Privatisation in Developing Countries (Performance and Ownership Effects)

Development Policy Review, 2008, 26 (3): 275-308
Privatisation in Developing Countries:

Performance and Ownership Effects
Narjess Boubakri, Jean-Claude Cosset and Omrane
Guedhami∗
Over the last twenty years, privatisation, defined as the transfer of public
assets (firms) from the government to private investors, has been on the
reform agenda of more than 120 developing countries. The switch of
ownership induces major changes in the corporate governance of firms,
and in their incentives to restructure and improve efficiency and
performance. This article evaluates this experience, focusing on its impact
on corporate performance and governance, identifying several issues yet to
be resolved.
Key words: Privatisation, corporate governance, performance, developing

countries
1 Introduction
Privatisation – the sale of state-owned enterprises (SOEs) to the private sector – is a key
element of the economic reform process launched in developing countries in the past
two decades. Its primary aim is to reduce the role of the government as a dominant actor
(stakeholder) in the economy, and to favour the emergence of an active private sector.
As such, the reform induces a change in the ownership structure and corporate
governance of firms, and hence in the incentives to improve performance. One objective
of this article is specifically to review the evidence as to how privatisation has affected
corporate performance and corporate governance in developing countries, focusing on
the 1988-2005 period. The interest in developing countries stems from the fact that they
started implementing privatisation under the supervision of international development
agencies such as the World Bank and the IMF rather than by choice. Privatisation in
these countries was particularly intensive during the 1990s, but slowed down after the
Asian crisis and towards the early 2000s. Transactions soon picked up again, however,
and seemed to gain momentum since 2004; hence our choice of the 1988-2005 period
(see Figure 1).
∗
Narjess Boubakri is at the American University of Sharjah (UAE), School of Business and Management,
P.O. Box 26666, United Arab Emirates (nboubakri@aus.edu) and HEC Montréal (Canada), Jean-Claude
Cosset is at HEC Montréal and Omrane Guedhami is at the University of South Carolina (US) and the
Memorial University of Newfoundland (Canada). They appreciate helpful comments and suggestions from
Najah Attig, Oumar Sy and an anonymous referee. They are grateful to the Social Sciences and
Humanities Research Council of Canada for generous financial support, and Sadok El Ghoul, Sorin
Rizeanu and Anis Samet for research assistance.
© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Published by Blackwell Publishing, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
276 Narjess Boubakri, Jean-Claude Cosset and Omrane Guedhami
Figure 1: Privatisation proceeds and number of transactions in

developing countries (1988-2005)
Our survey differs from previous surveys in several ways. First, most research on
developing countries expanded after the masterly survey of the empirical literature on
privatisation, by Megginson and Netter published in 2001. Since then, a number of case
studies and cross-country studies have appeared. This contemporary research takes
account of recent developments in institutional economics such as the potential impact
of the legal framework, law enforcement and investor protection on policy design, and
newly available cross-country databases on institutions, political governance and
regulation. The overview of this growing literature that has increased markedly in the
last five years will help guide future efforts yet to be undertaken by privatising
governments in the developing world.1
Second, and most importantly, our survey differs from a closely related survey by
Megginson and Sutter (2006) by analysing the privatisation trends and characteristics
based on comprehensive data obtained from the World Bank that cover the period 1988-
99. In particular, we outline the geographical and industrial distribution of privatisation
transactions, and discuss a number of important dimensions related to the design of
privatisation programmes including the timing, pace, extent, control transfer, divestiture
method, and share allocation, in addition to fundamental differences according to the
country’s level of indebtedness, development level, and legal origin. This analysis
provides us with a thorough understanding of the degree of diversification in
implementation. We also complement Megginson and Sutter’s study by empirically
examining whether privatisation’s effects on performance significantly vary across
regions and what explains such differences. Finally, by examining the impact of
privatisation on corporate governance using firm-level ownership data, we complement
Megginson and Sutter (2006) who mainly focus on the effects of privatisation on the
1. Megginson and Netter (2001) and Djankov and Murrell (2002) extensively review the literature on
privatisation in the world and in transition economies, respectively.

Development Policy Review 26 (3)
Privatisation in Developing Countries: Performance and Ownership Effects 277
financial and operating performance of divested firms. This survey also takes a look at
the burgeoning literature on the social and distributional effects of privatisation.
The article is structured as follows. Following an overview of the objectives and
design of privatisation programmes in Section 2, Section 3 describes the privatisation
trends in developing countries over the 1988-2005 period, focusing on the geographical
and industrial distribution of privatisation as well as the characteristics of programmes
in terms of timing, pace, extent, control transfer and share allocation. Section 4 reviews
the empirical evidence on the impact of privatisation on corporate performance, and
examines whether post-privatisation changes vary across regions at different stages of
economic and institutional development. This is followed by an empirical assessment in
Section 5 using a sample of newly privatised firms (NPFs), and specifically
investigating the post-privatisation ownership structure along two dimensions:
ownership concentration and ownership identity. Section 6 reviews the literature on the
social impact of privatisation, and the final section discusses policy implications and
identifies related avenues for future research.
2 Privatisation programmes in developing countries:

objectives and design
2.1 The rationale for state ownership
Proponents of state ownership often employ social arguments and assert that SOEs are
adequate responses to market failures in non-competitive industries or areas where
significant externalities exist (Atkinson and Stiglitz, 1980; Shapiro and Willig, 1990).
According to Shleifer and Vishny (1994), SOEs are controlled by governments in order
to achieve social welfare objectives and thereby improve on the strictly profit-seeking
decisions of private enterprises, especially when monopoly situations or externalities
create a divergence between private and social objectives. SOEs are therefore
productively more efficient and constitute a means of curing market failures with
pricing policies closer to social marginal costs. In the words of Guriev and Megginson
(2006: 3), the general ‘widespread acceptance of social democrat philosophies stressing
the strategic need for state control of an economy’s “commanding heights”’ contributed
to the pervasiveness of state ownership.
2.2 Objectives of privatisation
To better understand the goals of privatisation, we need to address the question of what
makes state ownership unsustainable. The most indisputable problem of state ownership
is probably inefficiency and value destruction. The economic theory of privatisation
identifies two main complementary arguments to explain the lack of efficiency of state-
owned enterprises.
The first argument, derived from the political view of SOEs, focuses on the high
level of political interference in SOE decision-making, which distorts the objectives
defined for managers (Shleifer and Vishny, 1994). It is often argued that the goals
pursued by the government-selected (generally, politically-oriented) managers are not

necessarily in line with profit or value maximisation. Among other things, these
managers attempt to maximise employment and wages; promote regional development
by locating production in politically desirable rather than economically attractive
districts; ensure national security; provide cheap, even underpriced goods and services;
and produce unnecessary goods, all of which is done to assist politicians in
accomplishing their electoral objectives and ensuring a long tenure in power. The
question then arises as to what motivates managers to behave in conformity with
politicians’ goals. Boycko et al. (1993) adopt an elegant viewpoint in their analysis of
the relationship between managers and politicians. They note that ‘except in a pure
command economy’ managers do not naturally execute politicians’ desires, and that
some bargaining goes on over the corporate decisions to be made. This bargaining takes
the form of payments by politicians to firms through subsidies or soft budget
constraints, so as to persuade managers to comply with their political agenda.
The second argument derives from the managerial view of SOEs introduced by
Vickers and Yarrow (1988), who argue that managerial behaviour is inadequately
monitored, leading to poor incentives among managers of SOEs and high discretion to
pursue their own objectives. Although this perspective emphasises managerial
discretion as the main cause of inefficiency in SOEs, it also includes a political
dimension since the politicians’ goals govern, to some extent, the managers’ behaviour
and discretion.
A more thorough and appealing argument for explaining the inefficiencies of
SOEs combines both the political and managerial views, and is provided by the agency
theory framework (Shleifer and Vishny, 1997). This strand of literature argues that the
absence of ownership incentives for managers, due to the separation of ownership
(public) and control (politicians), creates agency problems.2 What is more, unlike
private firms, managers of SOEs – most of which are monopolies – are not exposed to
market mechanism pressures such as the stock, product and managerial labour markets.
Instead, they are evaluated according to whether or not they comply with the political
goals of the bureaucrats.
All three perspectives provide related explanations that emphasise the role of
political influence as the main source of poor SOE performance. Boycko et al. (1993:
143) note that ‘public enterprises are inefficient because their inefficiency serves the
goals of politicians’.
When seen from this perspective, privatisation can be viewed as a potential means
3
for depoliticising SOEs and hence improving efficiency. Boycko et al. (1993) argue
that the objective of privatisation is to change the terms of the relationship between
2. Shleifer and Vishny (1997) describe the relationship between the public (taxpayers) and politicians in
SOEs as a situation where politicians retain concentrated control rights without cash-flow rights, which are
dispersed amongst the taxpayers of the country.
3. An alternative to privatisation as a depoliticisation measure is the corporatisation of SOEs, meaning a
transfer of control from politicians to managers. Boycko et al. (1996) argue that by shifting control to
managers, corporatisation makes it costly for politicians to manipulate managers to adopt their desires, and
therefore facilitates restructuring. However, as they point out, corporatisation as a stimulant for
restructuring has generally achieved only limited success in developing countries and transition economies
where politicians are very influential. Other policy alternatives to privatisation, which may improve SOEs’
efficiency, are competition and deregulation (Yarrow, 1986; Vickers and Yarrow, 1991).

politicians and managers by making it costly for politicians to subsidise the inefficiency
of SOEs. Managers will therefore be less inclined to pursue the goals of the politicians
and will go through with the restructuring. Moreover, privatisation alters the means of
monitoring managerial discretion (Vickers and Yarrow, 1991). Specifically, the trading
of privatised firms’ shares on stock markets increases managerial incentives by
conveying information about management achievements and firm performance. This
information is also crucial for the monitoring of manager discretion by the managerial
labour market. In addition to altering the relationship between managers and politicians,
privatisation affects the relationship between taxpayers (ownership) and politicians
(control) by transferring both control and cash-flow rights to private investors and/or
managers, who then place greater emphasis on profits and efficiency (Shleifer and
Vishny, 1997).
In addition to stimulating restructuring and improving the efficiency of SOEs,4 the
objectives stated by privatising governments include: (i) developing and strengthening
the private sector;5 (ii) reducing the size of the public sector and government
intervention in the economy; (iii) improving the overall efficiency (in production and
allocation) of the economy and speeding up economic growth; (iv) reducing budgetary
deficits and paying off public-sector debt by eliminating subsidies to SOEs and raising
revenues from sales proceeds and potential corporate tax revenues from the privatised
firms; (v) widening ownership which can contribute to promoting democratisation; and
(vi) stimulating capital-market development.6 The privatisation experience shows that
governments weigh these goals differently, depending on the existing political,
economic and cultural environments.7
4. Privatisation also provides firms with new opportunities in the form of attractive financing sources, up-to-
date technology and new approaches to governance brought by private investors (e.g., blockholders,
foreign investors, institutional investors), and new skilful management teams and practices.
5. By reducing government support to SOEs through subsidies and unconditional access to capital and inputs,
privatisation strengthens market mechanisms and competitive conditions that are instrumental in
promoting the development of the private sector.
6. Several studies have concentrated on the impact of privatisation at the macro level. Two IMF-sponsored
studies, Barnett (2000) and Davis et al. (2000) examine the macroeconomic effects of privatisation and
find evidence of an overall positive effect on growth, reporting that the privatisation revenues are saved by
governments rather than spent. Boutchkova and Megginson (2000) examine the effects of privatisation on
stock-market development and patterns of ownership and find that it has significantly contributed to
developing national stock markets and widening ownership. In the same vein, Perotti and van Oijen (2001)
show that the resolution of political risk through sustained privatisation has been a key factor in the recent
emergence of stock markets in developing countries.
7. Ramamurti (1992) shows that privatisation is more likely to be pursued by countries with high budget
deficits, high foreign debt, and high dependence on international agencies such as the World Bank and the
IMF. Villalonga (2000) asserts that, while privatisation is expected to increase firm efficiency,
emphasising other privatisation goals may result in disappointing outcomes when there is a trade-off
between these goals and efficiency. For instance, governments preoccupied with maximising privatisation
revenues in the short run for political reasons, tend to speed up privatisation, even if economic conditions
are adverse or the industry is declining, leading to an adverse effect on firm performance.

2.3 The design of privatisation programmes
To achieve its complex and diversified objectives, privatisation in developing countries

is implemented through diverse methods including auctions, stock offers, private sales,
stock distributions, negotiated sales, management buy-outs and management contracts
(World Bank, 2001). The choice of a particular method is a crucial but difficult decision
facing privatising governments. Megginson and Netter (2001) identify nine factors that
might affect a government's choice of method: (i) the history of the asset’s ownership;
(ii) the financial and competitive position of the SOE; (iii) the government’s ideological
view of markets and regulation; (iv) the past, present and potential future regulatory
structure in the country; (v) the need to pay off important interest groups; (vi) the
government’s ability to commit itself credibly to respect investors’ property rights after
divestiture; (vii) the capital-market conditions and existing institutional framework for
corporate governance in the country; (viii) the sophistication of potential investors; and
(ix) the government’s willingness to allow foreign companies to own divested assets.
In addition to the choice of method, the privatising government faces three key
decisions: on control transfer, share allocation and share pricing. According to Jones et
al. (1999), the decision on control transfer is related to (i) whether the SOE should be
privatised at once or through partial sales separated by months or years; (ii) if
divestiture is staggered, what is the relative importance of the initial stake sold
compared with subsequent offers; and (iii) whether to incorporate post-privatisation
limits on corporate control (for example, the privatising government may retain a
golden share that gives it significant control over the corporate decisions of the firm).
The share-allocation decision is mainly related to the amount of shares to be allocated to
various types of investors (for example, individuals, employees, local institutions), and
to whether or not to favour restrictions on some categories of investors (for example,
business groups, foreign investors). Moreover, the pricing decision includes (i) the
choice of the pricing method (i.e., tender offer, private placement and fixed-price),8 and
(ii) the amount of underpricing as well as the timing of the price disclosure for fixed-
price share sales.9
3 The record of privatisation in developing countries
In the following sections, we describe the recent privatisation trends in developing

countries focusing on the geographical distribution of privatisation as well as the
characteristics of privatisation programmes in developing countries. We rely on the
World Bank’s extensive privatisation transactions database to obtain a total of 3,316
8. Dewenter and Malatesta (1997: 1661) define the three methods as follows: (i) tender offer occurs when
investors bid for shares of an SOE, specifying both a price per share and quantity of shares that they are
willing to buy; (ii) private placement occurs when the government sells its assets to a private company or
group of companies; and (iii) fixed-price share sales occur when the government sets an offering price for
shares and investors submit applications for the number of shares they wish to purchase.
9. Dewenter and Malatesta (1997) and Jones et al. (1999) empirically analyse the three decisions, focusing
mostly on the pricing decision and its determinants. Both studies find evidence of underpricing. In
particular, Jones et al. (1999) show that underpricing in the initial share issue is consistent with the
political and economic objectives of the privatising government.

observations over the period 1988-2005. For each observation, the database provides
information on the privatisation year, country of origin, industry affiliation, percentage
of stake sold, total transaction proceeds in dollars and in foreign currency, the
privatisation method, the buyers’ identity and the stake which they were allocated at the
time of sale.10
3.1 Geographical distribution
Table 1 reports descriptive statistics of the privatisation activity in 77 countries

classified in 5 geographical areas between 1988 and 2005. Most of the countries (54)
had their first privatisation experience during the 1990s or later, consistent with the
increase in privatisation activity during this period. The total number of transactions
amounts to 3,316 involving 2,919 privatised firms, with the overwhelming bulk of the
transactions being in Latin America and the Caribbean (37%), followed by sub-Saharan
Africa (26%), and North Africa and the Middle East (18%). Turkey, Mexico, Brazil,
and Peru are among the most active privatisers.
Examining the percentage of divested ownership shows that the average among all
countries is 64%. The means are statistically significantly different between regions,
with the highest value in sub-Saharan Africa (73%) and Latin America and the
Caribbean (72%), and the lowest in North Africa and the Middle East (49%) and East
Asia and Pacific (54%). Looking at the distribution of proceeds summarised in the last
three columns of Table 1 reveals some interesting facts. First, the average proceeds per
deal among all countries is $84 million, with the highest values among active privatisers
observed primarily in Brazil ($478.22 m.) and Argentina ($320.94 m.). Second, the total
proceeds as a percentage of GDP is significantly higher in Latin America and the
Caribbean (1.94%), and lowest in South Asia (0.42%) and North Africa and the Middle
East (0.61%). Third, the average foreign proceeds as a percentage of the total across all
countries is 36.24%, with the highest values in sub-Saharan Africa (44.39%), Latin
America and the Caribbean (43.01%), and East Asia and Pacific (32.4%), and the
lowest in South Asia (22.15%).
Overall, the geographical distribution summarised in Table 1 shows significant
differences across regions and countries in terms of timing and extent of the
privatisation activity. Along a variety of dimensions, by far the most active privatisers
are from Latin America and the Caribbean. Countries from this region have been using
privatisation as a tool for economic reform, mobilisation of foreign investment and
development of their national stock markets. In contrast, countries from North Africa
and the Middle East (except for Turkey) and South Asia appear to be more reluctant to
embark on the privatisation process, since only a small fraction of their large public
sector has been divested. This suggests less commitment to economic reforms and
especially a lack of institutional infrastructure for privatisation.
10. We note that the information on the percentage sold is generally unavailable for the period 2000-5. No
other database covers privatisation in developing countries as extensively.
Table 1: The geography of privatisations in developing countries
Proceeds
Country First Deals Firms % share sold
Per deal % foreign Total % of GDP
East Asia and Pacific 1991 207 186 53.67 157.31 38.97 1.49
Fiji 1996 2 1 51.00 15.14 0.00 0.86
Indonesia 1991 34 29 51.94 247.57 71.19 0.33

Malaysia 1988 49 46 62.45 253.89 9.10 1.58
Papua New Guinea 1996 1 1 49.00 223.60 83.63 4.50
Philippines 1989 102 93 74.13 41.85 21.29 1.37
Thailand 1988 19 16 33.50 161.85 48.61 0.27
Latin America & Caribbean 1991 1,242 1,147 72.07 90.48 43.01 1.94
Argentina 1988 139 125 71.61 320.94 39.81 1.70
Barbados 1991 6 6 47.83 8.50 87.33 1.20
Belize 1988 7 4 48.58 20.21 5.00 3.00
Bolivia 1992 88 75 97.79 12.18 9.15 4.24
Brazil 1988 184 166 55.35 478.22 33.75 1.81
Chile 1988 37 33 44.90 108.58 27.96 0.52

Colombia 1991 32 32 66.85 225.56 44.00 1.03
Costa Rica 1988 7 5 97.50 12.99 0.00 0.14
Ecuador 1993 11 10 63.93 15.40 20.00 0.47
El Salvador 1998 8 8 61.23 170.63 100.00 6.02

Grenada 1994 1 1 90.00 6.06 91.75 2.25
Guatemala 1989 5 5 82.50 272.92 76.67 3.13
Guyana 1997 5 4 49.17 13.55 100.00 5.64
Haiti 1999 1 1 65.00 16.50 50.00 0.57
Honduras 1988 40 39 97.30 2.48 12.50 0.55
Jamaica 1988 42 38 79.47 20.36 19.70 1.70
Mexico 1988 258 244 90.55 135.39 11.05 1.59
Nicaragua 1990 82 80 88.65 4.20 3.25 1.86
Panama 1990 16 16 78.57 89.21 49.84 1.73
Paraguay 1994 2 1 80.00 21.00 50.00 0.24
Peru 1991 184 169 81.65 51.81 33.67 2.11
Trinidad and Tobago 1993 17 17 59.38 26.38 51.58 4.01
Uruguay 1990 9 9 51.00 38.82 75.00 0.29

Venezuela 1990 61 59 80.78 99.54 40.25 0.88
North Africa & Middle East 1994 600 477 49.34 98.36 32.68 0.61
Algeria 1996 9 8 44.50 159.39 0.00 0.26
Egypt 1993 120 108 57.35 57.60 80.28 1.16
Iran, Islamic Republic 1993 4 4 40.00 92.03 0.00 0.06
Jordan 1995 11 11 30.23 90.32 50.00 1.51
Lebanon 1998 2 2 61.00 179.00 100.00 1.03
Morocco 1993 75 67 58.01 126.96 29.13 1.23
Oman 1992 8 8 41.18 114.01 0.00 0.12
Tunisia 1988 79 74 68.67 15.06 19.27 0.30
Turkey 1988 289 192 43.15 47.63 15.40 0.43

United Arab Emirates 1995 1 1 . 190.00 . 0.44
Yemen Republic 2000 2 2 . 10.00 . 0.21
South Asia 1990 418 338 70.98 40.12 22.15 0.42
Bangladesh 1989 36 32 85.48 3.42 0.00 0.06
India 1991 117 79 24.39 136.28 54.55 0.32
Nepal 1992 3 3 100.00 6.60 . 0.15
Pakistan 1990 164 144 80.42 45.30 8.13 0.73
Country Proceeds
First Deals Firms % share sold
Per deal % foreign Total % of GDP
Sri Lanka 1989 98 80 64.59 9.00 25.93 0.83
Sub-Saharan Africa 1994 849 771 72.84 33.72 44.39 1.69
Angola 1996 3 3 100.00 2.08 0.00 .
Benin 1988 14 14 100.00 4.03 30.00 0.37
Burkina Faso 1994 8 8 63.22 3.88 48.19 0.28

Burundi 1992 7 7 64.14 0.60 0.00 0.21
Cameroon 1996 10 8 95.00 38.68 100.00 1.09
Cape Verde 1995 3 3 45.50 27.12 100.00 8.64
Congo, Rep. 2000 1 1 . 2.00 . 0.06
Eritrea 1998 2 2 . 1.02 . 0.30
Ethiopia 1998 4 4 100.00 62.13 100.00 1.03
Ghana 1989 96 92 82.89 10.47 46.88 2.11
Guinea 1997 1 1 60.00 45.00 100.00 1.11
Guinea-Bissau 1992 4 4 100.00 0.38 0.00 0.18
Ivory Coast 1991 52 51 48.24 11.49 33.21 0.68
Kenya 1988 85 76 49.09 4.16 19.05 0.36

Lesotho 1999 3 2 90.00 11.06 . 1.74
Madagascar 1999 4 4 85.00 14.81 . 0.42
Malawi 1995 20 19 57.77 1.32 59.01 0.53
Mali 1996 9 9 100.00 10.29 0.00 0.99

Mauritania 1995 5 5 37.50 16.57 0.00 3.63
Mauritius 2001 1 1 . 261.00 . 10.76
Mozambique 1989 155 132 82.27 1.88 12.94 0.71
Niger 2000 4 4 . 7.68 . 0.81
Nigeria 1989 90 83 78.41 29.04 1.75 0.63
Senegal 1997 9 7 30.07 54.01 100.00 2.08
Sierra Leone 1997 1 1 55.00 1.55 . 0.19
South Africa 1988 27 24 65.41 271.41 33.33 0.40
Tanzania 1992 69 67 78.91 7.07 48.94 0.74
Togo 1989 10 10 68.50 3.88 78.71 0.65
Uganda 1992 65 61 72.07 104.59 34.72 5.60
Zambia 1993 73 57 85.73 11.32 55.00 3.30

Zimbabwe 1994 14 11 72.00 24.93 63.62 1.05
All 1992 3,316 2,919 63.78 84.00 36.24 1.23
Tests of Means (t-statistics)
East Asia & Pacific vs Latin America & Caribbean -5.03*** -1.07 1.59 -6.95***
East Asia & Pacific vs North Africa & Middle East 3.21*** 4.01*** 1.96** 5.55***
East Asia & Pacific vs South Asia 1.18 3.99*** 3.25*** 6.62***
East Asia & Pacific vs sub-Saharan Africa -2.56*** 5.83*** 0.08 -1.31
Latin America & Caribbean vs North Africa & Middle East 12.29*** 5.25*** 0.93 17.21***
Latin America & Caribbean vs South Asia 8.60*** 5.21*** 3.19*** 18.31***
Latin America & Caribbean vs sub-Saharan Africa 4.40*** 7.06*** -2.83** 1.59
North Africa & Middle East vs South Asia -2.47*** 0.09 1.80* 2.20**
North Africa & Middle East vs sub-Saharan Africa -8.21*** 2.61*** -2.92*** -3.41***

South Asia vs sub-Saharan Africa -5.02*** 2.39** -4.92*** -3.82***
Note: The symbols *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels.
3.2 The characteristics of privatisation programmes
Table 2 differentiates the privatised stake and privatisation proceeds by industry

distribution, identity of the buyers, divestiture method, country’s indebtedness level,
country’s income group, and country’s legal origin.
Panel A describes the distribution of privatisations by major industry
classification. Privatisation has been widespread in a number of industries, ranging from
small and medium-sized firms in competitive sectors to large regulated infrastructure,
financial and energy firms. The divested percentage is highest in the services sector
(86%), and lowest in telecom (37%) and oil and gas (45%). The mean percentage that
has been sold is significantly lower (at the 1% level) in strategic industries – oil and gas,
telecom, utility – compared with non-strategic industries. However, the telecom and
utility sectors, and more generally the strategic industries, show significantly higher
average proceeds per deal and account for the highest share of foreign proceeds.
Panel B shows the identity of the buyers, and that privatisations reserved
exclusively to local investors dominate the total transactions (63%), consistent with
Jones et al. (1999) who claim that political considerations that favour domestic investors
are usually of considerable importance in the design of privatisation programmes.
Privatisations that are entirely aimed at foreign investors are non-trivial and account for
19% of the total. The mean percentage of capital sold to local investors is significantly
higher (at the 1% level) than that sold to foreign investors, again consistent with Jones
et al. (1999). However, the means of proceeds per deal and total proceeds as a
percentage of GDP are significantly higher (at the 1% level) in transactions involving
foreign investors. This is consistent with underpricing being required to attract domestic
investors.
Panel C shows that privatisation via private sales accounts for the majority of all
transactions (57%) with complete information on the divestiture method, consistent with
Megginson et al. (2004) and Guedhami and Pittman (2007). Specifically, two major
findings emerge. First, the average private sale privatises 73% of former SOEs
compared with 49% in the average public offer; the difference is statistically significant
at the 1% level. Second, the foreign proceeds as a percentage of the total is significantly
higher (at the 1% level) for the average private sale.
In examining the distributions with respect to the country’s indebtedness group in
Panel D, we find that severely indebted countries tend to privatise substantially larger
stakes, involve higher average proceeds per deal, and have higher proceeds as a
percentage of GDP. Panel E differentiates the percentage of capital being divested and
privatisation proceeds according to the country’s income level. The percentage of
capital being divested is significantly lower in low-income countries, while the average
proceeds per deal is substantially higher in upper middle-income countries. Finally,
Panel F shows that less protective countries privatise significantly higher stakes of
SOEs’ capital compared with high protective countries, but generate significantly lower
average proceeds per deal.

Table 2: The characteristics of privatisations
Share sold Proceeds

Group
N (%) N Per deal % foreign Total % of GDP
Panel A. Industry
Manufacturing 1,113 74.92 1530 27.16 19.97 1.13
Mining 78 67.49 123 213.45 41.81 1.97
Oil & gas 121 45.42 140 129.26 37.49 1.16

Financials 182 62.54 305 127.35 23.68 2.00
Telecom 92 37.15 198 423.63 68.29 2.35
Transport 107 70.80 197 131.60 22.54 1.41
Utility 169 56.33 264 238.09 53.15 1.68
Services 246 86.17 338 21.28 14.94 1.15
Others 90 67.01 149 50.29 17.89 0.61
Manufacturing vs non-manufacturing 7.23*** -9.26*** -6.16*** -3.17***
Financials vs non-financials -3.08*** -1.69* 0.57 1.39
Telecom vs non-telecom -11.76*** 5.90*** 10.37*** 1.84*
Utility vs non-utility -5.92*** 5.28*** 7.16*** 2.59***
a
Strategic vs non-strategic 15.94*** -8.32*** -11.79*** -2.71***
Panel B. Identity of the buyer

Local 1,135 77.19 1625 40.25 0.31 1.21
Foreign 346 64.30 430 176.08 98.71 1.90
Various buyers 310 53.38 361 249.47 45.26 1.36
Local vs foreign buyers 7.03*** -3.39*** -208.16*** -5.27***
Local vs various buyers 11.54*** -7.53*** -22.97*** -1.72*
Foreign vs various buyers 4.53*** -1.52 26.71*** 3.80***
Group Share sold Proceeds
N (%) N Per deal % foreign Total % of GDP
Panel C. Privatisation method
Public 573 48.91 706 95.52 25.86 1.00
Private 748 73.20 1110 119.17 36.28 1.63

Public vs private -13.06*** -1.15 -3.98*** -6.67***
Panel D. Debt level
Less indebted 561 67.11 693 102.21 22.95 1.24
Moderately indebted 817 65.79 1298 53.43 24.05 0.86
Severely indebted 848 75.43 1324 130.71 27.97 1.88
Less vs moderately indebted 0.68 3.99*** -0.43 5.71***
Less vs severely indebted -4.55*** -1.44 -2.00** -3.80***
Moderately vs severely indebted -5.98*** -4.45*** -1.90** -6.32***
b
Panel E. Income level
Low-income 1,229 66.59 1,993 40.20 25.40 1.16
Low middle-income 407 73.89 508 63.34 23.90 1.78
Upper middle-income 590 73.65 814 246.86 26.61 1.54

Low vs low middle-income -3.93*** -2.16** 0.56 -3.79***
Low vs upper middle-income -4.34*** -7.79*** -0.58 -3.37***
Low middle vs upper middle -0.12 -6.60*** -0.94 1.71*
c
Panel F. Investor protection
Less protective countries 882 74.05 1,225 68.67 26.99 1.40

High protective countries 1,329 67.07 2,073 110.56 24.37 1.32
Less vs high protective countries 4.95*** -2.56*** 1.38 0.68
Notes: *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels. a) Strategic is defined as the combination of telecom, utility, and
oil & gas; b) United Arab Emirates, classified as a high-income country, is excluded; c) classification according to the median investor protection score
derived from the World Bank (http://www.doingbusiness.org/).
4 Impact on corporate performance
4.1 Review of the evidence
Empirical evidence on the outcomes of privatisation is extensive and looks primarily at

developed countries and transition economies. Megginson and Netter (2001) and
Djankov and Murrell (2002) provide comprehensive surveys and in-depth analyses of
this empirical literature, and show that privatisation generally improves firm
performance. In spite of the growing importance of the privatisation phenomenon in
developing countries, it is surprising that only a few studies have examined the impact
of privatisation on firm performance in these countries. The foremost contributions to
this research are discussed below. We mainly focus on multinational studies, whereas
other studies focus on single-country experiences: Mexico (La Porta and López-de-
Silanes, 1999); Malaysia (Sun and Tong, 2002); Egypt (Omran, 2004); and India
(Gupta, 2005). With the exception of Omran (2004), the findings of these studies
summarised in Panel A of Table 3 imply that privatisation results in performance gains.
We do not focus on these single-country studies for two main reasons. First, these
countries are included in almost all the multinational studies discussed below; second,
the results of these studies represent only one country’s experience, and cannot be
generalised to other developing countries.
Multinational studies
In an influential study sponsored by the World Bank, Galal et al. (1994) assess the
welfare changes associated with privatisation using a small sample of 12 large firms –
mainly from non-competitive sectors – in three developing countries (Chile, Malaysia
and Mexico) and one industrialised country (United Kingdom). Using a counterfactual
approach, the authors show that privatisation induced net welfare gains in 11 out of the
12 cases. They also decompose the net sample welfare change by its distribution
(winners versus losers) and its sources. Regarding the former, they find no evidence that
privatisation occurs at the expense of workers, although substantial gains are obtained in
3 out of the 12 cases. They also identify 9 cases in which governments benefited. They
argue that the gains are mainly associated with improved productivity, an increase in
investment, revised output pricing and effective regulation. However, the characteristics
of their sample (small size and dominance by infrastructure-related firms) limit the
generalisation of their findings. More empirical research involving larger samples is
therefore needed to understand the relation between privatisation and performance in
developing countries.
Boubakri and Cosset (1998) are the first to use a multinational sample of 79 firms
headquartered in 21 developing countries, privatised over the 1980-92 period. They
argue that the embryonic financial markets, the weak regulatory capacity and the lack of
an efficient institutional setting in developing countries impede scholars from
generalising the results drawn from previous studies of developed countries. Using the

Table 3: Summary of relevant studies on the operating performance of newly
privatised firms in developing countries
Study Sample & study period description Summary of findings & conclusions
Panel A. Single-country studies
La Porta & López-de- 218 Mexican firms privatised over Unlike other studies, this research evaluates the performance benefits of privatisation and
Silanes (1999) period 1983-91. assesses its social costs. Profitability increases significantly in the post-privatisation period.

While SOEs underperform their industry-matched control groups, privatisation closes this
performance gap. The study’s main contribution is to contrast two competing views of
privatisation: the political view and the social view to explain the observed changes in
performance. The evidence suggests that market power (increased prices) is trivial; most of
the gains are explained by layoffs (31%) & enhanced productivity.
Sun and Tong (2002) 24 share issue privatisations in Malaysia Privatisation improves profitability, output level, and dividend payout and decreases
over period 1983-97. leverage. In examining the sources of performance changes, the authors find evidence that
ownership structure and corporate governance are key determinants: the presence of
institutional investors and directors is significantly associated with post-privatisation
improvements, while large individual blockholders & changes in key management have a
negative impact on performance changes.
Omran (2004) 54 Egyptian firms privatised over period An important contribution of this study is that it compares the performance of 54 privatised
1994-8. firms against a matching sample of SOEs. While the unadjusted results show that both
samples experience significant improvements in profitability and& operating efficiency
together with significant declines in leverage and employment, the adjusted results

generally indicate no significant differences in performance changes between privatised
firms and SOEs.
Gupta (2005) 36 Indian firms privatised over period The focus is on the effects of partial privatisation. Strong evidence of profitability and
1990-8. efficiency gains, but no significant decline in employment. The study also explores the
roles of competition-enhancing policies, namely, ‘Dereservation’ – elimination of

restrictions on private entry to the public sector – along with foreign ownership
liberalisation. The results indicate that both partial privatisation and competition have a
significant impact on firm performance, suggesting that the policies are complementary.
Panel B. Multinational studies
Galal et al. (1994) 12 privatised firms from non- The authors use a distinctive methodology that compares the actual performance of firms
competitive industries in 4 countries following privatisation with the predicted performance of the same firms under state
(Chile, Malaysia, Mexico, & the UK). ownership. Net welfare gains are detected in 11 out of the 12 cases, with no evidence that
privatisation comes at the expense of workers. Determinants of these gains include
improved productivity, increase in investment, market power, and effective regulation.
Boubakri and Cosset 79 firms from 21 developing countries Significant gains associated with privatisation in the areas of profitability, productivity,

(1998) privatised over period 1980-92. capital investment spending, output, leverage (declines), dividends, as well as employment.
An important aspect of the study is that it analyses both raw and market-adjusted
performance. The performance gains are slightly reduced when using the market-adjusted
measures, highlighting the importance of controlling for economic conditions when
assessing the effects of privatisation.
Chong and López-de- Survey of privatisation in Latin Consistent evidence on the benefits of privatisation even after addressing the selection bias
Silanes (2003) America. issue. The survey emphasises the importance of competition and sound corporate
governance environment to the success of privatisation.
Boubakri et al. (2004) 50 firms from 10 Asian countries Study examines post-privatisation performance and ownership structure. Some evidence
privatised over period 1980-97. that privatisation increases profitability, efficiency, and output; but these improvements are
generally less significant than those reported in other developing countries. Government
control of newly privatised firms continues to prevail even three years after privatisation.
Boubakri et al. (2005c) 230 firms from 32 developing countries Study mainly focuses on the determinants of post-privatisation performance changes. Two
privatised over period 1980-99. sources of determinants relate to the extent of macroeconomic reforms and environment

(e.g., economic growth, trade and stock-market liberalisation) and corporate governance
(e.g., post-privatisation ownership structure, stock-market development, legal protection
and enforcement).
pre- versus post-privatisation approach developed by Megginson et al. (1994), they find
that privatisation yields significant performance improvements.11 More specifically,
Boubakri and Cosset (1998) report improvements in profitability, operating efficiency,
capital investment, output, employment level and dividends. They also find that
leverage declines after privatisation. They control for the changing economic conditions
in their sample countries in order to assess the effects of privatisation better. The results
are generally robust, but less significant when market-adjusted performance measures
are used. In addition, the findings are robust to various partitions of the main sample.
Although the authors show that the transfer of ownership (partial or full) from
government to private investors yields significant improvements, we still lack
knowledge about the underlying conditions that drive these gains.
In a recent survey paper, Chong and López-de-Silanes (2003) provide a
comprehensive review and assessment of privatisation in Latin America. They show
that privatisation yields robust performance improvements. An important finding is that
the increase in performance is not affected by sample selection bias, i.e., best firms are
more likely to be privatised. The analysis suggests that successful privatisation is
conditioned by two complementary policies (p. 2): ‘re-regulation or deregulation of
industries previously shielded from competitive forces, and an effective corporate
governance framework that facilitates privatised firms’ access to capital at lower costs’.
In a contemporary study, Boubakri et al. (2004) examine the particular
privatisation experience of Asia where, in contrast to other geographical regions, most
divestitures are partial, whereby governments sell minority stakes but maintain control.
Their main findings indicate that partial privatisations indeed lead to a significant
improvement in profitability, efficiency and output. By comparing their findings with
other cross-sectional studies which examine the performance of newly privatised firms
(NPFs) in developing countries, they conclude that the improvements observed for the
Asian sample of NPFs are generally less significant. The authors address an important
issue related to whether privatisation creates value for shareholders. Using two
measures of value creation, specifically market-adjusted returns on equity and market-
to-book ratios, they show that NPFs are more profitable and valuable than their market
counterparts. This result suggests that privatisation is wealth-enhancing for
shareholders. Finally, they show that, in contrast to the evidence from other developing
countries, privatising governments in Asia do not relinquish control of NPFs.
The findings of Boubakri and Cosset (1998) on the dividends of privatisation are
more recently confirmed by Boubakri et al. (2005c) with a large and diversified sample
of 230 firms from 32 developing countries during the 1990s. A key feature of their
sample is the inclusion of firms from African countries, where governance is
particularly poor, and which have only recently embraced large-scale privatisation
programmes. The authors provide a rich analysis of the potential determinants of post-
privatisation performance changes, with a particular focus on the roles of the economic
11. In a seminal study, Megginson et al. (1994) were the first to thoroughly examine the performance
implications of privatisation in a wide range of countries. Using a sample of 61 firms mainly from
industrialised countries, they compare pre- and post-privatisation data and provide strong evidence that
privatisation improves profitability, operating efficiency, capital investment, employment, output and
dividends. Furthermore, they find that the privatised firms become financially healthier. Their conclusions
support the superiority of private ownership over state ownership.

and institutional environments. Consistent with their conjectures, they show that the
changes in performance vary with the extent of macroeconomic reforms and
environment, and the effectiveness of corporate governance. In particular, they show
that economic growth is associated with higher profitability and efficiency gains, trade
liberalisation is associated with higher levels of investment and output, while financial
liberalisation is associated with higher output changes. With regard to corporate
governance variables, they demonstrate that relinquishment of control by the
government is a key determinant of profitability, efficiency gains and increases in
output. Finally, they find higher efficiency improvements for firms in countries in
which stock markets are more developed and where property rights are better protected
and enforced. Taken together, these findings highlight the importance of economic
reforms and environment and corporate governance in explaining the post-privatisation
changes in performance of firms from developing countries.12 Cook and Ushida (2004)
also stress the differences that emerge between the performance of NPFs in regulated
versus unregulated sectors, and across (developing) countries, which lead them to
conclude that performance is influenced by the institutional and structural context.
Evidence from newly privatised banks

Until recently, the academic literature devoted little attention to the outcomes of
privatisation in the banking industry in developing countries. Most evidence is drawn
from the reforms in transition economies and only anecdotal information makes the case
of the often disappointing experience of developing countries, with the notable
exception of Clarke and Cull’s (2002) study on Argentina. A first attempt to study the
performance of newly privatised banks (NPBs) is that by Verbrugge et al. (1999). The
authors find that privatisation yields limited improvements in bank performance.
However, their sample is largely dominated by OECD countries (only 6 banks from
developing countries).
Cornett et al. (2000) examine performance differences between privately-owned
and state-owned banks in South Korea, Indonesia, Malaysia, the Philippines and
Thailand for the period 1994-7. They find that state ownership is associated with
significantly inferior performance. With the recession starting in 1997, the performance
of state-owned banks was worse than that of privately-owned banks. Likewise, in his
review of the empirical evidence on state versus private ownership, Megginson (2005)
concludes, ‘state ownership of commercial banks yields few benefits, yet is associated
with many negative economic outcomes’.
More recently, Otchere (2005) analyses the pre- and post-privatisation operating
performance of privatised banks and their rivals in middle- and low-income countries.
Using a sample of 18 banks from 9 countries, he finds marginal improvements in the
post-privatisation operating performance of the privatised banks. He attributes the lack
12. Using a similar analysis, D’Souza et al. (2005) document sharply different results for firms privatised in
developed countries. While Boubakri et al. (2005c) find that the institutional environment and the ongoing
macroeconomic reforms are important determinants of performance improvements after privatisation,
D’Souza et al. (2005) show that firm-level variables are the most important factors in explaining the
performance changes. These opposite results enhance the fact that privatisation in developing countries
indeed obeys particular constraints and has a dynamic of its own.

of strong performance improvements to two possible explanations: (i) the sample is

drawn from middle- and low-income countries where privatised banks may face less
capital-market monitoring, and (ii) most of the sample banks are partially privatised and
hence continued government ownership may have reduced the managers’ ability to
restructure the banks.
Boubakri et al. (2005a) examine the post-privatisation performance of 81 banks
privatised in 22 developing countries between 1986 and 1998. Their main focus is on
the risk-taking behaviour and economic efficiency of NPBs, while controlling for
differences in ownership structures and concentration (i.e., the involvement of foreign
banks and/or industrial groups). They also take into account such privatisation
characteristics as the method of sale, the timing of the privatisation and the residual
government ownership. Their results suggest that: (i) on average, NPBs have a lower
economic efficiency, and a lower solvency than state-owned banks; (ii) in the post-
privatisation period, profitability increases but, depending on the type of owner,
efficiency, risk exposure and capitalisation may worsen or improve. However, (iii) over
time, privatisation yields significant improvements in economic efficiency and credit-
risk exposure; (iv) they also find that NPBs that are controlled by local industrial groups
become more exposed to credit risk and interest-rate risk after privatisation. The authors
conclude that continued government ownership and low involvement of foreign
investors may explain the modest performance improvements. 13
4.2 Summary and discussion
Overall, the empirical evidence from non-financial privatised firms tends to support the
positive performance outcomes of privatisation. The evidence from privatised banks is
somewhat different, as it reveals insignificant improvements in the financial and
operating performance of state-owned banks. In addition to the impact of privatisation
on corporate performance, a major related issue is what conditions the success of
privatisation programmes in developing countries. This important issue was debated
intensely by Chong and López-de-Silanes (2003) and empirically addressed by
Boubakri et al. (2005c). Both studies highlight the essential underpinnings of successful
privatisation programmes in developing countries (including Latin America): a
favourable macroeconomic environment coupled with effective corporate governance.
From a policy perspective, the above studies suggest the following implications.
First, to ensure positive outcomes, privatising governments should implement economic
reforms (deregulation, trade and stock-market liberalisation) before privatisation.
Indeed, deregulation and trade liberalisation will lead to greater competition and a better
allocation of resources, while stock-market liberalisation will bring technological
innovation and progress as well as new physical and human capital through the
13. For a thorough assessment of bank privatisation in developing countries, refer to the special issue of the
Journal of Banking and Finance (Vol. 29, Issues 8-9, pp. 1903-2406 (August-September 2005)). In
particular, Megginson (2005) provides a survey of the empirical evidence on bank privatisation in
developed and developing countries and transition economies. He concludes that banking privatisation in
developing countries yields only negligible improvements in the financial and operating performance of
state-owned banks. Furthermore, in some countries, like Mexico, a poorly designed privatisation led to a
bank crisis.

involvement of foreign investors. All these changes will create an environment that
provides firms with the necessary incentives to invest and restructure in order to face
the competition of their private peers. What is more, when privatisation follows
liberalisation (and other significant economic changes), it reduces the risk of
reversibility of the privatisation policy. Second, there is need for a sound institutional
environment: better investor protection to promote capital markets and attract foreign
investors (the additional sources of funds to NPFs needed to finance restructuring and
growth).
5 Impact on corporate governance
5.1 Review of the evidence
As discussed in Section 2, agency theory provides an interesting background to explain

the inefficiencies of SOEs and the alleged positive effects of private ownership. This
theory argues that the absence of ownership incentives for managers, due to the
separation of ownership (public) and control (politicians), creates agency problems.
Shleifer and Vishny (1997) describe this relationship as a situation where bureaucrats
retain concentrated control rights without cash-flow rights which are dispersed amongst
the taxpayers of the country. In this context, the bureaucrats’ main concern is to achieve
their political objectives which are not necessarily convergent with the profit
maximisation objective. Seen from this perspective, privatisation implies a transfer of
ownership to outside investors, and thus substitutes a private governance structure for
the political governance structure.
Since privatisation leads to a change in the ownership structure, we focus on this
as a post-privatisation corporate-governance mechanism. We conjecture that if the
emerging ownership structure is inappropriate with respect to the state of political and
legal institutions, it may lead to a failure of privatisation in developing countries
(Shleifer and Vishny, 1997). Following Shleifer and Vishny (1997) and Dyck (2000),
we define the post-privatisation ownership structure along two dimensions: ownership
concentration and ownership identity. According to these authors, a concentrated
private ownership is more likely to ensure the success of privatisation in countries with
low investor protection. Indeed, large shareholders, whose wealth depends heavily on
firm performance, have more incentives to monitor the managers and ensure that their
resources are not diverted. In the same vein, when privatisation leads to a diffused
ownership structure, the agency costs associated with managerial control may increase
even when the costs of political control fall (Boycko et al., 1996). Since the post-
privatisation ownership concentration depends on the divestiture method, this latter
would also be influenced by the state of political and legal institutions. According to
Dyck (2000: 59), ‘the two predominant approaches to privatisation are to use public
share offerings, which are more likely to result in wide share ownership, or asset sales,
which are usually associated with the sale of a majority stake to a single investor or to a
consortium’. In countries with weak legal protection, privatisations through asset sales

are more likely than share-issued privatisations, and ownership concentration tends to
prevail.14
In addition, the identity of owners is also likely to shape post-privatisation
corporate governance and performance. For example, foreign investors require high
information disclosure standards and, for reputation concerns, maintain a strict control
of managers’ actions, which should lead to performance improvements (Dyck, 2000).
Likewise, institutional investors exert a close monitoring of management activities to
ensure superior returns (Boutchkova and Megginson, 2000).
The evidence on post-privatisation corporate governance comes mainly from
transition economies. In their review of these economies, Djankov and Murrell (2002)
show that ownership concentration and types of owners (for example, investment funds,
foreigners) play an important role in providing effective corporate governance, yet the
effectiveness varies with the region.
The evidence from developing countries is more limited. Boubakri et al. (2005b)
investigate the effectiveness and the determinants of post-privatisation ownership
structure using a sample of 209 firms from 25 emerging markets and 14 industrialised
countries that were privatised between 1980 and 2001. They show that privatisation
results in highly concentrated ownership by local institutions and foreign investors.
Consistent with their conjectures, they find that firm-level variables (i.e., size, sales
growth, industry affiliation), and country-level variables (i.e., the level of investor
protection, the stability of the political and social environment) are key variables in
explaining the cross-firm differences in ownership concentration. In a follow-up study,
Guedhami and Pittman (2006) show that legal institutions that discipline auditors in the
event of failure of financial reporting reduce the extent of ownership concentration in
newly privatised firms even after controlling for other legal determinants. Of particular
interest, both studies show that privatisations through asset sales result in a more
concentrated ownership. Finally, Boubakri et al. (2005b) show that firm ownership
concentration is a key post-privatisation corporate-governance mechanism, since it is
positively related to firm performance. Yet, the effectiveness of ownership
concentration is stronger in those countries where investor protection is weaker.
5.2 A re-assessment of post-privatisation ownership structure
In this section, we describe the post-privatisation ownership structure for a sample of

170 firms from 26 developing countries privatised between 1980 and 1997. Consistent
with the above review, we focus on ownership concentration and ownership identity.
Panel A of Table 4 reports descriptive statistics on the concentration of ownership
measured by the cumulative share of the three largest investors, the average share of
14. The empirical evidence on privatisation methods appears to be mixed. While Megginson et al. (2004)
report that privatisation through private sales is more likely when the investor protection is better
(common law countries), Bortolotti et al. (2000) report a higher frequency of private sales in civil law
countries. Likewise, Dyck and Zingales (2004) examine the effects of private benefits of control on the
development of markets, particularly on the ownership structure of firms and the choice of privatisation
methods. They show that countries exhibiting higher benefits of control, i.e. countries with weak legal
protection, have more concentrated ownership and privatisation is less likely to occur through public
offerings.

which increases from 10.64% prior to privatisation to 38.57% in the year of

privatisation and continues to increase at a rate of 6.4% per year to attain 45.96% after
three years. In comparison, La Porta et al. (1998) report an average ownership of the
three largest shareholders of 46% in the 10 largest private non-financial firms, drawn
from 49 developed (24) and developing (25) countries.
The above discussion suggests that concentrated private ownership is more likely
to emerge in countries with low investor protection. Accordingly, we present in Panel B
of Table 4 the evolution of the ownership concentration by legal origin (common-law
versus civil-law countries) on the theory that common-law countries provide higher
levels of investor protection (La Porta et al., 1998). The results indicate that the post-
privatisation ownership concentration is associated with poor investor protection (civil-
law countries). The average stake held by the three largest shareholders is 49.03% for
firms from civil-law countries in the privatisation year and 22.67% for firms from
common-law countries. Three years after privatisation, the average stake held by the
three largest shareholders is 28.64% and 58.42% for common-law and civil-law
countries, respectively.
Panel C of Table 4 reports the evolution of ownership by type of owner. The
results indicate a significant change in the ownership structure of the sample firms
following privatisation. Unsurprisingly, the average government stake declines
substantially. There is a substantial shift of 55% in the average government ownership
(from 78.16% prior to privatisation to 35.23% in the privatisation year). The average
post-privatisation government stake continues to decrease over the following three years
to reach 21.41%, which is consistent with the predominance of partial, staggered sales
in developing countries (Perotti and Guney, 1993; Perotti, 1995). While the government
is the controlling shareholder (more than 50% of shares) in 82% of the sample firms
before privatisation, this percentage drops to 34% in the privatisation year and 20%
after three years. Those firms which remained under government control three years
after privatisation come primarily (46%) from strategic sectors (for example, utilities,
telecommunications, airlines, and banking) and from East and South Asia and the
Pacific region (82%), where partial privatisations are more common (see, for example,
Boubakri et al. (2004) for an analysis of Asian countries and Gupta (2005) for a
comprehensive study of the Indian partial privatisation programme).

Table 4: The evolution of ownership structure of NFPs in developing countries
This table presents summary statistics on the evolution of the ownership structure for a sample of 170 firms from 26 developing countries privatised
between 1980 and 1997. Panel A describes the ownership concentration measured by the percentage of shares held by the largest three investors
(L3); Panel B according to the law origin; and. Panel C by type of investor. We consider four types of investors: the government, local institutional
investors, foreign investors, and individuals. The sample is drawn from Boubakri et al. (2005b). The table also reports the p-value of the t-statistic for
differences in means (p-value1) and medians (p-value2) between common-law and civil-law countries. All statistics are presented in percent. N refers

to the number of observations.
Ownership share after privatisation

Ownership share one
Ownership variable (year relative to privatisation)
year before privatisation
0 +1 +2 +3
Panel A. Ownership concentration
Cumulative share of the three largest investors (L3)
Mean 10.64 38.57 42.85 45.55 45.96
Median 0.00 36.00 40.00 42.91 45.00
N 148 131 141 137 110
Panel B. Ownership concentration by law origin
Cumulative share of the three largest investors (L3)
Common-law countries

Mean 13.97 22.67 26.07 28.09 28.64
Median 0.00 23.75 31.19 32.00 31.69
Civil-law countries
Mean 8.29 49.03 54.57 56.57 58.42

Median 0.00 52.00 55.43 59.00 60.20
Means difference 5.68 -26.36 -28.49 -28.48 -29.78

P-value 1 0.072 0.000 0.000 0.000 0.000
P-value2 0.114 0.000 0.000 0.000 0.000
Panel C. Type of investor
Government
Mean 78.16 35.23 30.22 25.02 21.41
Median 88.60 30.00 20.00 12.60 0.00
N 169 169 161 150 137
Local institutions
Mean 4.68 19.17 22.83 23.84 26.59
Median 0.00 1.25 8.83 10.00 8.61

N 120 109 124 123 98
Foreign
Mean 6.89 14.43 15.93 17.70 16.26
Median 0.00 0.00 2.20 4.96 3.90
N 137 136 142 136 117
Individuals
Mean 3.17 14.50 16.14 16.17 15.78
Median 0.00 8.60 10.00 9.50 8.47
N 118 111 118 112 90

6 The social impact of privatisation: ownership and

distributional effects
The privatisation literature generally concludes that the new owners gain from the
reform. What about the rest of the society, though? What have been the effects of
privatisation on the distribution of welfare among different income groups, and on
poverty? Overall, what was the social impact of privatisation? The literature is still
scarce on the subject, although it is a legitimate issue since privatisation is first and
foremost a redistributive policy. As such, it is often perceived as having a negative
effect on the distribution of wealth and income. Shleifer (1998) argues that privatisation
may result in an excessive emphasis on profit maximisation at the expense of other
socially valuable objectives, which may negatively affect social welfare. Traditionally,
the available evidence has focused on the distributional effects of privatisation in
strategic industries, mainly utilities. Indeed, the sale of firms in competitive markets has
not posed a distributional problem, even in low-income countries (Nellis, 2005). The
main results that emerge from these studies is an improvement in access to services and
network expansion among the population (see McKenzie and Mookherjee (2003) for 4
countries in Latin America; Fischer et al. (2004) for Chile; Jones et al. (2002) for Côte
d’Ivoire; Appiah-Kubi (2001) for Ghana). Galiani et al. (2005) show that water
privatisation in Argentina has resulted not only in substantial productivity growth, but
also in reduction in child mortality (saving about 500 infant and young children’s lives
per year). Similar results are obtained in studies that focus on telecommunication
privatisations (see Tables 4.12 and 4.13 in Megginson (2005) for a summary of the
results).
Birdsall and Nellis (2003) provide some guidance about how we should expect the
ownership change of former SOEs to lead to shifts in the distribution of welfare of
different income groups by identifying several channels through which this might
actually happen:
a) Pricing: Privatisation shifts an asset that is theoretically owned by taxpayers to

private investors. Whether this shift in ownership reduces or increases overall
equity in a society will depend for starters on the price received by the selling
state, and whether it adequately reflects the underlying value of the asset. If the
government underprices the issue below its fair value to ensure a quick sale
and attract investors, taxpayers are ripped off in the short run. Empirical
evidence suggests that underpricing share-issue privatisations is a common
practice by governments which want to signal their commitment to market-
oriented reforms (Dewenter and Malatesta, 1997; Perotti and Guney, 1993;
Perotti, 1995; Jones et al., 1999). In the long run, the effect of privatisation on
the distribution of income between taxpayers and new owners will ultimately
depend on both the initial price and the post-privatisation stream of cash flows
generated by the firm.
b) Labour: Privatisation can change the return on assets, such as labour, in a way
that affects the distribution of income. There are two potential effects here: one
short-term and one long-term. In the short term, low-income workers are

usually those more likely to be targeted during pre-privatisation restructuring.

Conversely, in the long term, privatisation, being part of a structural adjustment
programme, will eventually lead to higher growth and generate new jobs that
will offset pre-privatisation lay-offs. Several statistics on job losses associated
with privatisation are reported by Nellis (2005: 18) ‘150,000 in Argentina
between 1987 and 1997; roughly 50 percent of all employees in firms
privatised in Mexico in the 1990s; a reduction of more than 90,000 from peak
employment levels in privatised Brazilian railways alone; the dismissal of 15
percent of the total labour force in Nicaragua due to privatisation, to cite just a
few Latin American cases’. Chong and López-de-Silanes (2003) also show that
many Mexican state-owned firms reduced the number of their employees
during the restructuring process that preceded privatisation. Dewenter and
Malatesta (1997) generalise this evidence for a wide set of countries. One
survey of 308 privatised firms shows post-sale reductions in 78.4% of cases,
with no change or job gains in only 21.6% (Chong and López-de-Silanes,
2003: 43).
c) Prices of goods and access to services: Privatisation can affect prices
differentially across income groups. In potentially competitive sectors, it
generally leads to more competition, and the new private owner will set the
prices according to competition, and offer lower prices. In strategic sectors,
prices are below the marginal cost under state ownership. Once privatised, if
there is no regulation and once subsidies are cut, these firms are more likely to
increase their prices. Birdsall and Nellis (2003) argue that the distributional
impact of price shifts will then depend on the extent to which consumption of
the goods and services in question varies by income group.
d) Other effects: The impact of privatisation on society at large depends to a great
extent on the method of privatisation and the type of new investors involved in
the firm. Similarly, privatisation effects on the distribution of wealth depend on
the initial institutional conditions as well as the concomitant reforms
implemented at the same time as privatisation. As privatisation in developing
countries is usually part of a structural adjustment programme, it is often
accompanied by liberalisation reforms, which also may affect income
distribution.
Birdsall and Nellis (2003: 1621) conclude that ‘The overall point is that there can
be no simple prediction about the distributional effects of privatisation’. To the best of
our knowledge, the burgeoning literature on the impact of privatisation on inequality
and poverty indeed fails to provide evidence of the negative effects of privatisation. An
important contribution to the literature on this issue came from the Galal et al. (1994)
study on the welfare effects of privatisation in four countries (see Section 4.1). The
authors show that welfare actually improved in three out of four cases, and workers did
not lose overall from the process. A recent paper by McKenzie and Mookherjee (2005)
examines the distributional impact of the change in ownership for infrastructure projects
in Latin American countries, and shows that, although privatisation led to an increase in
the country unemployment level, it had very little impact on income inequality
measured by the Gini coefficients, comparing before with after privatisation. The

authors argue that direct negative effects of privatisation on employment are small
relative to the total workforce in the short run. In the long run, this will be offset by the
increased job creation in newly privatised firms. Furthermore, ‘the improved access to
increased services will also compensate for the negative effects of higher prices’.
(Nellis, 2005: 19).
There is undoubtedly still room for future research in the area. As Parker and
Kirkpatrick (2005) argue in their survey of the impact of privatisation on economic
performance, the objectives set by policy-makers through privatisation need to include,
in addition to efficiency gains, poverty reduction. However, the impact of privatisation
on poverty reduction remains unpredictable because, while it may contribute to poverty
reduction (by increasing incomes and expanding services), it can simultaneously
contribute to increasing poverty because of higher prices and fewer jobs (Parker and
Kirkpatrick, 2005).
7 Conclusion
In this article, we evaluate the privatisation experience of developing countries by

assessing the chief goals of privatisation programmes, describing the progress of this
reform over the 1988-99 period, and assessing the impact of privatisation on corporate
performance and corporate governance. We consider this survey paper to be timely,
since privatisation in the developing world shows an increasing momentum. Residual
government ownership is still quite influential in many developing countries, despite
significant privatisation efforts over the past two decades, and therefore much remains
to be accomplished (World Bank, 2001). Given these positive prospects, privatisation
will certainly remain at the centre of the financial economics literature for some time to
come, and reviewing the literature to date will provide insights from developing-country
experiences to support governments in shaping future privatisation efforts.
In addition to stimulating SOEs’ restructuring and efficiency, governments often
put forward other objectives to justify privatisation, namely: (i) developing and
strengthening the private sector; (ii) reducing the size of the public sector and
government intervention in the economy; (iii) reducing budgetary deficits; (iv)
widening ownership which will in turn contribute to promoting democratisation; and (v)
stimulating capital-market development. Privatisation experience worldwide shows that
governments weigh these goals differently depending on the existing political,
economic, legal and cultural environments. In the particular context of developing
countries, the dynamics of privatisation under these constraints proved to be unique and
shaped privatisation in a way that is not found in transition economies or developed
countries. We review some of these particularities below and identify related avenues
for future research.
Economic conditions: Unlike developed countries in which privatisation is a leap
of faith, governments in developing countries are generally reluctant to go through with
the reform, and do so mainly under the pressure of international financial agencies (such
as the IMF and the World Bank). As a consequence, the timetable of privatisation is
determined regardless of the initial economic conditions, since the allocation of funds
by the IMF or the World Bank is conditional on the reform’s progress (Stiglitz, 1999).
In general, unlike in developed countries, privatisation in developing countries is
implemented as part of a structural adjustment programme that includes other reforms

such as trade and financial liberalisation. Under these circumstances, the design and
outcome of privatisation are likely to be different. Although few studies discussed in
this survey suggested that governments should implement economic reforms (trade and
stock-market liberalisation) before privatisation, no research to date has focused on the
optimal timing (i.e., sequencing) of economic reforms in developing countries, where
liberalisation and privatisation are concomitant.
Institutional infrastructure: The country level of institutional development is an
inherent dimension of privatisation design and outcome. Recently, Boubakri et al.
(2005c), and D’Souza et al. (2005) show that the determinants of post-privatisation
performance changes are different across developed and developing countries, with the
institutional infrastructure being more influential in the latter. Indeed, the institutional
framework is weaker and underdeveloped in developing countries, providing limited
investor protection and judicial efficiency. Furthermore, the lack of law enforcement
and widespread corruption do not help to boost confidence from citizens and potential
investors (local and foreign). A related primary issue that is worth exploring in future is
whether privatisation, in turn, has had an impact on aspects of the institutional
environment such as transparency, shareholders’ protection and corruption.
Initial level of stock-market development: For a government that wishes to
privatise through public offerings, the level of stock-market depth is of the foremost
importance. Consequently, in underdeveloped stock markets, privatising governments
will often resort to private sales to strategic investors and/or to issues on foreign stock
markets. Such behaviour is very unlikely to boost the development of local stock
markets or favour individual ownership, which, ironically, are two primary objectives of
the reform. In the context of developed countries, privatisation led to an increase in
stock-market liquidity, and to a dramatic spread of individual ownership (Boutchkova
and Megginson, 2000). However, evidence from developing countries shows instead
that the post-privatisation ownership structure tends to be mainly concentrated in the
hands of local institutional investors, which could hinder stock-market growth. Further
research is needed to assess the impact of privatisation on stock markets in developing
countries, since they are a channel to overall economic growth (Levine, 1997).
Social inequality and ethnicity: Other features of developing countries that affect
the way privatisation is implemented and designed are the extent of social inequality
and ethnicity. Since privatisation is in essence a redistributive policy, the extent of
social inequality will condition the population’s support for the government in place and
its policy choices (Biais and Perotti, 2002), and may create political and social unrest if
privatisation is not credible. Developing countries are also characterised by ethnic
diversity, and ethnic tensions may arise following unpopular redistributive reforms,
such as privatisation, that may favour/exclude certain groups. The privatisation
experience of Malaysia where shares of privatised firms were allocated to Chinese
Malays (the main ethnic group in the country) is an example of the way ethnicity
becomes an endogenous feature of the privatisation process. The importance of these
vested interest groups, often organised in pyramids, family or industrial dynasties, has
been recently documented in the literature (Morck et al., 2004). Further evidence should
therefore assess the potential role of these particular ownership structures in the

privatisation process, and the impact of the reform on social inequality and other social
development dimensions.
In view of the aspects described above, it comes as no surprise that most
governments in developing countries lacked the political commitment and willingness
to pursue extensive privatisation efforts for over a decade after developed countries
started to do so. This lack of commitment shaped the overall process for the last twenty
years: for example, until recently, most governments in developing countries put up for
sale small, competitive firms in the manufacturing sector. They also tend to pursue
partial divestiture, and choose revenue (sale of minority shares) rather than control
privatisations (control relinquishment). Yet, the empirical literature to date has shown
that, for privatisation to yield significant improvements in performance, governments
need to relinquish control of the firms (Boycko et al., 1996). The political determinants
of the design of privatisation constitute a promising avenue of research in this area,
since, as suggested by the literature, to be successful, a reform must be politically
desirable, politically feasible, and credible.
first submitted January 2007
final revision accepted January 2008
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Development Policy Review, 2008, 26 (3): 275-308

Privatisation in Developing Countries:

Key words: Privatisation, corporate governance, performance, developing

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Figure 1: Privatisation proceeds and number of transactions in

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

2 Privatisation programmes in developing countries:

2.1 The rationale for state ownership

2.2 Objectives of privatisation

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

2.3 The design of privatisation programmes

To achieve its complex and diversified objectives, privatisation in developing countries

3 The record of privatisation in developing countries

In the following sections, we describe the recent privatisation trends in developing

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

3.1 Geographical distribution

Table 1 reports descriptive statistics of the privatisation activity in 77 countries

Development Policy Review 26 (3)

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

El Salvador 1998 8 8 61.23 170.63 100.00 6.02

Development Policy Review 26 (3)

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Development Policy Review 26 (3)

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Mali 1996 9 9 100.00 10.29 0.00 0.99

Development Policy Review 26 (3)

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

3.2 The characteristics of privatisation programmes

Table 2 differentiates the privatised stake and privatisation proceeds by industry

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Share sold Proceeds

Development Policy Review 26 (3)

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Development Policy Review 26 (3)

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Less protective countries 882 74.05 1,225 68.67 26.99 1.40

4 Impact on corporate performance

4.1 Review of the evidence

Empirical evidence on the outcomes of privatisation is extensive and looks primarily at

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Development Policy Review 26 (3)

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

roles of competition-enhancing policies, namely, ‘Dereservation’ – elimination of

Development Policy Review 26 (3)

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Evidence from newly privatised banks

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

of strong performance improvements to two possible explanations: (i) the sample is

4.2 Summary and discussion

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

5 Impact on corporate governance

5.1 Review of the evidence

As discussed in Section 2, agency theory provides an interesting background to explain

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

5.2 A re-assessment of post-privatisation ownership structure

In this section, we describe the post-privatisation ownership structure for a sample of

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

which increases from 10.64% prior to privatisation to 38.57% in the year of

© The Authors 2008. Journal compilation © 2008 Overseas Development Institute.

Development Policy Review 26 (3)

Ownership share after privatisation