Obstacles to Privatisation of State-Owned Industries in Algeria

28 Pages·2007·1.66 MB·English

Obstacles to Privatisation of State-Owned
Industries in Algeria: the Political Economy
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At: ISABELLE WERENFELS
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aft This analysis seeks to explain why privatisation of state-owned industrial enterprises
ch in Algeria - a process pushed by the IMF and the World Bank and launched in 1994 -
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en has not led to a single complete divestiture of shares of corporatised public enterprises
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Wis by 2001. Privatisation of these enterprises has been impeded by (1) intra-elite struggles
g and violent conflicts between state elites and armed groups over the distribution of
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u rents, rendering decision making and coherent reform strategies impossible; (2)
Stift military and bureaucratic elite clans that profit from import monopoly and oligopoly
y: [ rents and display little interest in increased domestic production; (3) the role of
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d industrial enterprises in (clientelist) social networks; (4) the strong remnants of a
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ad nationalist, étatist, socialist and collectivist ideology.
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In 1994, when Algeria signed a stand-by agreement with the IMF, it
committed itself to pushing ahead with privatisation of state-owned
enterprises (SOEs) in an encompassing way. Six years later, the World Bank
notes that 'Algeria's privatization has not yet resulted in a single complete
divestiture of shares of corporatized public enterprises to outside private
interests.'1 Algeria thus has a weaker record in privatisation than most
developing and transition economies.2 Even if we take into account that a
number of small production units of large enterprises have been spun off to
employees of such enterprises, and that these are an increasing number of
public-private joint ventures, the overall result of the efforts to privatise
SOEs in Algeria cannot be described as a success. This article seeks to
analyse and understand the interests and dynamics that have, so far,
prevented the privatisation of industrial enterprises in Algeria.
Privatisation of SOEs is a central pillar in the World Bank's and the
IMF's neo-liberal theoretical framework for transforming a state to a market
economy. Yet, in practice privatisation of SOEs involves more than just a
number of economic and institutional variables since SOEs are located in a
specific historical, social, political and cultural context. In the Algerian
Isabelle Werenfels is Research Associate in the Middle East and North Africa at the Stiftung
Wissenschaft und Politik (SWP), Berlin.
The Journal of North African Studies, Vol.7, No.1 (Spring 2002) pp.1-28
PUBLISHED BY FRANK CASS, LONDON
2 THE JOURNAL OF NORTH AFRICAN STUDIES
case, this implies being aware of the ideological foundations of post-
independence Algeria and of the ambitious import substitution
7 industrialisation project which took off in an initial period in the 1970s but
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20 completely collapsed with falling oil prices in the mid-1980s. It requires,
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ul moreover, understanding how the political, economic and military spheres
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6 are intertwined in a country where the military has dominated politics, albeit
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9: in an opaque way, for nearly four decades and where patron-client
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At: networks, clan structures and regional affiliations are strong social forces.
k]
oliti Finally, it needs to take into account the civil war between the regime and
d P armed Islamist groups, which has not only provided the backdrop to the
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U economic reforms Algeria embarked on in the 1990s but which has affected
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h the trajectory of those reforms.
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en The argument made here as to why privatisation of the industrial SOEs
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Wis in Algeria has virtually been non-existent will be three-fold:
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Stift • First, Algeria is governed by competing military clans and thus lacks two
y: [ important preconditions for successful transformation and development: a
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d unified leadership with a coherent (economic) strategy, such as we find it
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oa in developing states such as Taiwan and South Korea, and a bureaucracy
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w which is insulated in a Weberian sense but which, at the same time, has
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strong ties to the private sector. Based on these shortcomings, it can be
argued that what has kept privatisation from taking off, has been to a large
extent the same factors that have prevented SOEs from operating
efficiently and are hampering overall economic development in Algeria.
• Secondly, privatisation of state-owned industries affects the distribution
of rents because it undermines the patron-client networks in which these
SOEs are embedded. Moreover, it poses a threat to those receiving rents
from import monopolies that have moved from SOEs to private hands
after trade liberalisation. Any change of the status quo will thus be fought
by those groups that have much to lose, and will lead to conflicts
regarding the redistribution of rents as well as power. While the argument
here will not go so far as to claim that the redistribution of resources and
wealth is the main driving force behind the civil war Algeria witnessed in
the 1990s, it will argue that all groups involved in the violence have a
vested interest in the fate of the SOEs.
• A third obstacle to privatisation is the continuing and powerful remnant of
the nationalist, etatiste and collectivist ideological foundations on which
post-independence Algeria was built. These resulted in a strong mistrust of
the private sector and, even more so, of foreign investment. This ideology,
while having lost much of its appeal, is still a powerful instrument in
public discourse for groups fighting privatisation. Neo-liberal goals such
as efficiency are further undermined by what Beblawi3 terms a 'rentier
STATE-OWNED INDUSTRIES IN ALGERIA AND PRIVATISATION 3
mentality' among the elites - a mentality which results from income not
being related to work but to the redistribution of (hydrocarbon) rents.
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20 The points listed above do not imply that there are no other reasons that
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ul have - or could in the future - hinder privatisation, such as the lack of
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6 4 appropriate financial and legal frameworks, little interest by investors based
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9: on unattractive SOEs and a problematic security situation. These are,
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At: however, secondary reasons which result from the three constellations of
olitik] factors mentioned above. Hence, explanations, such as those of the World
P Bank and of new institutional economists, which reduce the failure of
d
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U privatisation primarily to an inappropriate economic and institutional
haft framework in a specific context and to informational shortcomings and high
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ns transaction costs, have limited explanatory power. By ignoring what Khan4
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Wis terms 'political settlement' (the balance of power between the classes and
g groups affected by a certain institution) and 'transition costs' (costs linked
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Stift to the intensity and extent of resistance faced by those introducing an
y: [ institutional change) they neglect the fact that formal and informal
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d institutions are shaped by a country-specific complex interplay of
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ad economic, social, political and cultural forces, and that these forces
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wnl decisively affect the path of any institutional transformation and vice versa.
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D The first part of this article critically discusses to what extent various
theoretical approaches can shed light on the obstacles to privatisation in
Algeria. The second part focuses on the Algerian privatisation scheme and
the outcome to date of privatisation initiatives. Part three highlights the
political and social structures and dynamics relevant to the privatisation
process and analyses why privatisation has failed to materialise, placing the
reasons for this failure in a theoretical framework derived from the
approaches already discussed. Whilst this article is primarily concerned
with obstacles to privatisation, the underlying question whether
privatisation now is the right policy and priority for the Algerian SOEs will
inevitably arise and will be discussed in the final part.
Obstacles to Privatisation: Theoretical Approaches
In an analysis of shortcomings and limits of the Algerian privatisation
programme, the World Bank cites three main clusters of problems: 'i) lack
of a well defined privatization strategy, including time bound objectives
underpinned by a detailed information plan and supported by a broad-based
information campaign; ii) lack of sufficient financial and human resources
devoted to privatisation in line with the ambitious scope of the programme;
iii) legal and institutional arrangements in need of clarification and
improvements'.5 While these are accurate observations, they only scratch
4 THE JOURNAL OF NORTH AFRICAN STUDIES
the surface of the problem. They describe phenomena but do not address
underlying issues and questions, such as why there is no well-defined
7 privatisation strategy and why the appropriate legal arrangements have not
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20 been made.
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ul The explanatory model used in this article attempts to analyse these
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6 4 underlying questions by using a political economy approach, focusing on
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9: political settlement and transition costs. Moreover, it includes insights
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At: gained from developmental state and rentier state theories as well as from
k]
oliti new institutional economics. The latter not only contributes some valuable
d P explanations for possible obstacles to privatisation in Algeria, but also
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U highlights some fundamental shortcomings of neo-liberal approaches to
haft institutional transformation.
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en Three concepts introduced by new institutional economists are of
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Wi relevance in the Algerian case:
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Stift 1 (political) transaction costs,
y: [ 2 imperfect knowledge/inadequate vision, and
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ed 3 sequencing of reforms.
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wnl Political Transaction Costs6
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These can point to the plethora of political interests involved in institutional
change and the high costs connected to organising side payments for
opponents of a change (bribes to co-opt opponents or compensation for
workers being laid off).
Imperfect Knowledge/Inadequate Vision
Such concepts7 assume theoretically rational actors lacking sufficient
(economically relevant) knowledge and/or having a 'wrong' vision to take
the most economically efficient decision. They can highlight important
phenomena such as the Algerian post-colonial nationalist, etatiste, socialist
and collectivist ideology.
Sequencing Of Reforms
Finally, this question addresses an issue largely neglected in IMF/World
Bank-prescribed stabilisation and structural adjustment programmes,
including the one in Algeria.8 This is the fact that certain reforms might be a
precondition for others - an issue highly relevant in the Algerian
transformation process where privatisation is being pushed at a time when
monopolies still prevail and banking system reforms have been slow and
where, as will be discussed below, some reforms have blocked other reforms.
At the same time, all the above concepts have serious limits to their
explanatory power because they do not address actors and interests.
STATE-OWNED INDUSTRIES IN ALGERIA AND PRIVATISATION 5
Underlying the concept of political transaction costs is the notion that (all)
institutional changes are voluntarily negotiated. If this is already a highly
7 questionable assumption with respect to Western capitalist countries, it
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0 certainly does not apply to Algeria where, as we shall see, institutions have
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uly been transformed as a result of violence rather than through negotiations.9 In
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6 4 the case of inadequate vision, the question how ideologies are shaped and
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9: change, and whether they are not simply a cover used for certain interests is
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Politik] icmonptleexmt ebnutta,t iaonnd otof rae fmorumchs lnaorgt eorn leyx theinntg, eosn o pno tlhitei craigl hwt islel qaunedn ccoe nfsoern as ussp.e10cific
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U Some of these deficits, namely the exclusion of the variable 'political
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h will', can be overcome by using a World Bank framework combining new
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en institutional economics with political economy and focusing on a triad of
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Wis political factors: lack of political desirability, lack of political feasibility and
ng lack of political credibility." It does not take a huge analytical effort to
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Stift conclude that in the case of privatisation in Algeria, the above triad is highly
y: [ relevant.12 Yet, as long as the political situation is analysed ahistorically and
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d in a social and cultural vacuum, as is done in this framework,'3 it will still
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a not be possible to get to the bottom of what keeps privatisation in Algeria
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What all of the above neo-liberal concepts have in common is that they
circumvent the central issue of power and class structures and struggles. By
focusing on what Khan terms political settlement and transition costs these
power structures can be highlighted and the interplay between the various
obstacles to privatisation not merely described but also understood.14
Transition costs highlight the costs of change beyond the transaction costs
discussed above. They occur when those defending the status quo (that is to
say, the potential losers in a change) refuse the concept of compensation
(reflected in transaction costs) or when compensation is not offered at all.
Even if transaction costs are low, transition costs can still be high and
prevent change. The high explanatory value of this concept (not just in the
Algerian case) stems from its inclusion of variables such as violence,
election defeat and legislative battles. It thus goes well beyond the
economic sphere and the easily quantifiable.
The high transition costs of the Algerian privatisation process can, at
least in part, be explained by the nature of the political settlement, which is
the balance of power between the classes and groups affected by a specific
institution (for example, private property rights). This balance of power
determines the net benefits of the institution or structure by 'determining the
contestation costs of maintaining the institution'.15 Political settlement can
explain why some countries have successfully developed and reformed their
economies while others have not, despite similar preconditions and a
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(strong) will to do so.16 Success or failure of economic development thus are
not so much (or just) a question of political will, but of the specific balance
7 of groups or classes.
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20 The specific nature of the political settlement and of the transition costs
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ul in the Algerian case can be better understood through rentier state and
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6 4 development state approaches. Rentier state approaches explicitly deal with
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9: the specific structural characteristics of oil economies.17 The ruling class in
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At: such economies is the principal rentier who distributes the rents to a layer
olitik] of beneficiaries who in turn distribute it to new layers thus creating a system
d P where loyalty and allegiance is bought from the top down, often running
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U along tribal and/or clan affiliations - this obviously has strong implications
haft for any attempt to alter existing economic structures. Not to be neglected in
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ns the Algerian context, furthermore, is the existence of a rentier mentality,n a
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s
Wis mentality which results from a break in the work-reward causal link where
g income is not related to work in a production circuit and to risk-bearing, but
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Stift is a 'windfall gain' related to chance and social situation. The implications
y: [ of this mentality in combination with the heritage of the nationalist, etatiste,
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d socialist and collectivist ideology of industrial development in Algeria helps
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ad to explain why it has been difficult to 'implant' capitalist values and goals
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wnl such as efficiency and 'getting the prices right'.
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Developmental state approaches, primarily focus on state capacity,
political power and institutional structures in the East Asian NICs (newly
industrialising countries) - the developmental states par excellence.19
Comparing state, power and institutional structures in Algeria with those of
the East Asian NICs can offer valuable clues as to why Algeria did not
manage to build up a successful industrial sector in contrast to Japan,
Taiwan or South Korea, even though it shares many of the features of these
NICs (dirigiste, developmentally minded, promotion of intermediate and
capital goods industries). Among the most obvious differences between
Algeria and East Asian NICs is that of the political decision-making
structures: East Asian NICs, such as Korea and Taiwan, have a centralised
and small circle of skilled decision makers pursuing the same objective and
ready to exercise discretion and discrimination in the national interest.20 In
Algeria we also find a small clique (of generals) taking all important
decisions.21 But the strong rivalries and differences of opinion within this
clique, and consequently among the respective political and bureaucratic
constituencies or, rather, clans have prevented relative coherence and
competence of internal state structures (including the bureaucracy)22 -
something that has proved to be an important prerequisite for the successful
execution of industrial strategies in the (South)-East Asian NICs and has
had, as will be demonstrated below, strong implications for the trajectory of
the Algerian privatisation process.
STATE-OWNED INDUSTRIES IN ALGERIA AND PRIVATISATION 7
Privatisation of State-Owned Enterprises in Algeria: Scheme and Path
Discussing the path as well as the scheme for privatisation of industries in
07 Algeria, necessitates being aware of a huge gap between the hydrocarbon
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y 2 and the non-hydrocarbon sector in performance and, as a corollary, in
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4 J importance for the Algerian state. In the mid-1990s, when the privatisation
36 process of SOEs was launched, the hydrocarbon sector accounted for 95 per
At: 09: cent of exports receipts and 60 per cent of state revenues.23 As it has been the
k] backbone of the Algerian economy for decades, privatisation of this sector
oliti has been an extremely sensitive issue and more or less out of the question to
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d date.24 The following will thus concentrate almost exclusively on the non-
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aft hydrocarbon industries (mainly manufacturing), where privatisation has
ch been a declared policy - albeit with little conviction - since 1994.
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se The legal framework for privatisation (of industries) was established in
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Wi several steps. The first law in 1994 allowed for
g
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Stift a) 'partial' privatisation, enabling private persons to acquire to 49 per
By: [ cent of the equity of an enterprise, either through the stock exchange
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e or negotiated agreements,
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c) the management of an enterprise to be transferred to a private entity.25
In 1995, subsequent legislation allowed for case-by-case privatisation of
100 per cent of equity and assets of specified large industries (textile and
agro-alimentary, mechanics, electrics, electronics, chemical, plastic, wood,
paper and leather) as well as all small and medium-sized local enterprises
mainly through the following procedures:
a) floating the shares on the stock exchange,
b) public offering at fixed prices, and
c) open bidding.26
For executing these 'total' privatisations a Conseil National de Privatisation
(CNP) was established. At the same time, all the public enterprises were
regrouped in 11 holdings, entrusted with the management and
administration of the SOEs. These holdings were placed under the control
of the Conseil National des Participations de l'Etat (CNPE). With the
consent of the CNPE, the holdings and the enterprises as joint stock holders,
were given the right to partially privatise, that is to say, enterprises can sell
their assets (including complete operating units) to private buyers, and the
holdings can sell full sub-units or large equity stakes of SOEs in their
portfolio.27 In 1997, legislation was added which favoured ceding (sub-
8 THE JOURNAL OF NORTH AFRICAN STUDIES
units) of (collectively managed) local enterprises to employees and the
population, with quotas of free shares for employees, victims of terrorism
7 and families of participants in the revolution.28
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20 In 1999, a new government created the Ministry of Participation and Co-
y
ul ordination of Reforms (MPCR), entrusted with a broad mandate including
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6 4 designing the privatisation strategy. With three government agencies having
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9: overlapping areas of competence and being involved in conflicts of
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At: competence, decision-making structures have remained opaque and
olitik] arbitrary to date. It is, for instance, not clear which of the above agencies is
d P entitled to officiate the transfer of a property to private interests.29 Moreover,
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U administrative procedures, such as the evaluation of an enterprise are
haft lengthy, complicated and inefficient.30
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en Legislation to simplify the privatisation procedures by converting the
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Wi formally independent CNP into a privatisation agency attached to the
ng MPCR and by placing the agency promoting investment (APSI), which
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Stift takes its orders directly from the head of the government, under the MPCR's
y: [ wings as well, faced wide-ranging public opposition before the ministerial
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ed proposition was even presented to parliament, and was put on hold in spring
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oa 2001.31 In September 2001 - at the time of writing this article - a watered-
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w down version of the above legislation, giving the MPCR more power but
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still keeping other agencies (strongly) involved, was passed in parliament
with virtually no notable opposition.32 It provides for the dissolution of the
CNP and the holdings, and for the regrouping of enterprises in industrial
groups. The head of the MPCR is to function as the head of the board of
directors and thus will steer the relevant economic decisions of these
enterprises. Whilst it is too early to draw any conclusions as to the wider
implications of the new legislation, it can be assumed that it is unlikely to
have a strong impact on the trajectory of the privatisation process as long as
there are no substantial shifts in the political settlement discussed below.
Outcome of Privatisation Efforts so Far
A strong caveat applies to all data/evidence regarding the outcome of the
privatisations so far for the following reasons:
a) there is little official data available,33
b) in the Algerian media the opening of capital or floating of a minority
of shares on the stock exchange is often referred to as privatisation,
and
c) there is a gap in terms of reliable data between the large enterprises,
the enterprises publiques economiques (EPE), and the (usually
collectively managed) small enterprises publiques locales (EPL).
STATE-OWNED INDUSTRIES IN ALGERIA AND PRIVATISATION 9
Privatisation of the former, having been at the forefront of
IMF/World Bank, interests has been documented more carefully and
has to date, as mentioned earlier, not led to a single sale of majority
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uly However, 76 out of 411 EPEs have been closed down since 1994.34
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9: involving subsidiaries of large enterprises. In a few cases, majority
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Politik] tpruabnlsifceirsreedd.3 5to private hands, this has, however, not been widely
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haft Regarding the EPLs, it is not clear how many have actually been privatised
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ns and who their buyers were.36 According to the Algerian ministry of industry
e
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Wis 935 out of 1324 EPLs (industrial and non-industrial) have been liquidated.
g Some of these enterprises that were liquidated officially, later had their assets
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Stift transferred to private hands, often illegally.37 Finally, 61 of the remaining 123
y: [ industrial EPLs have been spun-off to workers. Few details as to the
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d conditions of divestitures to employees (as well as the performance after such
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a a privatisation) have been made public by the ministry. In winter 2000/2001,
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wnl a newspaper article quoted the then head of the MPCR, that six brick (and/or
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D cement factories) had been privatised recently38 - what companies, when, to
whom (workers or outside interests) and under what conditions, remains
unclear.39 Similarly, overall proceeds from privatisation, have not been
documented well, but seem to have been meagre (see Table I).40
There have, however, been a number of well publicised failed efforts to
privatise industrial enterprises (mainly EPLs). In 1998, a first list of 35
TABLE 1
PROCEEDS FROM PRIVATISATION IN MENA* ($ 000,000)
Country 1990-97
Algeria 9.3
Egypt 1,510.2
Jordan 58.7
Morocco 1,846.7
Oman 60.1
Tunisia 150.2
Turkey 3,600.0
Source: World Development Indicators
1999, World Bank
*It has to be noted, however, that a strong
caveat applies to the comparative value of
these numbers, since the privatisation
process did not begin simultaneously in
these countries.
10 THE JOURNAL OF NORTH AFRICAN STUDIES
industrial production units was offered for privatisation through
international competitive bidding. A second batch of 26 units followed in
7 early 1999. These units comprised construction companies, soft-drink
00 producers and breweries.41 Though 36 bids (half of them from international
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uly investors) exceeded the minimum price and met the other technical
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6 4 qualifications the government aborted the process - apparently due to a
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9: political transition, that is to say, new presidential elections being
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At: announced shortly before the sale of these enterprises.42 Whether this
olitik] explanation suffices, will be discussed below. In winter 2000/2001, more
P than two years into a new, and apparently more privatisation-oriented
d
Un government, some of the same enterprises were put on a list of 183
aft industrial and non-industrial enterprises slated for privatisation or
h
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ns public-private joint ventures until 2004. With a reshuffling of the cabinet
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ss weakening the reform fraction in spring 200143 and with a project for
Wi
g restructuring and re-launching the state economy by injecting around 7
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y: [Stiftu bpirlilviaotnis adtioolnla srse em(1 5to phaevr e ceexnpte roiefn ctehde a1 s9e9tb9a cGk.D44P), the proponents of
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d The privatisation process has not only been slow and lacking
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oa transparency, it has also been accompanied by developments which have
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w been seen as efforts to prevent privatisation by some, as attempts to speed it
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up by others. They can, however, also be viewed as coincidences that serve
the proponents or the adversaries of privatisation. On the one hand, these
developments include the arrest of more than 2000 cadres of SOEs in 1996,
in many cases on apparently unfounded charges of corruption.45 What the
possible purpose of these arrests was and in what way they may be linked
to privatisation will be discussed below. The second development
accompanying the privatisation process again has no necessary causal links
to it, but certainly effects on it. It concerns the civil war in general and the
large number of attacks on state enterprises which have officially been
attributed mainly to the Groupement Islamist Arme (GIA) and which have
forced a number of enterprises in various sectors to close down.46 Claims
that there are also other groups interested in the closing down of SOEs
(rather than their privatisation) will be discussed in detail below.
Such allegations as well as the overall incoherent, inconsistent,- arbitrary
and non-transparent nature of the privatisation process beg the question
what forces have had an impact on this process and vice versa. This, in turn,
implies locating the SOEs in a social and political space. The structures and
dynamics which define this space reveal (or conceal) the political settlement
relevant for the allocation of private property rights to industrial SOEs. The
nature of the political settlement in turn can, finally, tell us more as to the
nature of the transaction and transition costs faced by those trying to
allocate these rights.