Privatization of Tobacco Monopolies By Ayda A. Yurekli, Ph.D World Bank Mr. Chairman, ladies and gentlemen, It has been great pleasure to be here.

PRIVATIZATION 1980-1991, roughly 6,800 medium- and large-scale firms were privatized in non-transition economies Close to 60,000 such companies were privatized in the transition economies since independence Source: World Bank, John Nellis In recent years, privatization issues of tobacco monopolies and stories about the process caught public eye. But the privatization of state-owned enterprises are not a new process. The last 20 years have witnessed a significant privatization process from low to high income countries. 1980-1991, roughly 6,800 medium- and large-scale firms were privatized in non-transition economies. Close to 60,000 such companies were privatized in the transition economies since independence.

Why to Privatize Economic: Unsatisfactory economic performance of state-owned-enterprises (SOEs) Inefficient (costly) production Cost on government revenues Political: Change in political systems, new international trade agreements, There are several reasons for privatization along with the changing global shift away from state socialism towards entrepreneurial capitalism. Governments face generally unsatisfactory economic performance of state owned enterprises that force them to sell their state-owned enterprises (SOEs) to private investors. Governments hope that these firms can be improved by the discipline of private ownership. Economic: Unsatisfactory economic performance of state-owned-enterprises (SOEs) Inefficient (costly) production Cost on government revenues Political: Change in political systems, new international trade agreements,

Impact of privatization Macro Economic Perspective Fiscal Perspective Micro Economic Perspective Public Health Perspective There are more studies examining the impacts of privatized state-owned enterprises from macro, fiscal, and micro economics perspective. From Macro Economic Perspective, evidence show that privatization help economic growth and increased investment opportunities. Although some countries experienced increased unemployment, some experienced increasing employment opportunities. From Fiscal Perspective Government revenues and returns from privatization have increased. Some countries used privatization receipts to reduce their international depth or financial deficits, like Hungary. From Micro Economic Perspective, privatization of SOEs increased the consumption and reduced price of the products. That positively affected consumer's welfare. From Public Health Perspective, I have not seen any study that examines the SOEs impact on public health. But certainly this issue became increasingly important in public health forthe privatization of the tobacco monopolies

Evidence from SOE privatization Profitability Efficiency Output Investment Employment Returns to Government Welfare Change (79 Firms in 21 LDC, (1998) 218 Mexican Privatization, (1997), 81 Firms in Ivory Cost (1999), Evidence from SOEs' privatization show that privatized state-owned enterprises operate more efficiently, increases quality, distribution and consumption , and not necessarily leads to unemployment. Moreover, the government’s returns from privatization increases. 79 Firms in 21 LDC, 1998 show large increases in, profitability, efficiency, investment, output, dividends & employment, 2/3 of firms increased jobs after sale 218 Mexican Privatization, 1997: profitability (+40% ), cost (-18%), output (+42%), employment )-20%), wages (+120% blue collar) 81 Firms in Ivory Cost 1999, promoted both efficiency and equity, and increased profitability, productivity, returns to government and large positive change in welfare

World Bank, IMF and Privatization The World Bank takes the lead in privatization and the IMF cooperates closely with it in this area. The World Bank takes the lead in privatization, but the Fund has cooperated closely with it in this area. Drawing the Bank’s experience and recommendations, a majority of Fund programs in recent years are found to have included some form of conditionality on privatization, including tobacco monopolies.

Privatization of Tobacco Monopolies from Public Health Perspective Privatization could lead to increased rates of smoking which contribute a deterioration in public health Publicly held tobacco monopoly could suffer from insufficient regulation and thus higher levels of smoking From public health perspective, the biggest concern is that the privatization of tobacco monopolies could lead to increased rates of smoking. The concern is based on the fact that private tobacco companies will produce and distribute their product more efficiently, thereby contributing to a deterioration in public health. The other concern is that publicly held tobacco monopoly could suffer from insufficient regulation. In particular, given the mixed incentives faced by the state as regulator on the one hand, and as owner and profit maximizer on the other, public ownership could be consistent with lax regulation, and thus higher levels of smoking

How much of increased sales contributed by the privatization Regulatory system New trade agreements Price and tax systems Government’s incentive and power Development process The Bank is funding a study to examine the impacts of privatization of the tobacco monopoly in Moldova. We believe that privatization issue should be evaluated from broader perspectives and all the factors that affect cigarette consumption should be taken into consideration. Such as: Regulatory system (strong anti-smoking regulations) New trade agreements (bilateral and international agreements) Price and tax systems (low prices, low tax rates) Government’s incentive and power(regulatory, economic and fiscal) Development process increasing income and other socioeconomic factors Let me give you some international experiences. Most developing countries lack strong anti-smoking regulations. Some have strong regulations but have very weak implications. Therefore it is easy to exploit these regulations. In 1995, Bulgaria had very comprehensive anti-smoking regulations, including ban on cigarette advertising and promotion. But tobacco industry (not domestic but international) advertised heavily on TV and radio. Again, when we compare the tax share in cigarette price between developed and developing countries, most developed countries had very high share, except US, whereas, most developing countries had very low tax share in cigarette prices. There is evidence that, when state-owned tobacco monopoly was privatized, the tax rates were lowered in some countries due to request from tobacco industry. Tobacco industry invests on not only politicians but also public by establishing day-care centers, health facilities etc. Therefore their political power is higher in the government. Most developing countries are in need of hard currency. Therefore, foreign investment is an important issue for generating revenues, export earnings, employment and economic growth. Tobacco industry negotiates hard to receive incentives such as private monopoly rights, profit revenue holidays for long period of time. Due to monopoly power, industry cannot generate revenues as long as it reduces prices. Therefore, they request government to reduce tax rates so cigarettes would be cheaper and affordable. Evidence show that trade liberalization reduces the barriers for international trade, lowers the price of cigarettes and increases cigarette consumption. Tobacco products are still normal goods in most developing countries. As income increases, tobacco consumption increases.

THE SIX COMMANDMENTS OF PRIVATIZATION 1-Thou shalt instill competition; 2- Thou shalt make all transactions transparent 3- Thou shalt establish a regulatory framework before you privatize 4- Thou shalt move quickly 5- Thou shalt keep the citizens informed, at every step along the way 6- Thou shalt make the workers partners in the privatization process by John Nellis 1. Competition should be created. How feasible or how much of governments are in control is the question. The competition may lead to lower prices and higher consumption, but that may reduce the influence of private monopolies on governments’ regulatory power. 2. What incentives government offers to private companies to purchase SOEs and how governments are planning to use the receipts from privatization process. 3. Before privatization, regulatory framework should be established. Moreover, the implication of these regulations should be forced effectively. 4. Once the basic framework is in place, privatization process should move fast. 5. Citizens should be informed about the process and the developments of the privatizations 6. Workers of the SOEs should be incouraged to be partners in the privatization process.