73003 July 2012 – Number 68 PRIVATIZATION: LESSONS FROM JORDAN William P. Mako1 and privatized with Program support have shown substantial gains in their financial performance and Introduction: While many governments in the Arab productivity. Consumers have also benefited, for world have undertaken some privatizations since example from major service improvements and the early 1990s, many retain surprisingly large reduced connection charges and tariffs; increases in portfolios of fully, majority, or minority state-owned electricity supply with no real (i.e., inflation- enterprises (SOEs). As in other parts of the world, adjusted) increase in average tariffs; and privatization often causes concerns among citizens. improvements in air service frequencies and services Workers fear loss of employment and benefits; as a result of airline restructuring and privatization. consumers worry about price increases; and voters As for workers, the GOJ avoided involuntary mistrust government officials. retrenchments. SOEs privatized with Program support witnessed only a 2 percent net loss in Jordan’s experience during 1998 – 2008, when the employment (448 positions), which were more than Government of Jordan (GOJ) privatized fourteen offset by an estimated 25,000 new jobs in SOEs – in telecommunications, electricity, air telecommunications and IT-enabled businesses. transport, mining and other sectors – with technical Workers who remained at privatized firms assistance program financing from the U.S. Agency experienced real wage gains in most cases, as well as for International Development (USAID) better benefits and greater training opportunities. demonstrates both how privatization can provide a Local communities have benefited from the wide range of benefits to society and how to corporate social responsibility programs (and implement a privatization program. spending) by the new owners of privatized firms. Jordan’s Privatization Program: The Firms privatized with support from the Program aforementioned privatization transactions saw additional follow-on capital investment of $1 substantially strengthened Jordan’s fiscal position. billion, representing 11.4 percent of foreign direct These privatizations generated $2.3 billion in sales investment (FDI) for the period 2000 – 2007. In proceeds, which were mostly used to buy Paris Club contrast to FDI that went into real estate debt in 2008 at a discounted price. By supporting development, this FDI served to increase the reductions in GOJ debt from 100 percent of GDP in capacity and productivity of Jordan’s industrial and 2000 to 89 percent in 2004 and 60 percent in 2008, the service sectors – all without any guarantees or privatizations supported by the Program contingent liability for the GOJ. Firms privatized contributed to macroeconomic stability. Part of the with Program support also experienced major gains substantial increase in annual payments (e.g., taxes) in labor productivity, to which privatization was a from these privatized firms to the Treasury can also contributing factor. Lastly, these privatizations be attributed to privatization. Firms restructured supported development of the Amman Stock Exchange and Jordan’s overall capital market 1 development. William P. Mako, Finance and Private Sector Development Unit, Middle East and North Africa Region (MNSF1), The World Bank. This MENA K&L Quick Note was cleared by Simon C. Bell, Key Lessons from Jordan’s Privatization P rogram: Sector Manager, MNSF1. Jordan presents a useful and relevant model for other MENA governments considering a greater the mixed-capital initial privatization of commitment to privatization or interested in the Jordan Telecommunications Company in details of how to design and implement a 2000 through a strategic sale and public privatization program. Lessons from Jordan’s share offering. privatization program likely have broader applicability as well, including for governments in By contrast, except for water, power, and South Asia and Africa. Key lessons from Jordan’s some other PPPs subject to sector-specific privatization program include the following: legislation, Jordan continues to lack an adequate legal basis for innovative a) Need for government commitment. Jordan, small/medium PPPs. A number of PPP- despite a number of changes in government related rights and obligations – such as a over the past 10 – 15 years, remained solidly private developer’s right to collect fees that committed to implementation of would otherwise go to the GOJ – still need privatization and public-private to be codified in a special-purpose PPP Law. partnerships (PPPs.). This sustained The lack of such a law has halted at least commitment reflected a collective sense of some small PPP transactions. urgency on the need to turn annual fiscal outflows (e.g., for subsidies) into inflows d) Need for a centralized privatization agency. and to maximize privatization proceeds Blessed with sufficient budget and staffing, available for paying down an uncomfortably EPC was able to build in-house capacity and high level of debt. This sense of urgency institutional memory on the numerous made it easier for officials and legislators to detailed operational issues involved in agree on a workable privatization law, on a organizing and implementing a successful centralized privatization agency, and on the privatization program (e.g., advisor terms of major transactions. selection, review of advisor work product, negotiation). Concentrating responsibility b) Need for a clear strategy. Governments for privatization implementation in one should set priorities in terms of what they central agency – rather than among multiple are attempting to achieve. Privatization – in line agencies – hastened the accumulation of particular – is likely to involve tradeoffs a critical mass of privatization program among maximizing sales proceeds, development and implementation skills. It protecting workers, enhancing enterprise is important for the privatization agency to competitiveness, developing capital have efficient local staff who can work markets, and sharing wealth with citizens. efficiently with external consultants. GOJ’s revealed priorities were privatization External consultants are good if their local sales proceeds, competitiveness gains, and staff counterparts are good. Hence, capacity worker protection. It will be important for building for local staff should be given top the effectiveness of a nation’s privatization priority. program to establish priorities in cases where such program goals conflict. e) Need for intra-governmental coordination. Jordan’s large and successful privatizations c) Need for sufficient legal authority. Jordan’s – including the telephone company, airline, 2000 Privatization Law gave sufficient and power sector restructuring and authority for a new Executive Privatization privatization transactions as well as the Commission (EPC) to retain external Amman airport build-operate transfer (BOT) advisors, undertake investor search transaction – required close coordination according to agreed tender procedures, and between the EPC, line ministries (e.g., for negotiate privatization transactions – subject communications, transport, energy), newly- to oversight by a high-level GOJ established regulators, and capital market Privatization Committee. This 2000 law institutions. Poor working relations with provided an adequate legal basis for a series any one of these would have disrupted a of privatization transactions beginning with July 2012 · Number 68 · 2 mixed-capital privatization transaction in retirement age. Especially in cases of SOEs any one of these regulated sectors. that are severely distressed and/or highly The privatization agency must be able to over-staffed, it will be important to design respond quickly to requirements set by severance/retrenchment packages carefully external advisors and obtain timely and – if need be – to draw on international government decisions. Investors often have financial assistance to fund severance and opportunities in multiple countries, and an interim health/pension premiums. entire transaction can fail if a government decision takes longer than it should. To i) Need for sufficient funding. Sector avoid this, working committees should be restructuring, development of regulatory given broad decision-making authority frameworks and capacity, labor within pre-specified committee mandates. retrenchment, and transaction support are extremely expensive. It will be essential for f) Need for highly-qualified external advisors. a government embarking on a privatization Jordan’s large privatization and PPP program to make sure that it has developed transactions involved complex preparations. a realistic projection of overall privatization The privatization agency’s readiness and program costs and lined up sufficient ability to hire leading international firms to funding (e.g., from internal government advise and assist on such detailed budgets, development agency grants, or implementation matters is essential. Hence, international financial institution credits) to the consultant selection process should be cover projected program costs. open and be based on full competition. The committee responsible for selecting an j) Need to avoid conflicts of interest. Those external advisor should be given full involved in a privatization or PPP program freedom of choice without any outside or transaction should have no conflict of pressure. interest. These include senior officials, privatization agency staff, and external g) Need for adequate preparation. Enterprise advisors and their families and business restructuring, if needed, should be partners. completed prior to privatization. Pre- privatization enterprise restructuring should k) Need to monitor impact. Privatization is be based on some sort of a privatization contentious, and it can be difficult to plan. There should also be some enterprise demonstrate the benefits. To do so, it would screening in order to exclude non-viable be useful to establish a pre-privatization enterprises from privatization. In the case of baseline in terms of the enterprise a PPP, a thorough feasibility study should performance results, employment effects, be completed before selecting a Program for fiscal effects, investment, and PPP. Otherwise, transaction efforts may go competitiveness to be expected in a counter- for naught if it subsequently turns out that a factual case where the enterprise remains Program is infeasible. Needed regulatory under state-ownership. arrangements, such as establishment of an independent regulator, should be put in l) Need for patience. Privatization/PPP place before starting work on a transaction. transactions usually take a long time to do properly – often much longer than expected h) Need to ease out redundant labor. As part at the outset. Any number of factors – of enterprise preparation, the GOJ sought to including needs for enterprise restructuring, avoid disadvantaging redundant SOE staff. enabling legislation and capacity As a matter of policy, GOJ avoided development or adverse market sentiment involuntary retrenchments in favor of and investor disinterest – can delay voluntary early-retirement packages (with transactions. For example, while RJ Airlines lump sum severance) and support for health was ready for privatization, potential insurance/pension premiums until investor interest disappeared in mid- July 2012 · Number 68 · 3 September 2011. To its immense credit, Contact MNA K&L: USAID remained patient and supportive Laura Tuck, Director, Strategy and Operations. throughout the long life of this Program, MENA Region, The World Bank which paid off both in terms of successful Regional Quick Notes Team: outcomes and in establishment of valuable Omer Karasapan, and Roby Fields lessons and institutional frameworks for Tel #: (202) 473 8177 future success. The MNA Quick Notes are intended to summarize lessons learned from MNA and other Bank Knowledge and Learning activities. The Notes do not necessarily reflect the views of the World Bank, its board or its member countries. July 2012 · Number 68 · 4