management autonomy in sector in the Tunisian economy. Disengagement or these enterprises; divestment of PEs was an essential element of the * Guarding against the great rigidity that has GOT strategy. It was obvious that the historically characterized the management of the PEs; poor performance of the PE sector would inhibit these enterprises' viability if they were privatized I I.Rdpublique Tunisienne, VII Plan de Developpement immediately, and that the social and political im- Econonique et Social (1987-91), Tome I, 1987, p. 171. 10 Privatization in Tunisia * Encouraging shareholding by employees in intended to undertake the required analyses the PEs for which they work, as well as en- and structure the privatization deals, and couraging growth in the numbers of small * A follow-up commission, whose role was to shareholders; carry out the actual privatization transactions. * Making financial markets more dynamic After the law was passed, however, it rapidly through a broad diffusion of capital to the became clear that the implementation design was public; and too complex and lengthy. Administration of the * Mobilizing both local savings and external process through these three commissions as dic- capital to boost the capital markets. tated by law was deliberately complicated because The VIIth Plan (1992-1996) intends to pursue of GOT concerns that withdrawal of the state from the restructuring and privatization of the PEs as a the public sector could temporarily have a negative key element of an ambitious growth program that impact on public welfare and might provoke the targets the annual GDPgrowth of 6 percent.12 This creation of private monopolies. The intricate struc- larger program includes the reform of consumer ture of Law 87-47 proved inflexible and was never subsidies, labor laws, and exchange controls. completely implemented. As a result, few divesti- ture operations took place under it. The Legal Framewrkfor Privatization A FrameworkforPrivatization: Law 89-9: When President Ben Ali assumed office in November Tunisia's first step toward a privatization policy 1987, the government was given a mandate to was the creation in 1984 of an Interministerial bolster the nation's economy by making it more CommitteeU chargedwith market responsive and less centrally planned. The identifying PEs as can<i- president was eager to encourage and accelerate the When President BenAli dates for privatization. At restructuring and privatization process. Divestiture assumed office in that time, how-ver, no therefore continued as a priority of the new admin- November 1987, the framework for restructur- istration. government was given a ingand privatizing the PEs The dissolution of the three commissions cre- mandate to bolster the was in place. Additional ated under the earlier privatization law and their legislation and the devel- replacement with a single body-the Commission ngon's & nMy by opment of an effective or- for the Restructuring of Public Enterprises making ft more market ganizational framework (CAREPP), which is chaired by the prime minis- responsive and less were needed before the ter-wasan earlyactionofthe Ben Ali government. centrally planned privatization could be When Law 89-9 was approved by the National implemented. Assembly in 1989, it provided further clarification, In 1985, GOT renewed setting up a framework institutionalizing privatiza- its efforts to identify and organize its PE portfolio tion and retaining responsibility for the program at through legislation (see Law 85-72 above). Mean- the higher levels of the government. while, the dissatisfaction with the performance of Law 89-9's most significant features included a the PE sector and movement toward public sector detailed and precise definition of a PE, and the reform and privatization continued to gain mo- processes for the restructuring, divestiture, and mentum. As GOT launched the SAP in 1986-87, liquidation of the PEs. The law also specified that it began to build a legal framework for the restruc- the prime minister--on the proposals made by turing and privatization of the PE sector. CAREPP-was responsible for making all of the The Wi so Privatize: Law 87-47. The govern- decisions related to the privatization and restruc- ment passed Law 87-47 in August 1987, during the turing of the PEs. For political and social reasons, last months ofthe Bourguiba presidency. It created the law does not use the term "privatization," but a legal framework for the first steps in the design indicates that the government is authorized to sell and developmentofa program for the restructuring some PEsoperating in competitive sectors by means and privatizing of the PE sector. This law provided of sales of shares or assets through public auction. for the creation of three commissions: * An interministerial commission, whose purpose 12.Economist Intelligence Unit, 1991. Tunisia: Counny was to choose the enterprises to be privatized, Profie 1991-1992. 1991, p. S. * A restructuring/privatization commission 13.Interministerial Committee (CIM), March 29, 1984. l4inatisatien in Tunisia 11 The law also expressed clearly three objectives: investments in the productive sectors. This law development ofa brger number ofsmall sharehold- provided for the restructuring of the TSE and a ers, development of the TSE, and intent to sell redefinition of its functions; the description of the shares of the PEs to employees. Finally, Law 89-9 role of financial intermediaries; a framework for the specified some fiscal and other incentives to facili- sale of securities; and an allocation of authority to tate and accelerate the whole process of privatiza- the TSE over the issue, sale, and distribution of tion. securities. The intent of this legislation was to In March 1989, Law No. 89-49 followed, with broaden the framework of privatization by creating its primary objective being the stimulation of the a legal framework for capital market development TSE and the channeling of private savings into and the mobilization of local savings. Chapter Four Organizational Framework for Privatization Institutiona Framework CAREPP proposes opportunities and methods for divestiture to the prime minister, according to The TPP has proven stable and transparent, but his powers under Law 89-9. CAREPP also has the slow. The key to the implementation of the power to propose financial incentives that can be ,rivatizations lies in the prime minister's personal granted to stimulate the privatization of PEs. Ad- responsibility for the program and his ultimate vice concerning the selection of buyers and the decision making authority in each divestiture trans- allocation of the proceeds of privatization on an ad action, coupled with consistent GOT commit- hoc and case by case basis are also the responsibility ment to the program. of CAREPP. Role ofthe Prime Minister Law 89-9 places the CTAREPP Parallel in status to CAREPP, the power to make decisions on all matters relating to Technical Commission for Restructuring PEs privatization, divestiture, restructuring, and finan- (CTAREPP) was established to set privatization cial incentives with the prime minister on the recom- strategies. Its responsibilities include determining mendation or proposal of the CAREPP. The divestiture priorities, reviewing company profiles Parliament does not have any specific role in this (financial and operational), setting forth condi- process. The prime minister therefore has a powerful tions for the sale of PEs to ensure that acceptable role in both guiding and advocating the overall TPP proposals are prepared byenterprises and theirsectoral and retaining responsibility for the individual transac- ministries, and coordinating the dossiers of PEs that tion decisions. The Prime Minister and CAREPP may be eligible for restructuring or privatization. In have been the driving force toward privatization. reality, CTAREPP acts as a technical working group CAREPP: Decree 89-377 established the that provides the foundation for CAREPP's recom- CAREPP in March 1989 as a consultative body mendations, which provide the basis for the prime made up ofthe ministers ofNational Economy and minister's eventual decisions. Finance, Plan and Regional Development, Inte- Experience in other countries confirms the im- rior, and Social Affairs; the governor ofthe Central portant role of bodies such as CTAREPP, because Bank; designated high-level civil servants; and the policy cannot be put into effect unless it is sup- secretary general of the government. Observers ported by a technical group capable of providing regularly participate in CAREPP meetings, often the "nuts and bolts" guidelines for restructuring including the president of the TSE, the general and privarizacion. The General Director for PEs director of PEs in the prime ministry (DGEP), and (DGEP), in addition to his responsibility to report some advisors to the president and the prime min- to the Secretary General of the government and the ister. CAREPP meets monthlyand is always chaired prime minister's office, serves as chairman of by the prime minister. CTAREPP. PPati atini in Tunisia 13 GeneralDirectorfr PEs (DGEP): The DGEP is DGEP and his Directorate also provide the Secre- a civil servant selected by the prime minister to rariat to CAREPP and CTAREPP, and follow up carry out comprehensive analyses of the PE sector, on the implementation of the prime minister's make recommendations on overall restructuring decisions. The DGEP reports to the general secre- and privatization strategy, coordinate the TPP. and tary of the government, who is a minister without monitor the effectiveness and consistency of sector portfolio named by the president, reporting di- ministry supervision of the PEs (performance con- rectly to the prime minister on economic and tracts, nomination of board members, etc.) The administrative matters. In the process of prepara- Chart 1: Tunisia Privatization Organization Structure ** E I-ku 14 Privatization in Tunisia tion of the overall program on long-term privatiza- keting and publicity for these sales. The PE itself, tion, an expert financed by U.S. Agency for Inter- and, in some complex cases, the ministry involved, national Development (USAID) served from close the deal after the prime minister's final deci- 1988-1990 as advisor to CAREPP within the sions regarding the specific transaction are taken. DGEP's office, and as a non-official member of Although managers of PEs and sector ministries in CTAREPP. some cases have opposed the privatization of se- The Role of the Sector Ministries: The sector lected PEs, so far- in general-they have cooper-. ministries participate in the privatization process ated extremely well. byinitiallyexaminingthePEstheysuperviseandby The Interdepan mental Commission: The Inter- cooperating with the PEs' boards of directors in departmental Commission ischaired bythegeneral identifying opportunities and strategies for divesti- director of State Participation in the Ministry of ture. The sector ministries then advise CAREPP on Finance, and is made up of representatives of the appropriate sales of PEs and strategies for the prime minister, the Ministry of Planning, and the privatization of PE assets. The sector ministries are Central Bank. Representatives from the sector min- responsible for the implementation and follow-up istry and the PE involved in transactions under of those proposed PE sales that have received consideration are also members. CAREPP's recommendation and the prime At the time ofeach sale ofassets, the Interdepart- minister's approval. mental Commission opens sealed bids, evaluates Participation by PEBoards ofDirectors:The 89- the offers, and presents a report of each sale to 9 Law which now governs the PE sector specified CAREPP. CAREPP then makes a recommenda- the roles and responsi- tion to the prime minister to accept or reject the The PEboa&ds---which bilities of PE Boards of bids. In the case of a sale through the TSE, the are Directors, the sectoral Interdepartmental Commission is responsible for a o mosded ttWhk"tutelle" ministries, and determining the procedures such as the introduc- reporting requirementsof tory market value of the shares. iealingfUI ole the PEs. The PE boards- which are composed The Divesiture Process mainly of insiders-play a meaningful role in es- tablishing and approving enterprises, objectives Government Circuar 33 offune 21, 1989 Gov- and strategy and supervising management. The ernment Circular 33 describes the implementation DGEP has established a Management Information procedures for privatization in detail. The roles of System to monitor the functioning of PE Boards of CAREPP and DGEP, which had been formally Directors, who are indeed parties in the divestiture spelled out by Law 89-9 in early 1989 and Decree and privatization process. The boards are required 89-377, were further defined and codified in Gov- to submit to their sector ministry appropriate sce- ernment Circular 33, which was prepared by the narios for the sale of individual PEs, as well as DGEP and issued by the prime minister. This suggested methods for accomplishing the sale. Al- circular defines the list of 189 enterprises consid- though in some cases certain managers of the PEs ered public and outlines the different requirements and secoral ministries have not agreed with deci- related to the total reform program for these PEs. sions to privatize and/or the procedure to be under- Modiications were introduced as to the function- taken, in general they have not obstructed the process. ing of the boards, nomination of members and Public Enterprises' Responsibilities: The manag- management, submission ofmonthly statements of ers of the PEs, in cooperation with the concerned liquidity, and so forth. sector ministry, study the opportunities for TheProcessofPrivatization:The process ofpriva- privatizing the individual PEs. The sector ministry tization involves eight phases: and then the PEs propose scenarios for their priva- i. The PE and the Sector Ministry undertake a tization to CTAREPP and CAREPP. If the prime study of the opportunities for restructuring or minister makes the decision to sell the PE on the ' privatizing the enterprise; recommendation of CAREPP, the requests for ii. The initial decision on the opportunity to sell proposals for enterprise valuation and bids are is made by the PE Board of Directors. There- prepared at the PE and by officials at the ministry after the proposal is presented to CAREPP for level. The PEs undertake all of the necessary mar- review and the prime minister for final decision; Pivaiation in Tunisia 15 ii.The valuation of the enterprise or the assets to vi. Marketing of the assets or enterprise for sale be divested is prepared by specialized public takes place, including the collection of bids, agencies or local independent valuers selected negotiation, and deal closure; by the enterprises; vii.Decisions on the allocation of the revenue iv. The mode of privatization is then determined, from the TPP transaction are made by the fiom various choices, including the following: prime minister on an ad-hoc and case by case * Sale of shares by privte or public offering basis; and * Sale of assets through public tendering viii. Post-privatization assessments and follow-up * EMBO analyses are performed by sector ministries and * Merger CTAREPP, with particular attention given to * Liquidation; the viability of the divested enterprises, success in v. The prime minister exercises authority for addressing goals such as broadening ownership final approval of the method of privatizatio and-growth ofcompetition, and the lessons and the conditions of sale; learned for future privatizations. Chart 2: Privatization Process: Tunisia PuiyRequest for Proposal Interdepartmfental FtcEnte R1 CnTREPP CRE H rie Mnite cnaldrio cmm CondfionRefSale ___ Chapter Five Implementation of the Tunisian Privatization Program Initiated in early 1987, the TPP will continue Beginning with the government of Tunisia's for the next few years. This chapter discusses the earliest divestiture transactions in 1986 through all implementation and covers overall program status; of the privatization transactions until September the actual results of the TPP; and the implementa- 1991, the results realized include the total or partial tion ofthe different phases of privatization, includ- privatization of 23 enterprises-involving 83 op- ing financial restructuring, valuation, marketing, erations of sale of assets-for a total amount of sales processes, and the impact on employees. US$104 million. Moreover, another 10 PEs have been privatized -entirelyor in part-through sales OveailStatus of shares, for a total amount of US$30 million. Total sales proceeds realized so far amount to about Between December 1987 and the end of June US$134 million. However, this is equivalent to no 1990, CAREPP examined 74 enterprises as candi- more than slightly over 1 percent of the book value dates for privatization or restructuring. CAREPP's of the approximately 200 PEs at the end of 1987. decisions on these PEs were as follows:' The sale proceeds were used to make severance * 6 were to be liquidated, payments and outstandingsocial securitycontribu- * 2 were to be merged with other PEs, tions for employees. These privatizations can be * 4 were to be financially restructured, further characterized as follows: * 11 were to be financially restructured with a * Six of the transactions involved tue sale of partial privatization of equity or certain activities, shares through the TSE. One transaction * 37 were to be privatized via total or partial sale reduced government shareholding while issu- of assets, which represented almost 73 sales ing new shares to the private sector. The re- operations, and maining transactions were private sales of * 14 were to be privatized by the sale of shares assets following an open bidding process. In a via the TSE. few cases, privatization has taken the form of In some of the decisions, elements from more liquidations, mergers, or the opening of share than one of the strategies were present. For ex- capital to private partners. ample, some of the companies' assets were ear- * In terms of sector concentration of privatiza- marked for privatization, while others were slated ton, nine operations involved the privatiza- for liquidation. Also, in several instances, the gov- tion of hotels. The remaining privatization erment decided to dispose of its holdings in suc- cessive transactions, which was the case for PEs 14. Rdpublique Tunisienne, La Restructuration du Secteur such as Sitex (textile), SHTT (hotels), and ONP Public, Rapport d'un Groupe de RAexion. Premier (fishing). Ministere, 1990. P1riouriation in Tunisia 17 transactions involved industrial and commer- Implementation cial companies in textiles, construction materials, foodstuffs, metallic packing, fishing, printing, Cost of Restrucmingr As noted earlier, most of and flour processing. the public sector companies had become overbur- * Concerning the nationalities of buyers of as- dened with debt or were technically insolvent and sets or shares, three sales were to foreigners, legally subject to liquidation. Therefore, CAREPP one sale was to a Tunisian-French group, and priorities were heavily influenced by these con- the remaining sales were to Tunisian nationals. strants. Cancellation or conversion of debt to * The sale of state interests and equity in PEs equity, debt consolidation, and restructuring were via the TSE accounted for 22 percent of all the key tools to render these assets unencumbered privatization proceeds (US$30 million). of liabilities and liens and available for sale. Hence, * Privatization has so far been a marginal phe- the total cost of the financial restructuring of the nomenon that in no significant way has re- PEs under the domain ofCAREPP from 1987 until duced the extensive role of the state in the June 1990 was TD260 million or US$290 mil- production of goods and services. The share of lion." The GOT, banks and other governmental PE value added in total GDP remains at about organizations assumed US$197 -million, US$29 30 percent. million, and US$64 million, respectively in debt Since the end of 1990, however, the pace of management and consolidation. privatization has been slowing. Two significant Valuation: Article 28 of the Privatization Law factors have contributed to this: (i) the degree of 89-9 specifies that valuation of shares or assets difficulty associated with privatizing the PEs that should always occur prior to privatization. In the still remain in the public domain; and (ii) the case ofa sale ofassets, the valuation can be prepared destabilizing impact of the Gulf War on the Tuni- by specialized public agencies or local independent sian economy, slowing Tunisia's overall rate of valuers. Banks may also perform the valuation of growth and the pace of the GOT reform program. shares that are to be sold. However, in most cases of the sale of assets some bids are solicited without a Labor Ises and Use ofthe FREP minimum acceptable price. Conventional methods of valuation-such as The social costs of the TPP are being addressed adjusted book value, liquidation value, and the through the redeployment ofexcess staff or appro- discounted cash flow method-were used and a priate compensation if alternative employment recommended base price was usually taken into opportunities cannot be found. The Public Enter- consideration by the Interdepartmental Commis- prise Restructuring Fund (Fondde Restructuration sion.. This commission, as noted earlier, has the des Entreprises Pubfiques or FREP) was established responsibility for opening sealed bids on assets and in 1987 by GOT to finance the following: making recommendations on each transaction to * Worker compensation packages due to work CAREPP. Based on the valuation, the commission force reductions; also fixes the introduction price on shares when the * Liabilities linked to privatization, such as ac- transaction is carried out via the TSE. cumulated arrears to the social security system, In general, the valuations prepared by indepen- pension funds, or third-party liabilities; and dent valuers or public agencies were satisfactory * Technical assistance in the areas of account- and, in most cases, the actual transaction price ing, organizational and managerial develop- closely approximated the valuation byan average of ment, and the auditing of the PEs, as well as 70 percent. In certain cases where the proposed advisors associated with individual privatiza- price was significantly below the valuation, the low tion transactions. offers were rejected and the process of sale recom- To ensure adequate funding, GOT made peri- menced. Because of the relative success of the odic allocations to the FREP. As ofJuly 15, 1991, valuation efforts to date, the political debate on commitments from the FREP totaled US$80 mil- over- or undervaluation-which is common to lion, allocated for the payment of the following: many privatization programs-was limited in Tu- * Severance packages: US$35 million nisia. The absence of such controversy helped to * Pension liabilities: US$9.8 million * Outstanding debts: US$35.2 million 16.Ibid p. 17. 18 Ptivatitation in Tunisia popularize and strengthen the support of GOTs the refrigerator company Confort SA. The general commitment to structural reform. rule is that the negotiation strategy, which is always Marketing Government Circular 33 on Privati- based on the technical valuation, and the terms of zation clearly indicates that an extensive marketing sale are prepared well before the offering. campaign and a maximum amount of publicity Once the sale price and other terms have been always should be organized prior to each divestiture agreed on, the attorneys for the PEs (or the sector in order to inform the population and potential ministry) and the buyers work together to prepare investors of the upcoming sale(s). deeds transferring the assets. In most cases, the The key players in the marketing process are the financial cleanup is completed, the assets are free PEs themselves and the TSE in cases of sales of and clear of liens, and the personnel problems are shares. Announcements ofall sales should appear in resolved prior to the closing of the transaction. the national press before the privatizations. LaborIssues The question of personnel remains No large scale public awareness campaign was one of the principal preoccupations of the govern- organized by the GOT or CAREPP to communi- ment in the implementation of the PE reform cate the importance of the TPP and its future program, and CAREPP focuses special attention impact on the Tunisian economy. However, initial on labor issues involved in each privatization trans- publicity efforts and a series of seminars organized action. The Minister of Social Affairs and the in 1987 and 1988 that were titled "Why Privatize" General Inspectorate of Labor-who are members and "How to Privatize" had an important role in of CAREPP-play crucial roles in dealing with explaining privatization to the civil servants and the these concerns. The prime minister is also in regular Tunisian business community. To interest foreign contact with the unions to inform them of the investors in particular in the TPP, GOT needs to impact of privatization decisions on the workers. organize international awareness campaigns in the To lessen this impact, ESOPs and EMBOs are near future. encouraged, which in turn have positive affects by Sales Process: Privatization Law 89-9 and Gov- supporting the broadening of ownership in ernment Circular 33 defined the manner in which privatized PEs. PEs could be sold. In Chapter 4, the process of Until 1990, employees released because ofpriva- privatization and the role ofeach of the key players tization received severance payments, which were were explained. All sales were to be accomplished, usually based on one month's pay for each year of in a transparent way, through one offive methods: service up to 12 months of pay, and a bonus of public sale ofshares, sale ofassets, EMBOs, merger, approximately 30 percent of the total amount. or liquidation. In practice, the sales procedure as Depending on the number of employees and the articulated has been efficient and the application of length of their service, these severance payments these methods has worked well so far. were substantial. However, in 1991 GOT changed In general, the requests for proposals and/or the formula to a unified 1.5 month's pay per year of prospectuses arewell organized. Theyidentify mini- service, with no limit. mum acceptable conditions set by GOT (e.g., According to an estimate by CTAREPP, the personnel situation or the terms of sale) and also average percentage of redundant employees with realistically reflect the condition of the PEs. The r' - PEs in Tunisia is in the vicinity of 20 percent. Interdepartmental Commission-which opens, ex- O Jhe77 enterprises examined by CAREPP through amines, and makes recommendations on the bids- June 1990,26 ofthe PEs were confronting the need is performing its functions well. Most of the to release personnel. Thirty percent of their em- privatizations follow a bidding process. All bids are ployees (6,483 workers) were affected by restruc- submitted in sealed envelopes and opened by the turing orprivatization ofcompanies, with a total of Interdepartmental Commission. The negotiations 21,206 employees involved. CAREPP handled the are usually undertaken by the sector ministries. reduction ofa total of6,483 employees(see Table 3) If, in some cases, the bidding process does not BroadeningPartcipation: In the VIIth plan, the result in a wholly satisfactory offer, the prime GOT established expanding share ownership as a minister may decide that it is in the best interests of central objective. Highly desirable redistributional the state to proceed with direct negotiations be- goals and the developme.r of domestic capital mar- tween GOT and either those parties making offers kets are behind this policy. yet practical problems or only those making the highest bid(s). For ex- impede the attainability of these goals. Efforts have ample, the latter was the case in the privatization of been made to encourage ESOPs and EMBOs to aid Privatintian n Tunisia 19 in the redistribution of shares, in addition to their In 1989, a series of new investment, tax, and ability to lessen the impact of the TPP on labor. securities codes (Laws 89-49, Law 89-114, and The availability of funds to purchase shares is Decree 89-530) offered customs and tax conces- likely to be less of a problem in Tunisia. According sions to both foreign and local investors, targeriu to the Central Bank ofTunisia, there is a surplus of export-oriented sectors. Law 89-114 in particular liquidity in the financial system. For example, in reformed the income tax law and removed taxes 1989 savings accounts totaled TDI.45 billion from security revenues. Many of the new regula- (US$1.7 billion). However, the capital markets are tions and incentives took effect in 1990, and-so new and small and no domestic precedent exists for far-no clear assessment of their impact has been dealing in securities. The reforms of the TSE insti- made. tuted in 1989 and 1990 will encourage the inves- In the privatization arena, Law 89-9 set up tors to give greater consideration to the TSE in incentives to facilitate and accelerate privatization order to diversify their sources of financing. How- operations. These included the following: ever, consumers may opt to invest in instruments * Tax rebate on company earnings and returns that may offer a higher rate of return than the reinvested; interest rate on savings. In any case, cultural biases * Remission of sharing fees related to capital against TSE are apparent. Family holdings are impairment; reluctant to dilute ownership and control. * Remission of registration fees for transfer op- As a result of proper educational efforts, honest erations for real assets and business goodwill; and accountingpractices, competitive ratesofreturn on * Remission of taxes on corporate earnings over investments, and appropriate protection for small the first five fiscal years ofactual operations. shareholders against manipulation and fraud, some Privatiation Proceeds:The proceeds from priva- individual savings may be channeled into securi- tization were, in most cases, allocated on an ad hoc ties. The privatization ofsome big and well-known case by case basis, channeled to the FREP and used PEs (e.g., Tunis Air) through the public offering of to pay for severance pay, liabilities, and outstanding shares will also contribute to broadening share social security contributions. In the future some of ownership and, in a larger sense, to changing tradi- the proceeds will be treated as budget revenue- tional patterns of investment in Tunisia. the 1992 budget foresees TD 10 million from Incentives: GOT has established an incentive privatization proceeds. Moreover, the government structure for investment, removing most barriers to is contemplating using some of the proceeds for investment in the Tunisian economy. Law 88-92 of regional development funds to finance infrastruc- 1988 provides incentives for development of in- ture and training. vestment companies under the previous Law 69- 29 of 1969, which had created two categories of Spport and CoperatWon betrrn International such companies: SICAV (variable capital invest- Agencie ment company, open mutual fund) and SICAF (fixed capital investment company, closed mutual The World Bank's involvement in this reform fund). program has been complementary to and coopera- Table 3: Effect of Privatization on PE Employees Number of % of affected workers workforce 1 Transfer with the new buyer 2,989 (46%) Voluntary departures with severance packages 1,011 (16%) Anticipated retirement 515 (8%) Early retirement 1,241 (19%) Retirement 101 (1.9%) Transfer to other activities 327 (5%) Layoffs 291 (4%) Otherr8 (0.1%) Total 6,493 (100%) 20 Privatication in Tunisia tive with the support provided by a number ofother and 1991, an additional 44 transactions are in agencies. The Bank is mainly supporting this pro- progress calling for total or partial privatization, gram through a US$130 million public enterprise includingPEs, subsidiaries, and inerest/equityheld reform loan approved in June 1989. USAID is also by GOT. Most of these cases have reached ad- financing technical assistance to the DGEP for the vanced stages in their valuation, publicity, or auc- implementation of this program and to the stock tion. The second phase of the TPP will concern exchange for development of the capital markets. privatization of larger PEs, such as cement plants, The IMF included the public enterprise reform and foodstuffs complexes, shipbuilding industries, and privatization as key elements in the structural re- construction material companies. form. IFC is playing a key role in privatization of Privatization in Tunisia has progressed so far on textile companies and attracting foreign investors a case by case basis, without any published or well- in other potential privatizations. defined privatization program, action plan, time- UNDP is also involved in financing technical table, list of candidates for privatization, or list of assistance to strengthen capital markets. Ajapanese those PEs excluded from privatization. The GOT Trust Fund provided funds to finance assistance is still very reluctan- bout publishing a compre- requirements of priority public enterprises and to hensive privatization program. The main reason privatize cement mills and the dairy sector. behind this is the social consequences of such an announcement. At the ourset, this approach worked TPPPmopects reasonably well, during the period when mainly smaller PEs were being privatized, and while it was The progress ofGOT economic reforms toward important to create momentum to boost the whole privatization promises further success during the process. VIth Plan. In the face ofadverse circumstances in However, even with the case by case approach, 1990-1991, the Tunisian authorities undertook GOT will have to publish an annual privatization strong and appropriate measures to keep the reform plan- including a concise list of candidates for process on track, and have received outside support privatization--to inform the local and interna- from the World Bank Group, IFC, UNDP, and tional community of upcoming sales. Like coun- USAID. tries such as Argentina, Mexico, Venezuela and the The prospects for continued privatization ad- Ivory Cost, Tunisia will have to tackle the privati- vances are promising. In addition to the 80 priva- zation of utilities, natural monopolies, and the tization transactions that took place between 1986 commercial state banks. Chapter Six Constraints to Privatization A variety of obstacles continue to confront the neurs, broaden participation in investment, and GOT privatization program as it enters its second familiarize the Tunisian business owners and man- phase, including private and public sector atti- agers with competitive management practices. The tudes, taxation and labor issues, capital market introductionofnewpractices, investors, and thereby development, and the need to broaden participa- new businesses would bring dynamism and com- tion. GOT lacks the staffand expertise necessary to petitiveness into the business environment. cope with the privatization ofthe large PEs and the increasing diversity and sophistication of the in- Pivate Sector Asnitude struments used to complete these transactions. However, GOT has made steady progress to date Private sector business owners in Tunisia are on all of these issues and may overcome many of traditionally riskaverse and seek to share ownership these obstacles through consistent pursuit of its only with other family members or close associates, private sector reform goals supplemented by out- professing discomfort with investment in busi- side financial support and technical assistance. nesses controlled by strangers.16 Long-standing in- For the GOT to reach its target ofdivesting itself centives have supported business and investment ofall the PEs in competitive sectors and improving strategies that promote closed ownership and con- Tunisia's competitiveness in the international area, trol ofenterprises, earning long-term returns throgh a business environment conducive to privatization cash flows, and achieving growth through increasing will be necessary. This presupposes a stable macro- the number of companies under close control. economic environment with credible government Other impediments to the promotion of invest- policies and mutual trust between government and ment in PEs include the availability of low-risk and the private sector. moderate-return investments encouraged by ear- The GOT has already made substantial progress lier GOT policies; uncertainties associated with the in removing legal, fiscal, and institutional barriers government's future position on private sector de- to privatization, and has provided incentives for velopment; the historical absence of experienced increased investment and growth. Indications are Tunisian managers, finance professionals and insti- that the removal of other important obstacles to tutions able to develop strategies for higher returns business operations, such as restrictive labor and on investment; and an absence of vital capital currency laws, will occur. However, traditional markets to mobilize private investment. Most of business practices, cultural biases, and an absence these factors can be overcome if a successful track of necessary tools, such as standardized accounting 16. Price Waterhouse, USADTunisia-Vemrt Capital procedures, may delay the effectiveness of these FeibiktyAzeamnt unpublished report for U.S. Agency changes. Steps need to be taken to attract entrepre- for International Development, p. 29. 22 Irivatiaion in Tunisia record of viable privatizations, and higher returns hands of a small number of private sector entrepre- on investment, can be achieved. neurs or families, and wishes to allocate the owner- While issues of higher rates of investment and ship ofthe privatized PEs to promote acompetitive, expanded capital markets are of continued impor- non-monopolistic and "equitable" distribution of tance in promoting privatization and private sector these assets. In terms of its political dimension, development in Tunisia, the private sector is also dispersion of capital ownership is also desirable to concerned with issues of access to new technolo- free GOT and the TPP from the public perception gies, management techniques, and other dimen- that primarily the wealthy and well-connected ben- sions of competition in the international arena. efit from divestiture efforts. The structure of the The PE sector previously led the Tunisian economy public sector in Tunisia has been monopolistic and in the introduction ofnew technologies and indus- oriented around distributive functions, and there- tries, and these issues represent a new set of respon- fore the transition to divestment must address the sibilities and uncertainties for the owners and creation of competition where none or little had managers in the country's private sector. previously existed while preserving flows ofincome The private sector in Tunisia has historically and wealth throughout the economy. The GOT benefited from its monopolistic status and high has identified the widespread distribution of own- levels of protectionism. In addition, petroleum ership and control of assets as the best means to exports fueled a boom that cushioned the Tunisian perform these functionsandpromotefuture growth. economy until the early 1980s. Issues of produc- Throughout the first phase ofthe TPP, PE assets tion efficiency or modern management were there- were largely sold to a small group of buyers with fore largely ignored, and Tunisian companies did access to financing, government officials, and rel- not vigorously implement standard accounting, evant information. The nature of Tunisian capital technological, or marketing practices. Present day markets, the small size of the enterprises in ques- Tunisian industrialists have had little experience in tion, and the unsophisticated "all or nothing" responding to market demands. In one demo- character of early divestitures contributed to own- graphic profile, Tunisian industrialists appear to be ership of elements of former PEs by those wealthy technicians or formergovernment bureaucrats, with enough to purchase whole blocks ofassets at one time. stronger political than business skills. The heavily Traditional business practice in Tunisia has encour- controlled and protected market environments in aged such owners to maintain close control of these which they are accustomed to functioning may assets, hampering growth ofliquid investment instru- prove inadequate preparation for the management ments or wider participation of private investment. ofbusinesses that must respond to market signals.'7 With the increasing sophistication and size of Concerns about the adaptability of workers may thedeals to be attempted in the second phase ofthe also influence assessments of the TPP. Inappropri- TPP, the GOT will move away from this simple ateexperience, widespread retraining requirements, approach. The government must, however, pro- and issues of attitudes and incentives may conse- vide preferences aimed at multiplying ownership, quently hamper the privatization process. such as preferential arrangements with PE manag- However, small- and medium-sized exporting ers and employees, sales of common shares, or firms are a source of domestic entrepreneurs, as are public distribution ofshares. Until institutions like the ranks of those returning from work abroad. the TSE are strengthened and effective incentives During the first phase, which emphasized small- are established, a wider capital market development and medium-sized PEs, the privatization initiative will not be achieved. seems to have enjoyed some success in attracting In step with capital market development, an such entrepreneurs. However, the relatively small educational effort must be made to support the goal size of this group does not allow it to contribute to the of broader share ownership. It will be necessary to broadening-or"democratization"--ofcapital own- promote investment in securities to the general ership, which is one of the prime goals of the TPP. public, articulate the role and functioning of finan- cial markets, indicate sources of information and Concentration of Capital guidance on investing, and publicize regulations GOT officials are concerned with the concen- which protect small investors. Similar educational tration of ownership of capital in Tunisia in the 17.Villemain, ibid p.35. Pratisatien in Tunisia 23 projects might be undertaken on the corporate accomplishments. An overvalued exchange rate, level, explainingthe advantages ofexpanded capital administrative allocation of foreign exchange and ownership and easing traditional biases toward hence cumbersome and erratic access to imports closely held companies. cannot but be serious obstacles to privatization, not only with respect to foreign investors. Hence, re- Confsdenc-BuAildingMeass ducing the discrepancy between the official and par- allel exchange rate to a narrow margin is important. Investorconfidencehas been supported byGOT The reforms supported by the Bank's loan of policies in all areas involving PE and fiscal reforms US$250 million (Economic and Financial Re- in recent years. An essential part of the move to the forms Support Loan) since December 1991 aim to private sector and market mechanisms has beer. zhe make the private sector more efficient and ensure liberalization ofbanking since 1987. Prior authori- that it is supported by a sounder, more market- zation requirements for almost all credits have been oriented financial system. lifted, and interest rates are free except for caps on sight deposits and a cap on deposit bank lending Capital Markst Demdopment rates, which can reach 15 percent, compared with an inflation of 6 to 7 percent per annum. Shallow capital market development and the Reform of taxation has replaced distorted and lack of access to domestic savings are obstacles to complicated direct and indirect taxes with taxes the TPP. The TSE, for example, has been in that are simple and economically rational. Under operation for 20 years but nonetheless possesses an the program supported by the Bank, a multitude of extremely thin trading base. Funds amounting to indirect taxes was gradually grouped around a few approximately 1 percent of total private savings tax rates and then, in 1988, replaced by a value- deposits have been channeled into the TSE. In added tax (VAT) on production. The VAT was addition, it has low trading volumes, increasing extended in 1989 to wholesale distribution, with from TD3 million in 1971 to TD55 million in the exception of foodstuffs. The system of direct 1988 (at the launching of the private sector develop- taxation was replaced in 1989 by new direct taxes ment initiative), to approximately TD68 million in that are simple and low on personal incomes and 1990. Bond trading, which appeals to risk-averse profits-the maximum rate on incomes and profits investors and might appeal to a wider range of is 35 percent. In particular, their transparency is potential investors in the Tunisian case, totaled less ensured by the absence of double taxation: for than I percent ofTSE operations. UntilJuly 1990, example, profits at the corporate level and divi- the TSE was composed of the Marchi Permanent dends as personal income. Customs duties have for listed companies and the March4 Occasionnel also been lowered and simplified; the maximum for unlisted companies. As of November 1991, the import duty has been reduced to 43 percent from TSE covered the Premier March6, composed of over 200 percent, while export duties have been some ten "blue chip" companies, and the Second removed from all but a handful of items. Marchd, made up of smaller, riskier companies, Despite the many GOT liberalization and re- with the intention of fostering their growth. form efforts and the creation ofattractive incentives The development of the TSE has been con- for investment and private sector development, strained not only by low trading volume, but by confidence in GOTs private sector policies has factors of liquidity, the structure of stock owner- been relatively slow to build. The evolution of ship, higher levels of taxation for dividend and attitudes and confidence in the permanence of the bond income, and shortages and unreliability of government's commitment to withdrawal from financial reporting information. Liquidity issues competitive sectors and to liberalize the economy have been hampered by historically low or even may require a number ofyears of consistent policy negative real return on securities, and byTSE trading application. The VIIIth Plan's continuation of procedures such as "fixing," which runs counter to many of the structural adjustment policies, com- "continuous bidding" practices used in most indus- mitment to high levels of economic growth, and trialized countries. Fixing results in the closing of inclusion of controversial labor and exchange rate bids on an individual company, blocking further reforms will support increased confidence as the bidding until the next trading session. Issuance of reform process moves toward a decade of concrete "nominative" stocks, which required registration 24 Aivatication in Tunisia and reissuance of stock certificates to new owners, managers recognize the personal adverse impact of significantly slowed the transfer process because of reductions in staffing and liquidation of the PEs. Tunisian companies' lack of transfer agents. With these justified concerns regarding job loss is Financial intermediation services are also unde- also the realization that pay and benefits within the veloped, with only 17 registered with the TSE as of PEs surpass those available in the private sector, 1990. Most ofthese are banks, providing buying or resulting in net salary reduction even in the event selling services as a courtesy to clients with no that individual jobs are preserved. incentive (such as commissions or performance- A case in point is the privatization in 1989 of based bonuses) to accelerate Stock Market activity Confort SA, a manufacturer of refrigerators. Dur- or development. As a service provided to attract ing the negotiations for the final sale, the process depositors rather than a line of business oriented wascomplicated byan employee strike andoccupa- toward facilitating customer investments, banks tion of the premises. GOT resolved the conflict generated little profit from their financial interme- through the inclusion of the union and employees diation activities. in the negotiations. In the TPP, the GOT has They therefore have few, if any, resources avail- identified and integrated labor concerns at the able to perform financial analysis and reporting, highest levels of decision making, and as noted conduct market research, or promote investment earlier, information is shared directly between the opportunities. Inaddition, underwriting, and there- Minister of Social Affairs and the unions affected fore guarantees of sale of security issues, has not by GOT privatization operations. generally been available through these intermediar- A large number of the layoffs of the approxi- ies. There are virtually no investment banking mately 3,500 redundant workers affected by priva- companies or brokerage firms in Tunisia that can tization decisions to date have been effectively raise and organize capital for clients and GOT on avoided through a variety of measures. These have a deal by deal basis. included incentives to purchasers within the terms Other constraints affecting the TPP include a of sale to maintain staffing levels, as in the privati- lack of local funds, a limited number of techniques zation of a GIAB Flour Mill in 1990 (keeping the and instruments for project finance, and the diffi- entire work force of 151) and the Confort SA Refrig- culty of mobilizing external private financing for erator Unit (retaining 600 of817 employees). divestiture. The eight development banks in which Experience in many countries has shown that GOT has half ownership are currently operating ESOPs and EMBOs are effective means ofgenerat- with the objectives ofi i) facilitating the financing of ing employee support and easing resistance to projects through their own funds or mobilization of privatization. These methods of privatization also other sources; and ii) identifying and promoting address issues of broadening capital ownership domestic and international partnerships. However, while assisting in the reorientation of formerly these banks are not equipped to mobilize adequate state-owned enterprises toward a market economy. national and international equity for the successful ESOPs, even though a form of participatory own- implementation of the next phase of the TPP. ership, leave a modem, market-oriented and profit- motivated corporate structure in place, while Laler distributing the profits of the corporation more widely to both public/private owners and the Tunisia has strict labor laws, which can act as a enterprise's workers. In addition, ESOPs and disincentive to foreign investors, though these codes EMBOs are a grass roots approach to capital market are targeted for reform under the VIIth Plan. The development and can provide incentives to workers laws restrict enterprises' ability to lay off workers, to improve productivity after privatization because and render potential investors reticent to take con- they derive direct benefit from such improved trol of PEs and their work forces. These labor laws performance. ESOP/EMBO financing provides a are notapplicable to off-shore enterprises and many link between workers, property, and productivity, domestic firms appear to find a variety of means to and is a means to extend the opportunity to own circumvent many of their requirements. productive assets toawider rangeofparticipants. In Employee resistance to privatization efforts rep- Tunisia, successful employee participation plans resents one of the most formidable obstacles that have taken place in the cases of SOGITEX (textile privatization initiatives face, as these workers and sector) in 1988 and ONP (fisheries sector) in 1989. . J Chapter Seven Conclusions: Lessons Learned The TPP is moving slowly but steadily. Much well. In Tunisia, the prime minister's office has been accomplished since 1988, and the pros- has direct responsibility for the TPP, which pects for the future are promising. Today, the has been consolidated into a single central Tunisians with responsibility for privatization authority. Centralizing the program and locat- within the GOT are familiar with the operational ing it at a high level defused jurisdictional details of the various stages of the privatization disputes and rivalries between the Finance process and have mastered the application of sev- Ministry and the Central Bank, and stream- eral methods for privatizing PEs. lined the process." The strategically targeted, cooperative, and co- ii. The role ofpublic awareness campaitns can be ordinated nature of the assistance among the bilat- critical in overcoming opposition, notably eral and multilateral agencies has been a key asset as among labor organizations, if developed and the GOT pursues its commitment to privatization, implemented skillfully. In the Tunisian case, with different agencies sponsoring a variety of well-organized and publicized seminars such technical assistance, funding, or other resources as "Why Privatize" and "How to Privatize" based on GOT needs. The World Bank was instru- played a significant role in defusing any outcry mental in supporting the GOTs own privatization that GOT was "giving away the national pat- initiatives; the International Finance Corporation rimony." (IFC) provided financing to specific firms; USAID However, seminars such as "Why Privatize" offered strategically placed, on-site and effective must quickly progress from theoretical discus- technical assistance to the CAREPP and the TSE; sions of privatization to action-oriented con- and the United Nations Development Programme sideration of the details of the process. Once (UNDP) funded studies and assistance to the TSE. the divestiture strategy has been accepted, it is In the course of the GOT privatization effort, a necessary to use the initial momentum to deal variety of lessons have been learned that are appli- with specific, practical problems that arise in cable to privatization programs in a wide range of implementation and to deal with them as settings. Despite considerations that are specific to rapidly as possible. the Tunisian economic, political, and social con- iii. Early establishment ofa legalframeworkand of text, the following general points can be made: an operational inWtusional framework is essen- i. The will to privatie must be determined and tial to steady progress, as in the consistent consistent fom the highest echelons ofgovern- implementation of the TPP. ment down. Privatization must be supported 18.Elicker, Paul .and jaral Saghir, Sarsg Up a Priawiza- by members of the ministerial ranks and influ- ten +grm The Car of Tunia Series 3 Case Studies, ential advocates outside of the ministries as Center for Privatization, 1990. p.3. 26 PWvasization in Tunisia iv. The most successful privatization programs cesses through the divestiture of less compli- are those in which privatization proceeds in the cated and more attractive PEs and to move connut ofan overall liberalization policy To through the learning curve with a minimum create the favorable investment climate neces- of criticism and opposition. Often these early sary to ensure privatization of a wide range of privatizations concentrate on small to me- PEs, entrepreneurs must be confident that dium-sized firms. It is less costly to make mis- such transactions are being facilitated by gov- takes with the small PEs. Also the government ernment economic policy. Without this per- can educate the investing public so that higher ception, it is difficult to mobilize domestic prices can be sought for larger PEs at a later capital or to attract foreign or "flight" capital. stage. v. Transparency is an important consideration for viii. Privatizauion should operate on a mixed time- all government privatization programs. The table that moves fonward on several fronts development and justification for individual simultaneously. These progressions should transactions must be a matter of public include the settling of policy matters, the set- record. Ensurin6 that the enterprises art to be ting forth of the procedures, and the actual run according to the highest standards of ac- conclusion of the transactions. In Tunisia, countability may retard early progress and some transactions were able to take place be- may risk crucial program momentum. How- fore procedures were made systematic. It was ever, too little openness may result in political only in the second quarter of 1989-when the recriminations later. In the Tunisian case, an TPP was well underway--that the prime acceptable middle ground appears to have ministers office officially requested that a been identified through a system of accepting written governmental privatization program buy out bids at public auction, then, if neces- be prepared. However, this program has not sary, concluding the final transactions through yet been approved by GOT. private negotiations. ix. Good working relaionships both between and vi. Tunisia has only one privatization commission, among the government of Tunisia and bilateral while other countries have as many as three. and multilateralaidagencies interested in sup- Establishing an effective relationship among porting Tunisia's plans for privatization have CAREPP, as the decision making body, been advantageous to the program. The World CTAREPP, the technical review group, and Bank, IFC, UNDP, and USAID have coordi- the DGEP, t%e actual working office, required nated closely, both with the GOT and with a great deal of time and effort. However, the one another in supporting a range of GOT constructive and cooperative interaction that privatization initiatives related to privatization. ensued underscores the importance of advance x. Tunisia confirms the belief that ifa promising planning and coordination. Also, it is always enterprise is offered for sale ata realistic and recommended that the sale be given maxi- attractive price, candidate buyers will appear. mum publicity and that once the decision has Many of the bidders, including the most suc- been made to sell, the authorities move cessfUl bidders, have been Tunisian nationals. quickly to prevent loss of employee morale. xi. The proceeds from privatization were, in most vii. The Tunisiar. case reaffirms traditional cases, used to pay for severance pay, liabilities thinking that initialprivaizations should be and outstanding social security contributions. undertaken with enterprises that are not highly It is recommended for political and perhaps complex in their organization and possess good also fiscal reasons that the net proceeds ofpriva- prospects for success. Also, privatization sization be usedfor regional development funds should be carried out with a low profile. 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