Early Warning System
Special Edition
The Privatisation of Natural Monopolies
This Report ushers in a series of specialised reports designed to
give national voices an important contribution to
the development of BiH and on meeting the challenges of 2015.
We hope you enjoy them.
Moises Venancio
Deputy Resident Representative
UNDP Bosnia and Herzegovina
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FOREWORD
The question of privatisation continues to generate much controversy in Bosnia and Herzegovina.
Certain powerful stakeholders, not least the international financial institutions, are lobbying hard for the rapid
transfer of various public enterprises to the private sector. On the other side of the debate are strong national
voices advocating for a less radical and more considered approach. For this section of opinion, privatisation
is far more than a narrow financial process, but one which has very considerable social and economic risks.
This special Early Warning System (EWS) Report reviews this ongoing policy dispute in the context of
the so-called 'natural monopolies' given by the water, telecommunications and electricity sectors. Like other
industries, the case for their privatisation is justified in terms of improved economic efficiency and ensuring
the success of other transition reforms. Yet these particular enterprises are special.
First and foremost, because natural monopoly status brings with it certain production and delivery
'realities' that fundamentally constrain the potential for competition. In short, the bulk of these industries are
monopolies by definition and not by policy choice. This has the effect of limiting both the scope of the
efficiency gains to be had, and the contribution private, as opposed to public, ownership can make to the
transition process.
Second, each of the sectors has a distinctly strategic character; their strength is central to the performance
of economy, and they constitute national assets of some considerable value. Transfer of ownership inevitably
carries with it inherent dangers and pitfalls, both for ordinary citizens and the country as a whole.
The debate over these matters is also somewhat coloured by the failures of the existing privatisation
process in BiH, and it is worth noting that surveys of public opinion, point consistently to widespread and
growing levels of disquiet and cynicism. This is unsurprising given that the wider transition reforms have
taken place with little regard to the social impacts of change, whilst also, certain large privatisations have
spurred a series of allegations, if not clear instances, of impropriety and corruption.
Moreover, there is an ongoing absence of accountability for the privatisation process. We have seen
national experts blaming the internationals for the introduction of wrong laws, weak responses to requests
for assistance, and the introduction of voucher privatisation schemes which have already proved a disaster
in many other transition countries, and in turn the internationals blaming the nationals for the tardiness of
decision making and the eventual options selected. The bottom line is that neither party has accepted, nor
seems willing to assume responsibility for these activities.
This report, which has been prepared by a high level group of national academics and policy advisers,
carefully reviews the evidence from both within BIH and around the globe. It concludes in favour of an
'eclectic' approach to privatisation; this position neither rejects the potential benefits nor accepts them
uncritically. It recognizes that a variety of alternative models exist for managing these industries and that a
non ideological, case by case approach, should be taken which brings the wider social and longer term
consequences into the decision making process. To quote George Bernard Shaw, 'the only golden rule is that
there is no golden rule' and this most definitely applies when it comes to the scope and nature of
privatisation.
The history of these reforms throughout the former socialist world is neither a happy nor a successful
one, and it would be a great pity if policy makers in BiH repeated the well-documented mistakes which have
been made. Yet this remains a very real danger, so long as we, the politicians and the international
community, continue to regard ourselves as the real stakeholders, and not the ordinary BiH citizens who live
with the social, economic and political consequences.
Thus I close with a demand for dialogue and inclusiveness, and I commend the findings, conclusions
and recommendations of this report, as a positive contribution to such a process.
Jens Toyberg-Frandzen
Resident Representative
United Nations in Bosnia and Herzegovina
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United Nations Development Programme
EARLY WARNING SYSTEM
Senior Portfolio Manager
Armin SIR^O
Project Coordinator
Tarik ZAIMOVI]
Admir SALKI]
Review
Moises VENANCIO, Deputy Resident Representative
Armin SIR^O, Senior Portfolio Manager
Editors
Tarik ZAIMOVI]
Richard MARSHALL MSc (Econ)
Authors
Tarik ZAIMOVI]
Aleksandar KALMAR Ph.D.
Slavo KUKI] Ph.D.
Fikret HAD@I] Ph.D.
Kasim TATI] Ph.D.
Armin AVDI]
BH version proof-reading
Mufid MEMIJA
Translation
Reza M. KEIVNZADEH M.A.
English version proof-reading
Reza M. KEIVNZADEH M.A.
Photo & Design
Tamara KOREN
DTP & Layout
Samira SALIHBEGOVI]
Print
Arch design d.o.o.
For the printing house
Esad ]ESOVI]
Although publication of this report is supported by
the United Nations Development Programme (UNDP),
the opinions stated in this Report
do not necessarily reflect the official position of
the United Nations Development Programme (UNDP)
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EXECUTIVE SUMMARY
This report examines the case for the privatisation of the so-called 'natural' monopolies in Bosnia
and Herzegovina, specifically the Electricity, Telecommunications and Water Sectors.
It is argued by many mainstream economists, that the presence of state owned monopolies in
transitional economies 'locks-in' inefficiencies and impedes the progress of other essential reforms,
including liberalisation and restructuring. Thus in BiH, as elsewhere in the transitional world, the clamour
for privatisation has become a 'mantra' of the Bretton Woods institutions and other influential voices
within the international community.
But is the case for privatisation as solid as is claimed when applied to cases of 'natural monopoly'
where the patterns of production and supply, mean that the potential for competition, the key ingredient
for securing economic efficiency, is extremely limited? Indeed, some form of monopoly in these sectors
seems both inevitable, and arguably the most 'efficient' outcome. The privatisation process implies, in
the case of these industries, the transformation of a public monopoly into a private one.
Furthermore, a review of the empirical evidence of past privatisations in the transitional and
developing worlds gives few grounds for optimism. As the research for this report shows, time after
time, privatisation programmes have failed to live up to their promised economic pay-offs, and have
at the same time contributed to significant social dislocation, felt in terms of bankruptcies and
unemployment.
Yet, the history of privatisation within the advanced industrial economies of Europe and North
America has yield somewhat better outcomes. Moreover, it is not true that all sub-sectors of the industries
examined in this report constitute 'pure' forms of natural monopoly, and thus competition in theory at
least, should be both possible and beneficial. This added to the potential for the introduction of overseas
management experience and crucially, capital investment, underlines the reality that a dogmatic stance
against all forms of privatisation is ill-advised. Indeed, there is no doubt that these sectors, like others in
BiH, require rationalization, investment and a fundamental reorientation in their approach to their
business dealings, and the quality of service provided to consumers.
However, although the report does not suggest retaining the status quo as the best solution, it also
does not argue for a rapid mass transfer to private ownership either, rather it presents a series of options
and models, some of which do not require the effective privatisation of public assets at all. These include
using innovative partnership arrangements and measures to improve the organization, management and
efficiency within the existing utility companies.
Overall, a more considered and consultative process to deciding the future shape and ownership of
these necessarily strategic industries is recommended. The ongoing goals should be securing the
maximum benefits and value for BiH citizens both in the short and long term, whilst also minimising the
costs and inherent risks
It is concluded at the strategic level that:
A consensus needs to be established on the objectives and goals of privatisation, and the
commitments to be sought from potential new owners and operators. The strategic long-term interest
in some of these areas must be a major decision-making factor and future position of BiH in the
region.
That the process should be properly phased and well managed; ensuring that appropriate and
socially responsible restructuring takes place prior to the transfer of ownership; and that tough
regulatory structures are put in place to protect both the interests of the state and citizen, as the
current owner of the assets in question.
That all sectors, and the conduct of all operators, state, municipal and privately owned, should be
regulated by strong and independent agencies, in the interests of the consumer. And this is a
fundamental prerequisite of the wider liberalisation process.
A variety of forms of ownership and management arrangements should be considered, including
models of partial privatisation (of sub-sectors and certain functions) and schemes in which
majority and/ or effective ownership remains within public hands. These include various
partnership mechanisms (public-private and public-public), management contracts and operating
concessions.
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And at the industry level:
For the Electricity Sector; restructuring to be followed by the privatisation, using a mixture of
methods, of the distribution companies as regional concessions, recognizing that some may remain
in public ownership. Retention of existing power generation, in state ownership as a strategic longterm export resource for BiH. With the privatisation of unexploited potential, to be done on
concession and time limited basis. And for the transmission mechanism, which represents a 'pure'
natural monopoly to remain as a state owned, but arms-length, managed entity.
In the case of the Telecommunications; the report acknowledges that technology has done much to
permit effective competition to operate. And thus authors conclude in favour of a more liberal
approach and see no benefit for retaining the existing companies wholly in state hands, save for the
need to ensure access to the fixed line networks they operate.
In contrast, they find that Water Services presents the clearest example of natural monopoly, and
thus should be retained in state or municipal ownership. However the authors also recognize that
this sector would benefit from the introduction of modern and commercial management practices;
and that there is a desperate need to make substantial new investment in infrastructure. Therefore,
it is concluded that there are potential benefits to be secured from management and partnership
arrangements.
The report is throughout, anxious to underline the political and social dimensions that surround this
difficult issue. There are considerable 'knock-on' consequences, both external to the industries in
question, and to the time frame typically used to appraise the outcomes of privatisation. These range
from the poverty fallout of rapid downsizing, to the diminution of public accountabilities. In sum the
challenges which confront us are neither simple to overcome nor short in duration. Most of all this report
counsels the authorities against proceeding with unnecessary haste, or taking decisions based on a
dogmatic or politicised position.
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CONTENT
1. INTRODUCTION
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2. KEY CONCEPTS
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2.1 The Dangers of Monopoly and the Case for Privatisation
2.2 Natural Monopolies
2.3 Policy Developments: Regulation, Privatisation and Liberalisation
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3. INTERNATIONAL EXPERIENCE AND THE BiH CONTEXT
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4. DETAILED REVIEW OF THE KEY SECTORS
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3.1. Discussion
3.2. Water as a Major Local Natural Resource
3.3. Electricity Production - the potential for recovery and long term gains
3.4. The Dynamic Telecommunications Sector
4.1. The Energy sector in BiH
Background and Key Issues
Specific International experience
Prototype models of organisation for the electricity sector in
the transition period
4.2. The Telecommunications Sector
Telecommunications in BiH
Reform activities being undertaken
The current position of the telecom sector and the privatisation process
The socio-economic impacts of privatisation
Proposed privatisation models and reform of the telecoms sector as a task for the future
What privatisation model to apply?
Next Steps: priorities for the sector
Government decisions on divestiture
The International experience
4.3. The Water Supply System
The International Conetxt - Water as a limited resource
Privatisation of the Water Sector
Experience of Developed Countries
Experiences from the region
The Situation in BiH
Recommendations
5. CHARTING A WAY FORWARD:
CONCLUSIONS AND RECOMMENDATIONS
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1. INTRODUCTION
In spite of much rhetoric to the contrary, the
occurrence of monopoly, or near monopoly,
market conditions is far from rare in the modern
world. Moreover, the tensions and pressures
which give rise to such conditions are particularly
strong in transitional economies, where an
institutional history of state ownership is
supplemented by invariably small and structurally
constrained national and regional market places.
The formal causes and the factors which sustain
monopolistic behavior can be complex, but are
frequently rooted in the domestic legal and political
environment. It is argued by many mainstream
economists, the 'problem' of monopoly and its
claimed fundamental inefficiencies, runs in parallel to
the dominance of state ownership. It is unsurprising
then that in the BiH context, as elsewhere in the
transitional world, the clamor for privatisation as an
antidote to monopoly power, and inter alia, the
elimination of economic inefficiency, has become a
'mantra' of the international financial institutions and
others within the international community.
But is the case for privatisation as solid as is
claimed? And specifically, what is to be done
about so-called 'natural monopolies', where
productive and delivery (typically infrastructural)
realties mean that some form of monopoly is
inevitable, and the arguably the most efficient
outcome?
This report examines these very questions in the
BiH context for three sectors which exhibit naturalmonopoly characteristics; electricity generation and
supply; water and sewerage services; and telecommunications. The report has three principal parts:
the first section provides a conceptual discussion
of the issues; the second investigates the BiH
situation in the context of relevant international
experience; whilst the third and most substantial
part looks in detail of each of the sectors in
question. Following this, overall conclusions and
recommendations are presented.
2. KEY CONCEPTS
2.1 The Dangers of Monopoly and
the Case for Privatisation
Different from other market participants,
monopolists are in a position to be able to pursue
price policies that ensure maximum profits,
disregarding allocation and cost pressures.
Operating in a competition-free environment,
monopoly producers are less
motivated to
introduce new technological solutions, which results
in reduced effectiveness, compensated for by higher
prices which exceed the real value of the product.
In Bosnia and Herzegovina, as was the case
in the majority of transitional economies, natural
monopolies are state-owned. It is generally
believed that such an arrangement perpetuates
inefficiencies slowing the general trend rate of
growth, and discouraging positive social and
institutional development of society and the
economy.
Thus the economic case for privatisation is
bound up both with the market failures implied
by monopolistic forms of production and the
claimed inefficiencies of state ownership. Three
principal arguments are usually advanced in
support of this:
The efficiency and productivity case; this
come in two forms, first it is argued, that
producers by adopting a profit maximization
objective, minimize costs and optimize
output, achieving what is termed 'productive
efficiency'; and secondly, via the operation of
effective competition, the system better
matches demand with supply, thus
consumers, producers and the wider society
benefits, as 'allocative efficiency' is secured.
Fiscal Gains; being the direct receipt of the
proceeds of the sale of assets by the state,
and the ongoing benefit of higher tax
revenues or lower subsidy payments, from/ to
the newly private and (as is claimed)
revitalized, industries.
Institutional
development;
being
the
intangible economy-wide behavioral spin-offs
and values which it is argued follow mass
privatisation.
Problematically though, these arguments rest
not merely on privatisation, but the creation of
effective competition, and this is fundamentally
limited in the case of natural monopoly. A proper
appraisal is therefore required of each an every
sector, to determine the real scope of the gains to
be had.
2.2 Natural Monopolies
A 'natural' monopoly represents a situation in
which the technology or the character of the
industry are such that the demand can be met,
achieving the lowest costs and the greatest social
benefit, through the existence of a single producer.
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Under these conditions, a key assumption is that
the free entrance1 of other companies would lead
to an irrational waste of limited factors of
production, requiring cycles of excessive
investment, which would result in excessive rivalry
between companies (stimulated by a large
difference between marginal and average costs).
Moreover, if the pressure of excessive
capacity leads to a price war, a consequence could
be the suppression of prices to a level very close
to the critical short-term marginal costs, which can
jeopardize companies' capacities to maintain
production at a satisfactory level of production, to
carry out necessary adaptations and the
modernization of production, and to continue
offering high quality services.
The basic characteristic of a natural monopoly
is an inherent tendency for average costs to
decline over the whole production range. This
situation appears when the scale economies are so
large to overwhelm normal rules of production.
The main source of this tendency is a necessity to
undertake extensive investment in order to meet
the effective market demand2.
This outcome is most clear in relation to
industries requiring expensive large scale infrastructures; water, electricity, gas transmission and
distribution, and telecommunications, companies
must dig up the streets, lay down infrastructure and
physically connect output to every potential
consumer. These costs can be absolutely static
regardless of the quantity of the end product
produced. Thus, average costs per product or service
unit will decrease disproportionately with the
number of units sold. This tendency is emphasized
by certain common and mutually dependant
characteristics:
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Fixed and essentially non-transferable physical
connections between the supplier and
consumer or locality;
No, or very limited, possibilities to store
productive output;
Stringent delivery obligations, a need to meet
the demand instantly, in accordance with
consumers' wishes (flipping an electric
switch, switching on a thermostat, or lifting a
telephone receiver);
Significant fluctuations in demand - both by
individual consumers and the system as a whole
All of these characteristics lead to a need to
make large initial investments in capacity and to
maintain a considerable margin of safety, i.e.
sufficient infrastructure and plant, in order to meet
the demands even under peak load conditions. This
can be most efficiently accomplished by a single
supplier, with one fixed connection to each
consumer.
These infrastructure or 'network economies',
which are apparent in the electricity, telecommunications and water industries can lead to
the formation of vertically integrated monopolies.
These large firms ensure there is scope for
production costs to be minimised, and secure
supply (including via in some cases, the right to
import supply), through transmission, and
distribution networks to the end user. Yet equally,
in some areas, particularly the energy sector, the
precise borders between which parts of the supply
chain represent natural monopolies, and which do
not, are difficult to define. For example, whilst
electricity transmission clearly exhibits all of the
characteristics of natural monopoly, electricity
generation does not.
In microeconomic analysis, a theoretical model of a monopoly is built on the following assumptions:
- There is only one seller and a multitude of small buyers. A monopoly market also recognizes the modalities of a monopoly,
consisting of one buyer and a multitude of small sellers, and a bilateral monopoly, where there is one seller and one buyer.
- There are no substitutes or complements to the product or group of products sold by a monopoly. This assumption ensures
that events on other markets have no impact on the events on the monopoly market. In other words, cross-demand
elasticity on a monopoly market equals zero.
- There is no freedom of entrance for new companies. The effective demand volume on the local market represents a specific
form of a barrier to entrance. An example can be a sparsely populated area where there is usually only one shop in which
one can buy almost everything. Opening specialized shops, considering the demand volume, would not be lucrative. "This
example indicates two important things related to market monopolization: (1) a monopoly relates to the market size and
(2) a monopolistic company does not necessarily have to be large" .
- Both buyers and sellers are in possession of perfect (and free) information on market conditions. This assumption is least
realistic but is necessary. For example, the most important thing for a monopolist is to have a complete knowledge of
demand, but, at the same time, the demand schedules are the hardest to determine. Without this assumption, we would be
unable to claim that a monopoly has the knowledge of its average and marginal revenue curves, and thus, that it is capable
of determining its optimal production.
Economies of scale can also be external for some companies. External economy of scales represent a reduction of average costs
of a company in a situation of production growth, caused by factors on which the company has no influence. For example, in
the case when a whole sector grows, companies have an opportunity to acquire their inputs at lower average costs.
Natural monopolies, which dominate the
infrastructure sector in any economy, are
extraordinarily important. The added value they
provide often accounts for considerable part of
gross domestic product (GDP) while investment
into infrastructure is even a greater percentage
share of the total investment. Still, their
importance, to a great extent, arises from the fact
that their services and products are sizeable inputs
for all other sectors.
The two most important features of network
infrastructure providers are the following:
Extensive investment can pay off only over a
relatively long period of time, and
The phenomenon of accumulated costs make
divestiture practically impossible, in the case
that a decision is made to leave a particular
market, the function cannot be reprogrammed
and rearranged for rendering different services.
By using network infrastructure, a monopoly
company is in a position to use the effects of the
economies of scale (the sheer scale of services
rendered to end users) to amortise the costs which
are accumulated by the necessarily high level of
activity. This is one of the main reasons why the
state decides to preserve a monopoly in the form of
a public company and a reason to decide to regulate
or control the business of such a natural monopoly.
The state tries to preserve the advantages with
regard to the potential low costs while at the same
time finding adequate ways to limit the monopolist's
market power; it forces them to increase production
while reducing the price, in order to move closer to
the manner in which a fully competitive market
would function (were this option available).
It is necessary to emphasise the characteristics
of these sectors in order to show clearly the
difficulty and complexity of the measures and
activities which are directed to achieving the full
liberalisation of the market and the development
of competition as a mechanism to change the
behavior of the existing dominant participants,
and thus to secure a reduction in prices and an
improvement in the quality and range of services
for the end users.
Network
services
(telecommunications,
electricity, water, gas) can be either:
Intermediary services, maximising efficiency
in managing the traffic in the network
infrastructure; and
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Final services, meeting the demand of the end
users of the network.
It should be noted that a natural monopoly is
not necessarily present in the field of services,
whether intermediary or final. In fact, investment
in the field of services should aim to address the
sources of monopoly with regard to intermediary
costs (in order to direct better the oscillations of
traffic in network infrastructure) and final services
(in order to adequately respond to the demands of
end users, in particular businesses whose effective
demand for this kind of service grows very
rapidly). Flexibility of offer and short-term
adjustability in the field of services are vital and
suggest that the most adequate market structure
would be made up of several service providers
who would then be mutually competitive.
It could be said, therefore, that the period
when integrated monopolies necessarily managed
and used infrastructure with the objective of
rendering all services has passed. The appropriate
future industry structure of these companies
should be a compound model, where the
dominant operator maintains its monopoly
position in that segment of the business which is
subject to the conditions of natural monopoly but
is exposed to competition from several operators
in other segments.
Competitive operators or those proposing the
introduction of services which the dominant operator
does not offer, may find themselves represented only
in some links of the vertical supply chain. Therefore,
they have to gain access to other parts of the chain
and obtain dedicated connection to the key
resources, most frequently to the basic infrastructure,
from the dominant operator who exclusively operates
the given infrastructure.
2.3 Policy Developments: Regulation,
Privatisation and Liberalisation
Natural monopolies in the sphere of
infrastructure play a key role in the process of
economic development and can have a considerable
impact on living standards and economic growth. By
the mid 1980s, a large number of underdeveloped
countries relied on public monopolies for the
funding and management of infrastructure3. In the
mid 1990s, the world began turning to the private
sector to take over the management and ownership
Assessments are that technical inefficiency in the sphere of electricity, water, roads and railways alone caused losses of about
55 billion US dollars per year in the early 1990s, which is an equivalent to 1% of the total GDP of all underdeveloped countries
or a fourth of the annual investment into the infrastructure sector.
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of the existing infrastructures as well as to finance
new investment4.
Deciding to privatise, governments were
simultaneously oriented towards economic, political
and financial goals. The goals were often
interdependent, yet were also sometimes in
opposition. Different countries ranked some of the
goals in accordance with adopted macroeconomic
policy aims, some with the sectoral characteristics
and/ or priorities, and specific conditions in their
respective countries. Moreover, it was not unusual
for a country to change the ranking of goals adopted
over time. Reliance on the private sector in terms of
finance and management culture was introduced
with the expectation of numerous beneficial effects.
The most important aspects of this were the need to
facilitate access to private capital in financial markets,
an increased motivation for more efficient business
practices, and a reduction in demand for constrained
and often meager public funds.
It is worth noting that natural monopolies
(with the characteristics of legally regulated
monopolies) in practice unify commercial and
regulatory functions of the government. And in the
field of infrastructure, countries have opted for
different programs of deregulation and privatisation
with a view to separating these two functions5.
Following the general trend of liberalisation
and deregulation, and in order to achieve the best
possible economic efficiency and rational use of
precious resources, a large number of countries
made the decision that it was necessary to ensure
a much greater level of competition in the delivery
of infrastructural services which was dominated by
public monopolies. This encompasses following
three separate processes6:
Privatisation - the transfer of ownership from
the public to the private sector;
Liberalisation - the introduction of competition into
markets which were either monopolistic or
oligopolistic; and
Deregulation or perhaps more accurately Transregulation - the change, or introduction of new
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and independent regulatory mechanisms with a
view of monitoring and controlling these
markets. The expression trans-regulation is
argued to be appropriate because it makes it
clear that this is not about abandoning or
eliminating, but about reshaping regulatory
mechanisms and practices to new realities.
Privatisation is a process which refers to
changes to the legal form and ownership of
companies in terms of the transformation from
government
(through
the
process
of
incorporation7) into public and finally into private
hands. Indeed, process issues like the speed of
transfer and the phasing of necessary legal
institutional issues dominate the policy debate;
best practice suggests there are a number of stages
to be followed in a systematic manner.
The first stage in the process of privatisation
may be partial privatisation or 'commercialisation'
of the enterprise, which results in greater
transparency, permitting better performance
evaluation of the company, increased financial
flexibility, the introduction of performance-based
incentives for managers (through vehicles like
stock options), better corporate governance and
pressure on management to realise value for
stockholders (increased shareholder value) rather
than political goals. In many countries, the
ownership dimension of partial privatisation
(disposing of a portion of the equity capital) was
undertaken as a strategy to gradually introduce
companies to the financial market because of the
limited absorptive power of the financial markets.
This was the case with many British (British
Telecom, British Gas), Spanish (Telefonica,
Argentaria) and Italian companies (ENI, Telecom
Italia). In other cases, partial privatisation was the
end of the process not an intermediate stage;
Deutsche Telecom, France Telecom and Dutch
Royal KPN were only partially floated on the
financial markets with the State as the majority
owner. This approach has some advantages and
In the period 1992-2000, the scale of investment into private infrastructure projects in underdeveloped countries amounted to
over 680 billion US dollars.
An important function entrusted to public monopolies was that of protecting citizens' living standards through the maintenance
of low prices for services, often much below average or even below marginal costs of their production. The difference to full
costs was compensated by the State through a system of the subsidies . However, an accepted conclusion in the field of
contemporary welfare economics is that this policy of redistribution of revenues could be much more effectively implemented
by means of direct transfers or transfer of the purchasing power or targeted subsidies than is the case with non-selective
subsidies when prices of products are kept low for all buyers. A direct consequence of such an approach is reflected in the
excessive use of production inputs (in particular of energy). Whilst a somewhat less obvious consequence, is that this is also
reflected in the lack of funds for modernization and expansion of activities in the infrastructure sector.
In this Report we will focus only on the first two.
Incorporation of the British Telecom lasted nearly two years.
the experience of certain countries, which
preserved majority ownership in former public
companies by selling only small packages of stock
to strategic foreign investors, may be useful for
Bosnia and Herzegovina. The most relevant
examples are telecommunications in the Czech
Republic and electricity management in Belgium.
The move from the partial to final
privatisation may be the most sensitive stage in the
privatisation process. It must be borne in mind
that a certain period of time must elapse after
incorporation, a period long enough for the
company to adjust to new commercial and cultural
realities and working within the framework of the
market economy. The company in question must
go through a process of adjustment and of
building new management and business
structures. The fact that this period has usually
taken five years in Holland tells us best how
sensitive this process is. Clearly we must take note
that a long period of time is required even in very
stable countries with long traditions of operating
liberal market economies with sophisticated
demonstrates legal environments. Bearing in mind
the current economic-political and legislative
situation in Bosnia and Herzegovina, we must be
utterly scrupulous in setting down and observing
the timing and phasing of strategies to be used in
the privatisation of publicly owned companies.
Final or full privatisation is an obvious
solution for those sectors where commercial or
profit-oriented goals are more pronounced and
dominant in relation to the public interest, and
particularly when they can be viewed separately.
When commercial goals are narrow and limited in
comparison to the public interest (in particular in
the area of rendering services such as health care,
education, public security, basic services)
advocating privatisation is far less justified.
Separation of these two functions (commercial and
public) in the process of full privatisation
improves economic efficiency by:
Eliminating traditional conflicts of interest,
and the insufficiently defined and nontransparent role of the state as the owner,
operator and sometimes the regulator, of a
business entity8;
Increasing motivation for managers to run
companies in more effective ways; and
Ensuring relevant and reliable information is
available, about the value of the company to
8
potential investors and its performance by
way of shares on the financial market.
We should bear in mind that privatisation is
often a part of a wider reform (often transition)
strategy which aims to change the role of the state
in the economic sphere - and thus, includes
regulatory reforms, to introduce (or strengthen the
existing) competition policies, in order to
stimulate an increase of material and social wealth.
Privatisation has interdependent and often
conflicting political, economic and financial goals.
The projected goals of privatisation can be
summarised as follows:
Changing the manner in which public
companies are managed and improve their
productive efficiency and business results by
introducing incentives based on private
ownership instead of bureaucratic supervision
and control.
Ensuring better access to necessary financial
sources of additional investment.
Creating considerable revenues for the state
budget and an improvement of certain
macroeconomic indicators, particularly a
reduction of the public debt and demand for
borrowing by the public sector.
Increasing the use of equities in financial
markets and the creation of a critical mass of
stockholders, as well as increasing the equityownership route for the channeling of savings
into the economic system.
Introducing competition into markets that were
closed until recently, leading to reductions in
prices and an improvement in the quality of
infrastructure, products, and services.
However, we need to emphasize that in the
context of a transitional economy, privatisation is a
necessary, but not sufficient condition for improving
the performance of the economic system as a whole.
In a formal sense, privatisation does nothing other
than change the structure of the ownership relations
between market participants. However, its potentially
powerful beneficial effects are manifest only when the
structure of the market adapts and other reforms are
progressed successfully. In other words, if we can not
fulfill the above mentioned reform goals then the
question arises; why privatize at all?
concerns
the
structure,
Liberalisation
flexibility and openness of an industry. Key issues
In the majority of OECD countries, responsible ministries abandoned the function of managing shares of public companies
regardless whether they were partially privatized later. This ensures a better separation of commercial goals (for example,
returns of the invested funds)
13
are whether a single company or a number of
companies make up a certain sector, and the
conditions under which these companies operate
or are connected in some way (vertically or
horizontally). The criterion of efficiency, which is
relevant here, refers to the cost structure and the
degree of the economies of scale. The entry of
new companies competing with the dominant
operator in a network economy can ensure greater
efficiency so long as this competition occurs in a
field in which there are not constantly increasing
returns to scale, and if the entrance of new
companies is accompanied by lower costs and
consequently lower prices for services. When
these conditions are fulfilled, a fragmented market
structure would enable the adjustment of supply
to the constantly changing needs of the users,
expressed as a diversified, flexible and dynamic
perfectly competitive market place.
Market liberalisation inevitably leads to
disturbances, and can result in the overlap of
regulatory goals. The former clear goal of ensuring
incentives to a monopoly company, public or
private, is replaced by the goal of disabling former
monopoly companies of abusing their still
dominant position in the market - and terminating
the practice of 'cross subsidy'. This is the practice
of realising insufficient revenues by calculating
low competitive prices (often below actual costs)
in those market segments where competition is
present, and cross-subsidizing by the revenues
made from the sale of services at unjustifiably high
prices in the still monopolised part of the market.
De-regulation or perhaps more appropriately
Trans-regulation is concerned with changing the
governance and management of economic
activity, by (but not necessarily) governmental
agencies. The objectives of regulatory policy are
bound-up with securing the public good in the
face of competing private interests and market
failures. Regulatory reform has to accompany both
privatisation and liberalisation if social and
economic goals are to be realized, at least in the
early stages, and in the case of natural monopoly
and/ or market dominance, on an ongoing and
permanent basis.
Best practice has shown that a crucial issue in
the privatisation process is the proper phasing of
reforms and policy instruments. Both empirical
evidence and theory, suggest that there are very
significant risks of rapid, ill-prepared programs of
divestiture. To succeed in securing the potential
economic and social benefits, policy makers need to
ensure appropriate regulatory structures are in place
and are functioning well before full divestiture
takes place. Liberalisation also requires a phased
14
and considered approach tailored to local
circumstances; chiefly the level of competition and
the presence of supportive market institutions,
ranging from commercial law to modes of business
conduct.
3. INTERNATIONAL
EXPERIENCE AND THE
BiH CONTEXT
3.1 Discussion
It has been argued that de-monopolisation,
aided by the privatisation of major enterprises, will
permit the restructuring process to occur in BiH.
But is privatisation the best way to move ahead
and in which manner? In the light of the above
conceptual discussion, it is necessary to build a
market that will ensure competition for the
purpose of securing greater efficiencies, given by
profitability for producers and lower prices for
consumers, and where competition is not
possible, such as in the case of natural
monopolies, establish regulatory structures which
result in the same desirable outcomes.
Market structures and institutional changes
are particularly important. In the case of the
energy sector for example, two market models are
possible for the production, transmission and
distribution of electricity:
The one buyer market model where production and transmission are managed within a
vertically integrated electricity system. Under this
model, production can be privatised partially or
fully, without major disturbances in the system
itself. The entry of new producers from outside the
existing system can certainly improve efficiency,
leading eventually to lower prices within a central
pool or exchange system. This model builds on the
discussion above, recognising that whilst
transmission and distribution have 'pure' natural
monopoly characteristics, production does not.
The open market model presupposes a full
separation of the existing units in the system. This
model implies a total restructuring of production,
transmission and distribution - and their complete
separation and eventual privatisation. Under the
open market model, vertically integrated units
disappear. This model ensures competition in
production and eventually in supply, which leads
to greater efficacy when using limited energy
resources. But, dangers do exist, not least the
threat of leaving the country without its own
energy sources, and a lack of emergency capacity9.
Indeed, the telecommunication sector in BiH
already somewhat mirrors this model in relation to
the provision of mobile telephony services, and it is
one of the most liberal in the Central and Eastern
Europe (CEE) region. We have three state owned
operations and two of them have their own GSM and
Internet operations. There is also one GSM operator
linked to Croatian Telecom and DeutscheTelecom
and working without the licence for more then eght
years. The present independent Communications
Regulatory Agency (CRA) has set a number of rules
and conditions for operators (but of course, the rules
and regulations do not apply to illegal operators
present in BiH); they are obligated to share basic
infrastructure, links, GSM space and infrastructure,
and provide services to the entire territory of BiH.
Moreover, the operators are required to make
preparations in order to attain European Union
standards and management practices.
The water supply industry is in a completely
different place. This sector has never been one
state owned company, but smaller local
monopolies that operate in municipal areas with
licenses, with the authority and the responsibility
to provide every household with drinking water in
their limited local community areas. The
privatisation of these entities would be a locally
driven process and questionable when it comes
the overall efficiency gains and income generated.
This is unsurprising as the water supply industry is
the sector which most clearly approximates
conditions of natural monopoly.
It is important to recognise that the questions
raised by these different models of production and
supply are not solely related to the nature of the
ownership model adopted. Indeed, securing
efficiency particularly if a wider social calculus is
employed rests more on the structures and regulatory
institutions which are in place. And the existence of
public companies represents a certain advantage
because such companies, regardless of how
imperfect have some, though not guaranteed, interest
in maximizing overall social welfare rather than
private gain. The presence of often substantial market
failures, costs and benefits external to the productive
9
10
11
process, termed 'externalities', make a socialised
approach to provision more favorable in the context
of natural monopolies.
Expressed in microeconomic vocabulary, we
could speak of an approximated or 'second-best'
accomplishment of allocative efficiency; services
are mainly ensured in the required quantities and
mix; prices are calculated for end users within
acceptable boundaries; and the benefits from
public services accrue to the users regardless of
location or supply constraints. Considerable
progress in the work of public companies was
made by many countries, by improving the
internal management and culture of such
companies10. Water supply is an example which
suggests that publicly owned enterprises such as
those in Holland, Japan and the USA operate more
effectively than private companies in England and
France. In the area of electricity, too, the results
show that privatisation often does not yield the
desired results. The emergence of an energy crisis
in California in 2001, where it became apparent
that consumers in Los Angeles were the only ones
in California who were spared electricity
restrictions because production and distribution of
electricity in this city is in the hands of a public
company owned by the city government, provides
a valuable lesson.
The public sector can be as effective if not
better than the private sector in increasing
productivity. An analysis of privatised industries at
the time of Margaret Thatcher's government shows
that the greatest improvements occurred before and
not after privatisation. Where partial privatisation
was implemented, as in the refuse collection and
disposal sector, companies which remained in the
ownership of local governments improved their
work as much as private companies. Finnish
economist Johan Willner, concluded in a study
published in 2001, that political control, realised
through public ownership, may lead to better
economic results, in particular in those sectors
which are "natural monopolies"11.
In Honduras, for example, the branch trade
union played a leading role in the process of
successful, restructuring the water sector.
It advocated the preservation of existing jobs,
Rumania is importing electricity produced by Rumanian power-plants and fueled by Rumanian coal.
The function of managing the entrusted assets was improved by many countries by introducing the required flexibility which
was so far a characteristic of the private sector. In Sweden, for example, a new government department for managing assets
of public companies was established in 1999 with a mandate to govern commercially state participation in the 59 main
industrial companies (including telecoms and air companies). The new department is authorized to sell stock of these
companies when it is decided that withdrawal of the state from the given sector is the best investment decision.
Johan Willner: "Ownership, efficiency, and political interference", European Journal of Political Economy, Volume 17, Issue 4,
November 2001.
15
however, the private sector commonly as a first step
towards improving efficiency, reduces the numbers
employed. This example indicates the fact that the
current employees of public companies constitute
an important resource of expertise imbued with a
service ethic. State institutions in some countries
have increasingly come to acknowledge this fact.
Also, it is important to note that three of the most
advanced and most powerful telecommunications
operators in the Europe, DeutscheTelekom, Telenor
and France Telecom, remain mostly-state owned.
Moreover, the service provider with the best quality
of service in CEE has been judged to be Slovenian
Telecom which is still 67% owned and managed by
the government. Examples of negative experiences of
post-privatized firms include; Macedonia where
Matav Telecom, 51% owned by Deutsche Telekom
(following privatisation of Hungarian Telecom),
increased GSM service prices to the highest levels in
Europe (3 times higher then in BiH); and in Croatia,
where Deutsche Telekom, after majority privatisation
and restructuring, raised prices for fixed telephony by
an average of 250%.
One of the doubtless advantages of public
corporations over private companies is that in hard
times and unfavorable economic environments
public companies can not simply stop operating
and abandon a certain sector or segment of the
market, and go in search of better profit in another
sector. In the private sector, firms possess incentives
to do just that12. While the private sector often
cannot afford to continue providing certain
services, a public company is not permitted to
abandon provision. A current example is the EU
telecoms market, where large operations,
recovering from considerable outlays, are trying to
find ways to cover their debt anywhere they can.
Here, one must wonder how many of them would
have been closed down had they not had
government support at a time of global recession.
Also, in many cases CEE Governments have been
forced to intervene when weak management and
foreign investors threatened the survival of telecom
operations and the service provided to the local
population in general.
Therefore, the process of privatisation of
natural monopolies, or transfer from public to
12
16
private management, can first be understood as an
intention to secure direct realisation of productive
efficiency which results from the care and
endeavors of managers of private companies to
increase their profits - in order to enlarge their
own revenues - under the control exercised by
stockholders and creditors. With regard to
allocative efficiency, this is partly realised in the
form of increased production efficiency (lower
expenses largely lead to lower prices) which is
partially guaranteed by the interventions of the
regulatory bodies.
It must be recognised though that the
realisation of socially efficient outcomes within
public ownership and management cannot simply
be assumed either. Indeed, although public
companies are often tasked with, and claimed to,
operate their businesses in line with wider social
and public interests, they often manifestly do not.
Without oversight and regulation, publicly owned
monopolists can behave as badly as unregulated
private ones do.
What is required is a balanced and strategic
approach to these matters. Privatisation of natural
monopolies should be accomplished as a longterm and strategic process, rather than simply a
matter of divestiture of assets. It should be kept
in mind that when it comes to the sectors of
energy production and distribution, water supply,
and telecommunications, that the long-term
benefits should rank as the first priority, then the
mid-term, in the form of liberalisation of the
sector, and finally the short-term gains in the form
of privatisation receipts and higher tax earnings.
3.2 Water as a Major Local Natural
Resource
Water reserves per inhabitant are shrinking on
all continents. The greatest reductions of water
resources are in Asia, Africa and South America.
This trend is a consequence of several factors;
population growth, climate change, emergence of
so-called 'mega-opolis' cities and more and more
extensive pollution, in particular of surface waters.
A dramatic increase of the population began in
1950 when Earth was populated with 2.5 billion
An American company operating in transmission and sale of electricity, AES, simply abandoned its work in 2001 in Orrisa,
one of the poorest states in India, because it was not able to realize sufficient profits. A leading world company in the field
of water supply, Suez, simply terminated supplying water to more than a half of Manila as it could not pay debts and realize
profits. A British company, National Express, simply broke a contract in 2002 that it had in the province of Victoria, Australia,
leaving the local bus company with a 55 million dollar debt. These are not exceptions, the basic goal of a private company
is enlargement of its equity and if the circumstances are not right for that the private company simply terminates its business
and searches for more profitable activities.
people. Forty years later, in 1990, there were 5.3
billion people. According to some projections, by
2025 there will be 8.3 billion people, and by 2050
a critical 10 billion people on this planet. A trend
towards the concentration of people in large cities
is more and more pronounced. In 1950, 29% of
the world's population lived in cities, while in
2000; this number had grown to as much as 47%.
In 1950, only 78 cities in the world had more than
a million inhabitants, while in 2000, there were
408 such cities. Large cities are in need of greater
quantities of water within a relatively small area.
After use, this water becomes waste which is let
out into the environment and can pollute the
scarce remaining water reserves.
Water consumption increases constantly.
Although a human being needs between 1 and 5
litre of water a day to sustain life, depending on
climatic conditions, the actual consumption is
much greater. To maintain a good quality of life
and hygiene in urban conditions a minimum of 40
to 50 liters of water is consumed daily per person.
The consequences of drinking water
shortages confirm a deep division in the world
between the rich and the poor (the developed
versus the undeveloped). The rift between these
segments will continue to widen in the future.
Developed countries will probably rectify some of
the current situation as they anticipate stagnation
in population growth, further development of
'clean' technologies, building waste water
purification plants, environment-friendly waste
disposal, introduction of environment-friendly
agro-technical methods and the building of
desalinisation plants. The situation with water with
respect to the undeveloped world, could well
worsen in the future, as they are going through a
cycle of demographic explosion that will put
pressure on living and health standards and in
extreme situations, people may face starvation or
poisoning because of shortages of water and/or its
pollution.
Bosnia and Herzegovina is relatively rich in
water resources. This, among other things, is
indicated by the number of rivers on its territory; the
Bosna, the Neretva, the Vrbas, the Una, the Sava and
the Drina. There are a number of natural lakes and
impounded reservoirs created by the construction of
hydro-power plants on the Rama, the Neretva, the
Trebisnica, the Drina, the Vrbas and the Pliva. These
resources are vital to BiH's development for a
number of reasons. The potential offered by hydroenergy is most worthy of attention. Thanks to this
13
fact, BiH is today the only country in the Balkans
which has a surplus of electricity. Waters in BiH are
also relatively free from pollution. This opens
opportunities for more investment into the
production of drinking water as one of BiH's
strategic natural resources.
3.3 Electricity Production - the potential
for recovery and long term gains
Successful energy management is a general
precondition for the economic and social
development for every society, and this is
fundamentally true of Bosnia and Herzegovina.
Enormous efforts have lately been invested in BiH,
and its entities, to ensure as much energy as
possible is secured from local resources and thus
energy dependency on others, is reduced.
Coal remains the main energy resource in
Bosnia and Herzegovina. Coal production in the
1980s surpassed 13 million tons. Performance of
the local coal mines in this period was at
European levels. In the last 50 years, considerable
changes have taken place in the BiH energy
sector. Energy consumption was considerably
reduced because of the conflict and the transition
to the market. As a result of these events, coal
production today is between 30% and 40% of prewar production levels. Yet, we should have in
mind that water-based energy plants are designed
for maximum use and their true potential in BiH
has yet to be exploited. Their export potential in
a world of growing electrical energy demand
could provide a strategic competitive advantage
for BiH13.
Aside from coal and water-based resources,
the electricity sector also includes nonconventional resources, primarily solar energy. It
is well known that BiH abounds in these resources
and their potential for growth including export
supply is high. Hydro-electricity provides the
strongest potential. We should also have in mind
that the average number of sunny days in BiH is
also well above the European level.
Energy management today has an extremely
important impact on the development of the social
system and on changes in the natural environment.
The level of social development is directly
correlated to the quantity of energy produced.
Impacts on the environment are also strongly
related to this. Therefore, it is important to address
two questions: First, what is the quantity of energy
produced in our country? And second, what
BH is already regularly exporting electricity to the neighboring countries - Croatia, Slovenia, Serbia, Montenegro etc.
17
measures are necessary in order to increase it in an
environmentally sustainable manner?
3.4 The Dynamic
Telecommunications Sector
What was once a fairly stable and sedate,
state-owned and monopoly-dominated sector has
worldwide become a dynamic engine of growth.
Competition aided and abetted by privatisation,
new entrants and perhaps most significantly rapid
technological change has grown exponentially.
The new competitors that have appeared are no
longer telecommunications companies, but
horizontally integrated conglomerates including,
cable TV operators, utility companies, software
producers, financial institutions - indeed, even the
French state water supply corporation has entered
the telecom sector. Telecoms spurred by
continuing technological innovation has reached
the pinnacle of political priorities.
Across Eastern Europe the demand for
telecommunications services continues grow at
dizzying rates. In countries such as Albania, where
land lines are rare and links bad, satellite networks
have sprung up in an attempt to catch up with the
expansion of the long suppressed demand. But this
growth is not confined to basic services. Several
years ago, Russian connections to the Internet were
notorious for their unreliability. Today, however,
connection quality and speed are close to Western
standards. Even the most lagging transitional
countries are not been spared this hunger for new
services. For example, in 1900, Russia had only
1,000 international telecommunications channels
and one international exchange - in Moscow.
Leningrad serviced an area of 12 million inhabitants
with only 11 channels. Today, Russia has 45,000
international channels and all regions, and
practically all telephones, have international access.
In some countries, such as Poland, dozens of
private operators, often supported by Western
companies, directly face the one-time state
monopoly in competing for subscribers.
In spite of technological innovation,
telecommunications still contain an element of a
natural monopoly, in the form of the basic fixed
line network. A new operator must be in the
position to be able to connect to the existing
network, but inevitably, this infrastructure is
owned by the former monopolist with whom the
new operator has to compete. Many former state
monopolies have abused this control; either
overtly, like the Polish TP SA, who smothered
competition directly, blocking new competitors
from accessing their network; or implicitly through
18
controlling the allocation of access lines. Equally,
business users are rarely keen to change their
telephone company if they have to change their
number because they risk losing customers and so
things often remain as they are.
Bosnia and Herzegovina is going through a
phase of developmental transition. The
telecommunications sector is relatively well
undeveloped. A stimulus to its development was
given
with
the
separation
of
the
telecommunications and the postal service
providers. Telecommunications facilities and
installations have been considerably renewed and
modernized, powerful digital transmission systems
and digital mobile telephony for GSM standards
have been built, stet large on before ISDN
technology has been introduced since 1999, and
integrated enterprise recourse planning systems
have been introduced to support the management
and finance controll processes.
There are three companies in BiH providing
services in the domain of telecommunications: BiH
Telecom,
RS
Telecom
and
Croatian
Telecommunications Mostar. Relations in this
sector at the state level are regulated by the
Communications Regulatory Agency (CRA). The
level of service is relatively good, and thanks to
roaming, direct access to a large part of the world
is offered. Mobile telephony is also going through
expansion as well as internet networking. All this
will ensure better links with the world, increases
in the scale, types and quality of services, but also
by improving the profitability of the
telecommunications sector.
4. DETAILED REVIEW OF
THE KEY SECTORS
4.1 The Energy sector in BiH
Background and Key Issues
The privatisation of energy companies in
transition countries is largely complete, particularly
in the case of small and medium size enterprises.
There are some delays in the case of larger
corporations, with differences between countries.
BiH belongs to the countries in the region which
have implemented about 70% of planned
privatisation. The majority of large companies are
still fully or partially in state ownership (about
35%), the approach adopted is generally for
restructuring to be carried out before privatisation,
and this matches with established best practice.
Some of the remaining large companies represent
natural monopolies and considerable attention
must given to conducting social and economic
impact analyses in order to fully appreciate the
consequences which will arise from their
privatisation. Impacts will be felt by consumers and
the state as the former owner, and other enterprises
including those in neighboring countries. Given this
reality, it is necessary to analyse in detail, the
implications of the method and speed of the
privatisation process for these companies.
As noted, a natural monopoly is held by a
company which can produce the total output at
lower costs than several companies, and under
such conditions, greater efficiency can be secured
if there is only one large company rather than
several operating within the market. Privatisation
has been carried out so far in many countries, with
different levels of coverage and utilizing a variety
of methods. In Eastern Europe, Hungary and
Poland have gone the furthest in the privatisation
of energy companies and it is instructive to
examine their experiences in some detail.
Since the energy sector inherently possesses
elements of natural monopoly, it is vital we
determine the most desirable regulatory
framework. A first question is; who should be
operationally responsible for regulation? And there
are two generic solutions to this: (a) an
independent regulatory agency, or (b) a
responsible ministry. Experiences from other
countries show that it is much more favorable to
establish a regulatory agency which is
independent from the relevant ministry and
external political and economic influences. It is
important to recognize that the forms out
influence to be resisted often include attempts by
the monopolist being regulated to gain effective
control or 'capture' the regulatory agency.
A second question is the nature of price or
economic regulation; three distinct alternatives are
put forward:
1. Control over the rate of profit, a method used
commonly in the United States which
involves setting a ceiling or threshold above
which penalties apply on the profits to be
made as share of, typically, the capital
employed.
2. Price-ceiling determination, an approach which
specifies the maximum rate of change in enduser (consumer and commercial user) prices
paid. This is a method pioneered in the United
14
15
3.
Kingdom by Professor Stephen Liittlechild,
typically, with increases being linked to the
consumer price index less or plus a judgmental
factor to reflect efficiency savings or investment
needs over and above the rate of inflation
(some times referred to as a 'CPI - X approach').
Profit distribution limitation, being the
limitation of profits to be distributed to
shareholders, commonly specified by a
threshold defining extra profits. In contrast to
method one, profits are permitted but have to
be retained within the company.
Considering that there is significant
inefficiency in the management of generation of
electricity in BiH, a price-ceiling determination is
considered the most favorable method of
economic regulation. This is also the increasingly
generally favored approach in that the welfare
gain is directly linked to prices paid by consumers,
and given the high level of transparency the
control is difficult to evade.
Turning to the process of privatisation of the
energy sector, itself five key questions should be
addressed:
How rapidly should the division and restructuring of the sector be carried out before
privatisation, including the establishment of
functioning regulatory agency?
How much will prices be permitted rise after
privatisation?
What return rate on the invested capital is
considered a normal return?
In what way will redundancies in these
companies be taken care of?
How can an open energy resource market is
established, and what structural reforms are
required for this?
At the beginning of this analysis, it is worth
noting several trends which are pertinent to the
region:
1. The average growth of energy consumption in
the region is between 2 and 5% per year14. For
the period 1989-1998, energy consumption
grew in Poland by 8%, in Slovenia by 20%, in
Slovakia by 56% and Romania by 84%15.
2. All countries in the region have insufficient
energy potential from renewable sources, such as
water and wind generated energy. This also applies
to BiH's neighbours, and in particular to Croatia
and Serbia and Montenegro.
In Croatia, the annual level of electricity consumption grows by about 4% (HEP report for 2002).
Reform of the Electricity Market In Transition Economies: How to Avoid Traps of Deregulation, Martin Siner and Jon Stern
19
3.
4.
5.
6.
7.
Croatia imports about 24% of its total
electricity consumption (3,724 Gwh per
year16), while Serbia and Montenegro import
about 5% (1,711 Gwh a year17). This trend is
growing at a fairly constant rate.
There are many agreements at the
international level related to the reduction of
pollution by means of reducing the production
of energy from coal, oil and other sources
which contribute to the pollution of the natural
environment (chiefly the Kyoto agreement).
BiH has the largest hydro potential per capita
in Eastern Europe.
BiH is second in the region in terms of exports of
electricity after Bulgaria18 and with only about
40% of expected hydro capacity exploited.
Collection rates for electricity supplied are
good (at about 87%).
It can be concluded on the basis of these points
that BiH is rich with renewable energy sources
whose importance will grow in the coming years.
Returning to the five key considerations noted
above; in the majority of European countries, the
energy systems are divided into three areas:
production, transmission and distribution. Attempts
are currently being made to divide the current
electricity management in BiH into these three
segments. This process attempts to address the
Privatisation model
Management agreement
Services agreement
Cession of facilities
Concession
Privatisation of
company capital
- there are no effects
20
Restructuring
Regulation
Privatisation
Liberalisation
Market strengthening
1.
2.
3.
4.
5.
Management agreement
Services agreement
Cession of facilities
Concession
Privatisation of equity capital
Each of these models has its advantages and
disadvantages. The table below summarizes the
characteristics of each model of privatisation by, the
economic efficiency of companies, new investment
needs, transfer of know-how and applicability.
Economic efficiency
New investment
Transfer of know-how
Applicability
*
*
**
**
*
*
**
**
Yes
Yes
Conditional
Yes
**
**
**
Yes
* moderate effects exist
** strong effects exist
questions about restructuring and market formation.
The follow on questions which arise are; which of
these parts of the electricity system should be
privatised? and in what way, and to what extent? In
different countries, this procedure and the
subsequent regulation of the constituent parts of the
system has been accomplished in different ways.
Before beginning the process in BiH it is likely
to be necessary to merge the three existing vertically
integrated companies (EP Republike Srpske, EP
16
17
18
19
Herceg Bosne and EP BiH) into one company
which would operate on the territory of the entire
country19. Only after this would the privatisation
process be commercially realistic, given the need for
the new enterprise to achieve economies of scale
sufficient to compete in the regional market place.
Thus changes in the electricity sector should be
undertaken in the following order:
There are five basic models for the
privatisation infrastructure companies:
The table above shows that the full privatization of company capital is the only relevant
model of privatisation of the energy sector
considering its strong effects on all four criteria.
Privatisation can then be carried out by
means of applying several essentially different
divestiture options:
Public sale of stock
Sale to institutional investors
Sale to financial investors
Ibid
Annual Report for 2002 by Electricity Management of Serbia and Montenegro
OHR Report - www.ohr.int
Note that this process is likely to begin shortly.
Sale to strategic investors
Distribution (assignment) to local investors.
The table below evaluates the potential
energy sector privatisation methods.
Privatisation model
Public sale of stock
Institutional investors
Financial investors
Strategic investors
Local investors
- there are no effects
condition and price, while Government could focus
on management and production. In time through
the concession arrangements, there should be a
number of local generating companies that would
compete for both local and international business.
Economic efficiency
New investment
Transfer of know-how
Applicability
*
*
*
**
**
*
*
**
*
*
**
-
No
Yes
Yes
Yes
Yes
* moderate effects exist
** strong effects exist
From the above, the greatest value for the
State can be obtained from the sale of electricity
companies to a strategic investor, either local or
foreign.
The next factor that should be taken into
consideration is the likely social impact of
privatising production and supply of electricity.
The policy of privatising energy companies
should be based on three basic elements:
1. Partial and necessary restructuring of the
electricity sector before privatisation;
2. Definition and development and efficiency
goals to be achieved through privatisation;
3. Reform of the market and pricing policies,
which in many cases implies growth of existing
electricity prices (price based on the coverage
of total costs, which is not the case now).
Restructuring should serve to rehabilitate the
business and lead to the fundamental restructuring
of EP BiH. Restructuring should be based on
vertical separation, i.e. separation of production,
transmission and distribution. In the domain
of production several mutually independent
production companies need to be established.
This will enhance competition between the
production companies, but this does not
necessarily mean reduced electricity prices. What
is certain is that productive efficiency will be
enhanced. Surface coal mines should remain
integrated with the companies using their coal for
electricity generation. This would ensure a more
efficient business for both the coal mines and the
energy production companies.
The State should retain majority of control/
ownership in the areas of transmission and some
generation, as opposed to distribution that could be
offered to strategic investors, either local or foreign.
In this way citizens would have local distribution
companies that would be enable to purchase
electricity from any producer at the best possible
We recommend distribution should be
organized through a number of companies on a
regional level. Privatisation of distribution will also
lead to an increase of efficiency in this part of the
electricity system. Transmission of electricity
would be organised as one company, which
would operate on the whole territory of BiH and
would be owned in full by the state. In this way
the state could retain an effective control over the
production and distribution companies.
The next factor that needs to be considered is
what social impacts will the privatisation of the
production and sale of electricity have within BiH?
Considering that a very sizeable proportion of the
population live in or close to the poverty line, it will
be necessary to make a specific assessment of the
effects of privatisation on this segment of the
population. It is generally known that electricity
companies owned by the state had an important
social role and that they often produced losses, failing
to cover even their average production costs. The
current situation in the BiH is such that households
spend on average between 10 and 12% of their
overall income on energy. In comparison with OECD
countries, where the population spends between 2
and 3%, we can conclude that the population of BiH
is much more vulnerable to price increases than the
populations in developed countries.
Therefore, privatisation of the electricity
sector should primarily enable price reductions for
household consumption.
The Polish and
Hungarian experiences show that prices in these
countries grew on average up to 25%. Prices have
risen in most other countries which have carried
out privatisation - Finland, Argentina, Chile and
Australia.
Another factor which needs to be kept in
mind is price changes for commercial customers.
Companies in BiH pay nearly the most expensive
unit rates for electric in Europe and this considerably
diminishes their competitive advantage in relation to
21
neighboring countries. If the price of electricity
increases for these large consumers also, the
companies will be still less competitive. And this will
certainly worsen the overall socio-economic situation,
ultimately in turn causing reduced consumption by
households, implying still further pressure to increase
prices again. It seems inevitable that prices will rise in
the short term at least simply because prices will be
based on the principle of full cost recovery.
An increase in business efficiency will
inevitably cause a reduction in the number of
employees in the electricity sector. There are 6,095
employees in the BiH electricity production sector,
while the other two companies employ 4,000
people. It is known from the experiences of other
countries that the average rate of layoffs is
between 25 and 40% of the total staff. Provisional
estimates suggest that the number of employees in
BiH would be reduced by about 30%, which are
about 3,000 people. A sum of money would have
to be provided from the national insurance funds
(e.g. 5%) to take care of redundancies and ensure
training and employment in other sectors.
With regard to the consumption of electricity by
the general population, a 13.5% reduction was
recorded last year, while gross consumption
increased by 0.1%. This is indicative of a saturation
of demand in the market. This leads to the conclusion
that surplus electricity will probably be exported in
the future, bringing considerable revenues to the state
and eventually the operating companies.
The privatisation of natural monopolies has
many detractors in the countries in which it was
carried out. Many start from the assumption that
the right to energy is a basic human right and that
production, transmission and distribution of
electricity should be left to the state. This is
supported by the experience of California in 2002,
was without electricity for 38 days because private
producers could not agree with the state on the
conditions under which they should supply
electricity. There is also the possibility of creating
an informal oligopoly between production and
distribution companies, which may again lead to a
conditional monopoly in the electricity market.
It is necessary to assess the dynamics and
manner of privatisation of the electricity sector in
BiH in detail and with the participation of all
interested parties. This is the only way optimal
solutions for the privatisation of this extremely
important sector can be found.
Specific International experience
During the last decade, regulation of the
electricity sector has changed fundamentally in
many developed - and some less developed,
22
countries. Economic and technological developments have stimulated an evolution of regulatory
systems, changes of ownership structures through
the privatisation process, and changes in the
structure of the sector itself. Since transmission and
distribution networks are natural monopolies, the
whole electricity sector can be considered to be
dominated by monopolistic pressures. Countries
have adopted two basic models in this sector:
State integrated monopoly, and
The regulation of private companies.
Many countries (for example, Ireland, France,
Greece and Italy) consolidated and nationalised
their resources in the field of electricity in the form
of state monopolies, assuming that state
monopolies would operate with the primary goal
of ensuring social welfare rather than profit. In
Germany, there are regional state monopolies.
Another model is found in the USA and Japan,
where private companies are regulated on the
basis of costs and indicators of profitability of the
invested capital. In the largest number of countries,
regardless whether this sector is centralised, state
owned or private, electricity production and
distribution companies always remain vertically
integrated. But there are variations.
Approaches to liberalisation and the degree of
liberalisation in this sector are considerably different
in the countries that have carried out reforms.
Essentially, the reforms have been directed at:
A functional division between generation and
transmission networks,
The introduction of competition in electricity
production, and
Expansion of access to transmission
networks.
In advanced stages, reform includes the
formation of an electricity market and the guarantee
of free choice of suppliers of electricity for
consumers. In the final stages of reform, regulation
of tariffs for companies operating in transmission
and distribution (based on costs and indicators of
profitability of invested capital) has been replaced
by establishing maximum tariffs for transmission.
Apart from the differences in the degree of
liberalisation achieved, there are considerable
differences between countries with regard to the
degree of participation of private capital in the
sector. The decision to carry out privatisation does
not always coincide with the degree of
liberalisation accomplished. Some of the countries
with a considerable degree of liberalisation (e.g.
Norway) did not proceed to privatisation at all,
while privatisation for some other countries was
the primary goal of reform (e.g. Great Britain). In
some countries (e.g. Japan), the electricity sector
was historically predominantly state owned.
In many countries which have included
privatisation within their electricity reform
programmes, the order in which privatisation and
liberalisation were carried out differs. In Great
Britain, privatisation preceded liberalisation, while
in Scandinavian countries, liberalisation preceded
partial privatisation. As a whole, there is a
tendency to privatise production and the sale of
electricity, both through an active privatisation
programme and through allowing access to new
private production companies.
Prototype models of organisation for the
electricity sector in the transition period
With regard to the reform process, a great
number of countries have been or are currently
going through a transformation stage, indeed the
position in those most advanced in this process is
constantly evolving. With different institutional
and social limitations, transition in many countries
from a vertically integrated sector model was
carried out into a competitive model by means of
gradual adjustment of different market structures.
Basic prototype models for the reform of this
sector, which have been employed by a large
number of countries at different stages of reform,
along with the key advantages, are as follows:
Vertically integrated model - guaranteeing a
reliable supply of electricity with regulatory
price controls.
Independent generator model - satisfying
growing demand for electricity thanks to
guaranteed state agreements with independent
producers within compressed vertically
integrated models. Independent enterprises
compete for contracts guaranteed by the state.
Sole purchaser model - creating competition
between producers but preserving consumer
price controls. Competition for electricity supply
contracts for a sole (state controlled) buyer.
Competition model - creating a competitive
market for producers and consumers of
electricity. Competition in market place for
both wholesale and retail energy. Regulated
issuance of licenses for participants in the
market.
C ompone nt s of e ac h i ndi v i dual pr ot ot y pe :
Vertically integrated
model
Independent
manufacturer
model
Sole purchaser
model
Competition
model
Electricity
production
Within one company
Cost optimisation
mechanism
On the basis of
cost data
Within one company
On the basis of
+
cost data
Some participation of
+
independent producers Private competition for
contracts for dependent
producer
Independent producers Competition for
delivery contracts
Independent producers On the basis of
competitive prices
Transmission
No access to
other participants
Access through
one supplier
Access through
one supplier
Access for
other suppliers
Price
mechanism
Adjustable tariffs
Adjustable tariffs or
determined by means
of a contract
(for independent
producers)
Tariffs determined
by contracts
Competitive prices
on a single market or
bilateral agreements
A dv ant age s and di s adv ant age s of i ndi v i dual mode l s :
Vertically integrated model
(Russia, France)
Positive factors
Retention of vertically integrated
structures within one company
Price control
Independent
manufacturer model
(South East Asian countries)
Sole purchaser model
(Hungary)
Attraction of private investors in
the presence of minimum change structures
Retail price control
Attraction of private investors in
the presence of minimum change structures
Retail price control
Competitive model
(Scandinavia, England
and Wales)
Strong incentives for increased efficiency
Negative factors
Absence of economic
incentives to increase efficiency
For state companies - necessity for
state funding of the sector
Necessity to grant long term
state guarantees
(high risk for state budget)
Necessity of concluding medium term
contracts on the wholesale market because of
limited possibilities of changing tariffs on
the retail market
Necessity for possession of considerable
structural information
Upward correction of price levels to
economically justified levels
23
4.2 The Telecommunications Sector
Telecommunications in BiH
The telecommunications sector in BiH is still
considered to be relatively under-developed.
According to data for the end of 2002, the
penetration rate for fixed lines in Bosnia and
Herzegovina was 27%, in Serbia and Montenegro
22%, in Macedonia 10%, and in Croatia 38%. If we
compare the penetration data with mobile services
at the end of 2002, it amounted to 22% in BiH, 8%
in Serbia, 8% in Macedonia, 30% in Croatia and
54% in Montenegro.
This data indicates that there is a still
considerable potential for growth in BiH, and thus
the sector is an attractive target for strategic investors.
In order to attract strategic investors, who could
ensure a wider spectrum of telecom services and the
development and rehabilitation of the physical
network, and specifically raising service levels to
those in the European Union, it is necessary to
undertake a series of interventions. According to a
decision on BiH Telecommunications policy adopted
by the Council of Ministers in 2002, the
Government's intention is to achieve the following
by the means of a balance between controlled
liberalisation and appropriate regulation:
a) Continuous
and
accelerated
development of the sector with a view to ensuring telecommunications services operate
completely under competitive conditions and
at a defined level of quality for all BiH citizens;
b) Attract investment with a view to promoting the
development of the telecommunications sector;
c) Further development of the regulatory
framework in order to establish competition;
d) Realization of mechanisms which will satisfy
social policy objectives;
e) Realization of maximum benefit for the State
and citizens from the process of business
operations and privatisation of the sector.
Reform activities being undertaken
The reasons for the reforms, which are
already being put into practice, arise from the
wider processes of: globalisation, privatisation
and liberalisation. The emphasis of these
developments is a change in the generic role of
telecommunications, in particular at a time of the
economic transition and social restructuring.
The globalisation process inevitably imposes a
need to maintain the development of the
technological capacity of telecommunications in the
country in order to enable quality communication
with others, in order that systems continue to track
developed world standards.
24
The liberalisation process, which emphases
the primacy of end users, should continue to be
rolled out. The telecommunications policy has
already liberalised all speech and non-speech
services except speech services on the
international level. And it is foreseen that this too
will be liberalised by the end of 2005, and this will
requires a revision of prices (primarily in local
versus international terms).
The privatisation process, which has been
relatively rather long in the preparatory sense
(valuation of enterprises, preparation of
information memorandums) in terms of defining
the privatisation policies for important economic
infrastructures (decisions of Entity governments and
privatisation agencies with regard to the models,
relations, role of the strategic partner etc), has
begun nevertheless. Telecoms in the FBiH have
been privatised to the extent of 10% (certificates)
and extent of 20% (vouchers) in the RS.
The views of the general public, has become
clearer recently, which although not formal
politics, is something that formal politics all the
same, must acknowledge. Several key messages
are emerging:
First that privatisation should continue.
Second it should be implemented gradually.
Third that the majority owners should be
primarily interested in development of the
enterprises (employees, certificate owners,
state, etc.).
In the initial stage of the transition of the
telecommunications sector, the Law on Telecommunications, which was adopted in 2002 at the
state level specifies the Council of Ministers as having
the responsibility for drafting and implementing
policies for this sector, while the Communications
Regulatory Agency CRA is responsible for regulating
telecommunications networks and services, including
issuance of licenses, specifying prices, interconnections and laying down the basic conditions for
ensuring common and international communications
standards are met.
The post-war development of this sector in
BiH was characterised by monopolies held by the
three operators in a divided market. The operators
in the Federation of BiH are PTT BiH Sarajevo and
HPT Mostar and PTT Republike Srpske in the RS.
Whilst PTT BiH Sarajevo has based its post-war
development on its own resources, HPT Mostar did
so on the basis of an investment made by HPT
Zagreb. The result of this cooperation was the
formation of a joint company for mobile telephony,
Eronet Mostar, while services of fixed telephony are
rendered by HPT Mostar. Mobile telephony services
of the second company in the Federation, PTT BiH,
remain together with fixed telephony within the
framework of one legal entity. The same is the case
in the Republika Srpska with Telecom Srpske.
A decision on Telecommunications Sector
Policy in BiH limited the number of operators to
three. In accordance with this decision, state
owned mobile telephony operators are allocated
licenses free of charge (BH Telecom and Telecom
Srpske have secured them already), and the
proceedings for the allocation of the third GSM
license are in progress. The companies which
were allocated licenses committed themselves to
covering at least 80% of the BiH territory with their
services. Due to legal proceedings conducted over
the ownership structure of Eronet, this operator
currently operates without a license.
The current position of the Telecom Sector
and the privatisation process
The ownership structure of the telecommunications sector does not follow the same pattern
throughout the country. HT Mostar has been in
mixed ownership since 1996. The State, to be
precise, owns the majority package of this company
at 63% of the stock. But, co-owners of the company
are two companies from the Republic of Croatia,
HT Zagreb with 30% and HP Zagreb with 7%.
If we set this fact aside, preparation for the
further privatisation of the companies began in
2002, with the separation of PTT BiH and HPT
Mostar into telecoms and postal companies, which
meant the division of property, obligations,
managerial structures and employees, drafting
initial balance sheets, the revision of financial
statements in accordance with international
standards by independent auditors, and transferring
obligations with regard to subsidised postal
operations and so forth. The separation of telecom
and postal services into separate legal entities in the
RS was achieved much earlier.
The first formal steps to divestiture were made
with the privatisation of a proportion of the
companies' share capital in the form of a public
offer of 10% of the equity in the Federation of BiH
(BH Telecom and HT Mostar), and 20% in the case
of Telecom Srpske. It should also be noted that
Telecom Srpske was granted a pre-privatisation
credit by the EBRD, with an obligation to start the
privatisation process by 2005.
The socio-economic impacts of privatisation
It is clear that the privatisation of the telecom
sector will have an impact on the socio-economic
position of the citizens of this country. These can
be viewed from at least three perspectives:
a)
b)
c)
The impact which privatisation has on the
employees in the sector
The impact on the living standards of the
population;
The impact on general economic and general
social development in BiH.
It is certain that privatisation will, above all,
result in the identification of a staffing surplus in
the current operators, and pressure to reduce the
number of employees to the levels of other
European countries. The direct consequence of
this will be, whether wanted or not, is the laying
off of some of the employees working in the
sector today. It is clear that, in the competitive
European environment, there is one employee in
the Telecom sector per 300 to 450 telephone
connections. In Bosnia and Herzegovina, the
number of connections per one employee is much
smaller, particularly so in HT Mostar, but also to a
considerable extent in RS Telecom, too.
A considerable percentage of citizens share the
conviction that privatisation could lead to an
increase in unemployment. According to a public
poll conducted for this study, 43.4% of citizens at
the state level share this conviction (40.8% in the
Federation, 47.7% in the RS and 33.3% in the Brcko
District).
Competition in the telecom sector implies this.
However, it is also not certain that the change in
ownership and management objectives, albeit with
some service improvements, will not also have
negative effects in terms of putting additional loads
on household budgets. Citizens themselves share
this conviction to a considerable extent. An opinion
poll indicates that 36.5% of citizens of Bosnia and
Herzegovina have fears of a negative impact. These
fears are somewhat more intense in the RS.
As regards the impact of privatisation on the
longer term overall economic development of the
country, it will most likely be positive.
Proposed privatisation models and reform of
the telecoms sector as a task for the future
Reform goals: The goals of reforms are
building the necessary information and
telecommunications infrastructure, and the better
matching of supply to demand; more appropriate
services provided at a satisfactory level at
acceptable prices.
This implies raising the level of penetration of
fixed and mobile users with reductions in the
differences with other countries.
Activities: The road into reform requires both
a sound legislative and regulatory environment.
This means that the activities of the CRA, which
25
now more than ever, are vital to securing the
reform goals, need to be continued and
intensified. The Council of Ministers needs to
update and reformulate the telecommunications
policy, linking it with information and internet
technologies, which will encourage a broader and
fuller application of ICT in general.
In order to enjoy the full benefits of ICT there
will have to be appropriate infrastructure,
primarily highway, and later access points, which
is the task of the newly constituted telecoms
operators with their considerable market power
and highly commercially favorable environment.
Reform sponsors: these should include:
The Council of Ministers, via the Ministry of
Transport and Communications,
Entity
Governments,
via
responsible
ministries,
The Communications Regulatory Agency,
The operators and service providers
C ur r e nt pr oje c t s and i nt e r nat i onal as s i s t anc e :
Projects that need to be inaugurated in the coming
period are as follows:
An Information-communications highway at
the BiH level (fixed telephony operators are
planning to build their own backbone
networks using MPLS technology, with
appropriate connections in 2003);
Connection with neighboring countries using
optic cable (regional highways);
Development of a European Communications
and Information Highway (EICH) Node in
BiH (probably Sarajevo)
A wideband CaTV network (for services:
video, fast internet and IP telephony), with
master and regional nodes interconnected
with optic cables with digital transmission at
the state level.
Which privatisation model to apply?
The issue of privatisation of the telecom
sector is often in the public focus. In this context,
several questions deserve special attention:
Should privatisation be carried out as a once
and for all event, or gradually?
Should telecommunications companies be
sold on the international market or should
local capital be invested in them? Or,
possibly, combine these two possibilities?
Should citizens participate in privatisation, or
should they be excluded from the process
altogether?
20
26
Many people share the conviction that
privatisation is not a task to rush into. This means
that gradual implementation is the recommended
route. Citizens have a negative perception of the
privatisation process in BiH thus far. According to
the public polls conducted for this study, as many
as 70% of citizens have objections to certain
proposed privatisations.
In response to the questions; 'How should
privatisation be carried out? Should majority shares
in telecoms be sold to international investors or
local companies?', only 29% of respondents think
that foreign buyers should be selected.
But, citizens do have a positive conviction that
they themselves should be given an opportunity to
take part in the Telecoms privatisation (along with
those of other natural monopolies).
Next Steps: priorities for the sector
Rebalancing tariffs and liberalisation of
services: The current tariff structure is typical for a
regional market before privatisation. It is
characterised by very low prices for local calls,
which are often internaly subsidized. Prices are
still calculated on the basis of impulses (only for
fixed telephony) and not on the basis of
minutes20.
Comparing this to international practice, we
arrive at the conclusion that tariffs need to be
brought to a level which is comparable to other
markets, preparing the market for liberalisation,
and preventing considerable loss of market
participation in the liberalised market, and
ultimately, the reduction of high international call
tariffs. This means that rebalancing tasks should
be carried out to achieve the following:
Draw up a more market oriented tariff
structure;
Determine better cost structures for every
service;
Meet users' demands for every service;
Promote operational performance;
Optimise profit on the basis of services
offered.
In accordance with the generally accepted
opinion that telecommunications services are best
offered in a competitive environment, the goal of
telecommunications sector policy is the full
liberalisation of services. This creates the right
conditions for private investment into public
networks and services. Taking into consideration
the level of development and inadequate
Most of the operators are in the process of price restructuring and adjusting to EU standards.
penetration in fixed telephony, the liberalisation
of fixed telephony services should be carried out
in stages:
The liberalisation of non-speech services
(data transfer and internet services);
The liberalisation of local telephone services;
The liberalisation of international telephone
services.
Privatisation Process: The following important
issues are pertinent and must be taken account of
in the implementation and management of the
process:
The commercial environment in which the
newly private companies will operate (local
business environment, world economic cycle,
condition of international telecommunications
market);
Market and tariff regulation (regulation of
competition, readiness of the government to
change tariffs);
Preparation of companies for privatisation
(incorporation, corporate governance and
information preparation and disclosure
standards);
Definition of obligations of strategic investors
with regard to investment and employment
(level and time period);
Criteria for bidder selection (price relations,
investment, employment, credibility);
Size of the stock package that will be offered
(majority, control, at once or gradually);
Selection of advisors for privatisation
transactions;
Optimal timing of sale.
Government decisions on divestiture
The initial step requires a decision to be made
on the sale of Telecoms companies to strategic
investors. These decisions will draw the attention
of both of the local public and international
community, and the following considerations are
required:
a) Carrying out the sale on the basis of
government decisions or special laws
adopted by the respective parliaments;
b) Sale of all companies in a package (BiH),
only some (in the Federation of BiH), or
separately;
c) Should fixed telephony be separated from
mobile telephony where necessary (BH
Telecom, Telecom RS) before the sale;
d) Further issues; the size of stock package, and
the definition of the obligations of the
strategic investor.
The International experience
Experience of the privatisation of traditional,
vertically integrated monopolies in the field of
telecommunications in Western Europe shows that
after a series of concrete measures are undertaken,
monopoly structures wane and disappear. Though
it must be acknowledged this is often more formal
than real, particularly in the early stages, with the
former monopolists retaining substantial market
power. New approaches in the field of Telecoms
services (in the USA after 1996, and in the majority
of European countries after 1998) tend to
emphasize re-regulation of the sector, contributing
to the easier entrance of new competitive
companies. This is differentiated from the existing,
traditional regulatory approach which is more
concerned with rigidly specified amounts of
compensation for rendered services and the rate of
return for invested funds, in terms of overseeing
cases of natural monopoly.
Privatisation has become the most
widespread method of implementing reform in the
telecommunications sector, freeing companies
from limitations imposed by former requirements
to operate as state owned companies or as strictly
regulated monopolies. The structure, organisation,
means of financing and commercial environments
of telecom companies have been transformed
considerably. Political commitment and dedication
to liberalisation and reform of this sector must
be comprehensive and sincere; otherwise
privatisation will not yield the desired results.
Before the beginning of the privatisation process
in the telecom sector, governments must modify
all laws and provisions in areas such as rules on
foreign investment, basic telecommunications
policy,
frequency
allocation,
technical
compatibility, universal services and pricing
structure. New laws must be introduced in order
to ensure relocation of staff, changes in
management, valuation of property and prices,
reward and incentive schemes and accounting
systems to enable former state bureaucracies to
become efficient independent corporations.
Sadly, for some countries, privatisation
represented little more than a tender-based license
sale offering exclusive rights to protected markets,
for a period in which the return on investment
could be ensured, and an acceptable rate of return
on capital investment could be generated.
Privatisation conducted thus far in this sector, has
in the main, been successful. Though it must be
recognized stockholders, governments and consumers have profited to varying extents. A further benefit
of privatisation of international telecommunications
27
(somewhat like privatisation in general) is reflected in
the fact that the whole process has brought millions of
new investors into the international business system.
The scope and distribution of privatisation of
dominant operators has been substantial, not least
in the developing countries as the following
chronology shows:
1990 - Malaysia, Argentina, Mexico, Peru
1991 - Venezuela, Estonia
1992 - Puerto Rico, Lithuania, Ukraine
1993 - Latvia, Korea, Israel, Singapore
1994 - Kuwait, Pakistan, Hungary, Turkey,
Czech Republic
1995 - Indonesia, Thailand, Columbia, Ivory
Coast, Taiwan, Panama
1996 - Brazil, Nigeria, Paraguay, Poland
1997 - Ecuador, Madagascar, Guinea, Russia
In terms of outcomes, the picture is more
mixed than in the advanced industrial economies.
For example, the privatisation of ENTEL in
Argentina yielded only moderate results. The sale
to a foreign investor brought a considerable capital
receipt to the government, enabling it to reduce its
foreign debt and attracted new foreign investors.
Indeed, the successful sale signaled a new
decisiveness and dedication on the part of the
government to privatisation and reform - and this
act strengthened its credibility. Yet, critics have
argued that the government guaranteed the foreign
investor monopoly profits in order to make the
sale more attractive, thus raising the price of the
tender, at the expense of other considerations. The
government thus showed more concern for
maximising the capital receipts than for creating a
more open and competitive telecom market.
Citizens complain that the quality of services have
not improved in proportion to the increase in
prices paid. Criticism directed at the inadequacy of
the Governmental institutional apparatus for
regulation of this sector appears also to be justified.
A more stark, though rarer example of
unsuccessful privatisation in the Telecom sector, is
provided by that of Puerto Rico. As a result of
unrealistic assessments, the legislature included
within the privatisation statute, various conditions
which made the state telephone company
unattractive to foreign investors. The Law
specified a minimum price of 2 billion US dollars
plus a reduction of foreign debt by 1 billion US
21
22
28
dollars. It also prohibited any increase in tariffs
and the dismissal of workers from the existing
company. The tender failed and privatisation was
not implemented. This case underlines the need
for a balanced approach to the regulatory process.
One should also have in mind that examples
where telecommunication prices have doubled or
even tripled21 after the privatisation and major
investment where stopped, could also be viewed
as failed privatisation process since in the long
term the overall economic effect will be more then
negative ones.
4.3 The Water Supply System
The International Conetxt - Water as a
limited resource
Learned and senior commentators, including
those within the departments for strategic planning
of some larger powers (Great Britain, for example)
believe that water in the 21st century will be what
oil was in the 20th - the basic resource for
development and a key cause of armed conflicts.
Drinking water remains one of the key strategic
resources in the world. Consumption of water in
the world doubles every 20 years, twice as fast as
the population grows. According to United
Nation's assessments, 1.2 billion people in the
world today do not have access to drinking water,
while 2.4 billion people live without basic sanitary
conditions (sewerage). Today, 31 countries in
Africa and the Middle East are dangerously short of
drinking water. Assessments are that another 17
countries will join them by 2025. Expectations are
that, by then, two thirds of the population of this
planet will live in countries where water shortages
will become chronic. Many countries around the
world, including parts of India, China, West Asia
and the Arabian Peninsula as well as the countries
of the former Soviet Union and western parts of
the USA, are faced with the rapid exhaustion of
underground sources22.
The achievement of several of the Millennium
Development Goals hangs on a sustainable
approach to securing the supply of healthy drinking
water. The acknowledgement of the physical
limitation of water resources has led its value to
grow greatly. Water supply has become big-business
and several countries have sought by expanding the
reach of their geo-strategic influence, to open a path
Regional examples of Croatia and Macedonia.
We must not forget that today in the world about 70% of overall 'drawn' water is used in agriculture, mainly for irrigation, and
that a further continuous dynamic growth of its usage is predicted because of constant needs to increase food production in
the world. Assessments are that about 22% of drinking water is used in industry.
for their multinational companies to manage storage,
production and distribution, and thus exercise control
over national reserves of drinking water of many
(mainly undeveloped) countries in the world. There
is a real danger that the exploitation of water which
is a basic source of life preservation, is becoming a
highly profitable activity for a narrow circle of
capitalists in the West, whilst also a potential cause of
degradation of the quality of life of hundreds of
millions of people all over the Third World23.
Shortages of drinking water are becoming
more severe every day. The most undeveloped
countries in the world are in a particularly difficult
situation. Their populations live in climatically
unfavorable environments and conditions of
extreme poverty. Projections indicate that nearly
two thirds will soon live in urban zones without
realistic prospects for stable access to drinking
water and sewage. The affected areas are,
primarily, regions of Africa, South and South East
Asia and Central America. Apart from them, some
areas of China and South America will also have
serious problems in their attempts to ensure
adequate quantities of drinking water.
Privatisation of the Water Sector
A coterie of international institutions, the
World Bank (WB), the International Monetary
Fund (IMF), the World Trade Organization (WTO)
and the European Commission (EC) are trying to
find a solution to this problem by means of
supporting the privatisation of public utility
companies operating in water supply and the
treatment of waste water. They believe that
existing state companies in this sector are
inefficient, have too many employees and are not
capable of ensuring sufficient investment in the
reconstruction and development of water and
sewerage infrastructure. They do not view the
23
24
25
supply of water simply a fundamental human
right, but a commodity, an 'economic good' which
has its price within a market which is subject to
the laws of demand and supply. They often
advocate that its price must fully cover the costs of
exploitation, processing and distribution, as well
as the costs of amortisation of the existing
infrastructure. Therefore, its real market price
should ensure funds for new investment. And they
argue that the private sector is best placed to
ensure efficient management of drinking water
resources, giving it the status of a key player in the
development of the water supply system and the
treatment of waste water. Through the General
Agreement on Trade and Services (GATS), the
WTO obligates signatory governments to liberalise
public services and thus lift barriers that prohibit
international private capital into this socially
sensitive sector. This has begun the process of
providing incentives and support for governments
of many poor countries, especially in Africa, in
terms of full or partial transfer of the responsibility
for water supply from public and state owned
companies to foreign, private multinational
companies. This process is often made a condition
of their access to new loans and various kinds of
assistance.
In mid and late 90s, a process of accelerated
privatisation of the water supply sector began in
dozens of poor countries in Africa and Central and
South America24. Private multinational companies
(mainly from France25) have entered the privatisation
process in a way in which they did not purchase the
existing infrastructure but would operate supply by
means of long-term concession contracts, new
investment and more efficient management of the
whole system. Thus, they are supported by
favourable loans from the World Bank and other
international financial and development institutions.
According to the World Bank's assessments, the value of the water market in the world is estimated at 800 billion dollars and
by value it compares to the fossil fuel market. That this is a stable, fast-growing and profitable business tells us that in 1990
about 51 million inhabitants in a dozen countries in the world were supplied with water by private companies while estimates
today are that they supply more than 450 million inhabitants in 56 countries in the world. Projections indicate that this number
will reach even 1.16 billion in 2015.
In mid-2000, the following countries had various forms of agreements for privatisation of the water supply sector: Ivory Coast,
Guinea, Mali, Senegal, Guinea Bissau, Lesotho, Djibouti, Zimbabwe, South Africa, Gabon, Morocco, Mozambique, Egypt,
Kenya, Rwanda, Chad, and Cameroon, while tenders were prepared for Niger, Nigeria, Tanzania, Lagos, Congo and Ghana.
Of the Central and South American countries: Argentina, Chile, and Bolivia, while: Honduras, Nicaragua and Panama, as well
as Cambodia and Vietnam, prepared for privatisation of the water supply sector.
Out of four largest private multinational companies operating in the sector of water supply in the world, three are from France:
Suez-Lyonnais des Eaux with its affiliate Ondeo, Vivendi Environment with the affiliate Vivendi Water, and Bouygues with its
affiliate SAUR. Today they together cover about 75% of the world water market. Besides these, other strong companies are
also fighting for their share on the market: German RWE, British Thames Water (as part of the German RWE), American Betchel
(cooperating with the French SAUR and British United Utilities), and Enron's Azurix. Different joint venture companies are
also present on the market, and they are owned by the already mentioned large multinational companies such as Berlinwasser
International (as an affiliate of the German RWE and French Vivendi).
29
These loans are intended for the implementation of
rehabilitation and reconstruction projects, the
construction of new capacities and an improvement
of the process of managing production and
distribution of drinking water. Private multinational
companies, beside investment returns, also expect
profits, and at least at the level that would be realised
by investing in other sectors of the world economy.
Motivated by profit, multinational companies are
mainly interested in supplying drinking water to the
populations in urban or more densely populated
areas. Supplying smaller towns, suburbs and rural
areas, due to high rates of investment into the
network, often remains the responsibility of the State,
municipal or public companies26.
Foreign investors tend not to be interested in
privatisation of the sewerage network because of its
low profits due to a typically large backlog of and
difficulty collecting payment from users. Considering
the social sensitivites of this sector, special approvals
and/or consents from governments for the selection
of concessionaries and/or conclusion of privatisation
agreements are necessary. This process creates fertile
ground for the appearance and development of
various forms of corruption of high state officials by
multinational companies27.
Basically, two models of privatisation are
applied in this sector:
Public-Private-Partnership
(PPPs);
this
represents the dominant model, according to
which general responsibility for water supply
and sewerage remains within the public sector,
while water supply (sometimes including water
26
27
28
29
30
treatment) in urban (usually densely populated
areas) is ceded to a private company. The
company collects fees or a rent for assets
provided on the basis of long-term concession
agreements and defines the price of services,
which must ensure return on investment and
realisation of profit for the company in the
course of the concession period28.
Build-Operate-Transfer (BOT); under this
option the private company finances or
provides assets, builds plants and/or networks
and manages them, ultimately transferring
back into state ownership after a certain period
of time (from 20 to 30 years), after a return on
invested capital and profit is realised.
Assessments today show that only about 5%
of the water supply and sewerage sector in the
world is privatised. International experience of the
process of privatisation of water supply and
sewerage sectors in the Middle East and other
developing countries are generally negative.
Some specific positive results are however
recorded; these include improvements in the
water supply delivery, reduction of network loss
and improvement of system management.
However, a basic goal of the process - facilitation
of access to water for the poorest strata of
population - was largely not realised. In order to
satisfy full cost recovery, private companies, as a
rule, dismissed considerable numbers of workers
of former public companies and increased the
prices of water and other services29. They
The privatisation proposal of Ghana's water supply system stipulated investment of a foreign company only into construction
of a new network and not into the rehabilitation of the existing one, And that the state would subsidize the companies to
compensate for the difference between the market price and the price paid by citizens, in the period before the market price
principle takes effect. Assessments indicated that that this would have meant a rise of current water prices by 300%. And finally,
the government would have had the responsibility for overall sewerage and water supply of small towns and rural areas.
The examples of Indonesia and the Philippines may be the best illustration. The concession of supplying Jakarta was won by
two consortiums: British Thames Water (later owned by German RWE) and French Lyonnaise des Eaux. Both consortiums
included local partners whose owners were "friends" of the former president Suharto. The price of water rose rapidly. After
political changes in the country, there were strong calls from the new political masters and trade unions to terminate these
concessions. Additionally, the twenty five year concession to manage the water supply of Manila was entrusted to a joint
venture private company consisting of private British and French multinational companies in cooperation with local private
companies whose owners were members of the ruling family and/or their close and rich friends.
Model applied in Albania, Montenegro, Jordan and Bolivia (El Alto).
Thus, for instance, prices of drinking water after privatisation rose as a rule by several dozen to several hundred percent: in
Guinea by 30%; in Germany (Rostock) after privatisation in 1992, water consumption in households dropped so that the
private company Eurawasser, in order to protect its revenues, was 'forced' to increase the prices of water by 24% and sewerage
by 30%; Kenya (Nairobi) by 40%; in the Czech Republic (in the period between 1994 and 1997 in areas which were supplied
with water by private companies) by 100%, by the same amount in Argentina (province of Tucuman); in France in the period
between 1984 and 1997 by 300%; in the Philippines (Manila) in five years by 300%. Maybe the most drastic case of water
price rising was recorded in Bolivia (Chochabamba, third largest city in Bolivia) where the prices rose in 2000 only by 200%
which led to mass demonstrations (and also deaths of several demonstrators) after which the concession agreement was
cancelled with a concessionaire compensation claim in the amount of 40 million dollars.- clearly a sizeable attack on the living
standards of the population! This rise in prices showed that after privatisation, the average worker had to allocate one fourth
of his or her monthly income to cover the expenses of household water consumption. Also in Manila, the poor population
spends more than 10% of their income to buy adequate quantities of drinking water of suspicious quality.
increased efficiency of the collection system by
excluding from the network, those users who
could not pay for their services. The goal of
facilitating access to water for poorest strata of the
population turned is thus into its very opposite.
Due to high prices and disconnections from the
network, the poor were denied a basic human
right, the right to access to drinking water. The
consequences for human health, infant protection
are clearly negative30. Some cities recorded mass
illegal connections and theft of this life-critical
resource. Often Governments are caught in a trap
of paying for subsidies for the poor population
paying the funds that they received form
privatisation back to the private company, as a
result of increased prices.
Experience of Developed Countries
The countries of Western Europe have
followed various paths to water privatisation,
which in the main preserved the existing
privatisation model where water supply and
sewerage services remain vertically integrated and
publicly owned monopolies. Exceptions from this
model are Great Britain (excluding Scotland) and
France, where private companies dominate the
sector. Recently, Spain has also been rapidly
privatising its water supply sector. Opposing this
trend are the remaining countries of Western
Europe, which either did not accept privatisation
at all (Denmark, Greece, Ireland, Luxembourg,
Holland and Austria), or have a relatively low
share of private capital in the structure of the
overall ownership (Belgium, Germany, Italy,
Portugal, Finland and Sweden); this is illustrated
figure 1. The view of the Dutch Government
articulated in 1999, is indicative of the general
stance adopted, which concluded in the course of
the discussion on privatisation of the water supply
sector that it is a 'vulnerable and valuable public
good, which is not to be played with'.
The majority of Western Europe countries
prefer a model where it is not necessary to carry out
the privatisation of this important and sensitive
sector. They quote the following advantages of the
state or public ownership in this field: 1)
responsibility, where the companies operating in
this field are responsible to publicly elected local or
national governments, which, test via the electoral
process their success in managing this sector; 2)
transparency and openness of company operations
which have to present their business results publicly
and cannot hide behind so called 'commercial and
business confidentiality'; 3) responsibility to citizens,
where the water supply and sewerage sectors
perform a basic public functions and therefore they
should be responsible to citizens and not to
stockholders; and 4) costs of operations are lower
which also makes the price paid by the end user
lower, since the goal of the business is not profit or
dividends, which would be paid to owners of the
private company and/ or transferred abroad31.
A similar model is adopted in the countries of
North America, both the USA and Canada, the
public sector dominates with a 95% share, where
water supply and sewerage are generally owned
Figure 1:
Percentage of population supplied with water, by the type of the company operating this business, 1996.
Source: Eureau: Management Systems of Drinking Water Production and Distribution Services in the EU Member states, according
to: Hall, David, Water in public hands - the alternative to privatisation and globalization, Helvetas conference on water, Zurich,
March, 2003.
30
31
After commercialisation of the water supply in South Africa (in cities in the region of the Dolphin Coast), in 1988, the local
population was forced to pay the full price of drinking water. Two years after that, cholera broke out in those parts of Africa
which infected over 25,000 people, of whom 300 died, before the disease was contained.
For instance, in Bolivia, capital returns at a rate of 16% are guaranteed by the concession agreement to the concessionaire
(consortium led by the International Water company).
31
by municipalities. Funding these needs in the USA
is realised by way of revolving credits from the
central government.
Experiences from the region
Two approaches to managing and developing
utility sector (water supply and sewerage)
infrastructure can be seen in Central and Eastern
Europe, privatisation and restructuring. Privatisation
has mainly been realised through concession
agreements with leading foreign private multinational
companies. Recent assessments show that about 4%
of the water supply and sewerage networks are
privatized in this region. Some of the countries that
have selected privatisation as an approach are; the
Czech Republic, where more than 50% of this sector
was privatised to multinational companies (Prague,
Brno, Osrava, Karlsbad, South and North Bohemia,
Pilsen, Sumperk); Hungary (Budapest, Kaposvar,
Szeged, Pech); Poland (Gdansk); Estonia (Tallin);
Romania (Bucharest, Ploiesti, Timisoara); Slovenia
(Maribor); Croatia (Zagreb - waste water systems);
Bulgaria (Sofia); Albania (Tirana, Elbasan); Armenia
(Yerevan-management agreement).
Among the countries which did not accept
privatisation, but opted for restructuring of the
current municipal utility companies are: Poland
(Poland (Lodz, Szezecin, Torun, Zywiec, Krakow,
Bydgoszez), Hungary (Debrecen), Moldova
(Chisinau), Latvia (Riga), Lithuania (Kaunas, Vilnius),
and Russia (St. Petersburg and Kaliningrad)32.
After brief analysis of the mentioned
approaches to managing and developing utility
infrastructure in the region, we can conclude
restructuring the existing utility companies
represents a viable and sound alternative to the
privatisation process. It is also observed that the
restructuring process was supported by EBRD the European Bank for Reconstruction and
Development and by EIB - The European
Investment Bank, by long-term and favorable
credits, which were not conditioned by guarantees
of municipal and city government structures.
The Situation in BiH
Bosnia and Herzegovina annually receives
about 1250l/m2 of rain, which represents a total of
64 billion m3 of precipitation. About 57% of the
total precipitation flows away from the area of
BiH, of this 62.5% down the Sava River basin to
the Black Sea and 37.5% down rivers flowing to
the Adriatic Sea. The quantity of precipitation, in
temporal and spatial terms, is not equally
distributed. Average consumption of drinking
water in BiH amounts to about 420 liters per
capita per day, of which 32% is used by
households, 35% by industry, while the remainder
represents so-called 'non-chargeable' water, which
is lost in the network or is used for public
purposes. About 89% of the drinking water is
drawn from underground sources, 10.2% from
waterways and only 0.8% from natural lakes and
impounded reservoirs33. Even with the
unfavorable spatial and temporal distribution of
water, BiH has enough drinking water to meet its
needs in the medium and long term.
According to results of the living standards
measurement survey conducted in BiH (LSMS) in
2001, 94.4% of urban households, 89.8% of semiurban households, and 75.4% of rural households
Figure 2:
Percentages of population in BiH which have drinking water, by areas and entities
Source: BiH Statistics Agency, Federation Bureau of Statistics, RS Bureau of Statistics, Living Standards Measurement Survey in BiH
(LSMS), 2001.
32
33
32
For more details on each of these projects, see: Lobina Emanuele, Water privatisation and restructuring in Central and
Eastern Europe, 2000, Public Services International Research Unit (PSIRU), School of Computing and Mathematical Sciences,
University of Greenwich, London, U.K., 2001.
Mrden Damir, Water and Sanitation in Post Conflict Areas - Bosnia and Herzegovina, World bank Water Forum, 2002.
were supplied with drinking water. By entity, the
situation in urban and semi-urban areas of the
FBiH was more favorable than in the RS, while the
situation is reversed for households in rural areas
(see Figure 2).
The situation is far less satisfactory in the case
of the sewerage network. According to the results
from the same survey, 76.2% of households in
urban areas, 46.7% in semi-urban areas, and 24.5%
in rural areas use the public sewerage network.
The situation is much more favorable in urban and
semi-urban areas in the FBiH.
Referring to figure 3, on average, 78.4% of
households in BiH have a bathroom with toilet,
82.7% in the FBiH and 71.2% in the RS. The
situation is more favorable, for households in
urban areas in both entities.
Public utility companies, organized at the
level of municipalities, cities or cantons are
responsible for supplying drinking water to the
population and the regulation and disposal of
waste water. These companies are owned by
municipalities or cities or cantons and are
accountable to their respective assemblies. Yet
equally, the age of the water supply and sewage
infrastructure in some areas does not meet the
needs of the users, neither in terms of the quantity
or quality of the water. Most parts of the water
supply systems were damaged during the war and
are worn out to a lesser or higher degree. This
particularly refers to the distribution networks in
urban areas, where water losses are particularly
high34.
Preparations for the privatisation of public
utility companies began between 1999 and 2000.
These companies were obligated to submit their
privatisation programs to the responsible cantonal
privatisation agencies, which were required to be
drawn up using the same methodology which was
applied to other business companies.
Considering that these are significant public
companies of a large value and special (even
political) importance for municipalities and cantons,
it was concluded that their privatisation could not
be conducted following the models which used for
other businesses. In the search for an adequate
model, their privatisation was practically
abandoned and (for now) permanently postponed.
In terms of the position of the public to the
privatisation of this sector, the results of a public
34
35
survey35 at the level of BiH, shows 53% of
respondents have a negative view of privatisation
and one third of that number has a 'very negative'
view. Consequently, 27.9% view privatisation
positively, while only 11.3% had a 'very positive'
view. Subdividing the sample; 59.3% of examinees
from urban areas have a negative view of
privatisation, while only 23.5% of respondents
think it is positive. Further more, than two thirds
of respondents (68.5%) support citizen
participation in the privatisation of electricity,
telecom and the water supply sector. After
privatisation, 49.2% of examinees expect the
quality of services to remain at the same level, and
16.9% believe the quality will worsen. With
regards to the prices of services, 39.6% of
examinees believe that prices will rise after
privatisation, 17.9% expect them to remain at the
Figure 3:
Structure of sewerage provision by urban
households in BiH
Source: BiH Statistics Agency, Federation Bureau of Statistics,
RS Bureau of Statistics, Living Standards Measurement Survey
in BiH (LSMS), 2001.
same level, while 26.5% expect a decrease.
Negative effects are expected with regard to living
standards and employment.
Research conducted for the purpose of this
Report clearly shows that the citizens are much
more interested in taking an active part in the
privatisation of the existing public companies.
Future research should perhaps concentrate only
on the privatisation of water supply and sewerage
as a separate utility sector.
It is interesting to note that the Living
Standard Measurement Survey in BiH, as well as
Framework water management basis of BiH, JVP Vodoprivreda BiH, Sarajevo, Zavod za vodoprivredu (Water Management
Institute), Sarajevo, 1994, according to: PRSP - BiH Poverty Reduction Strategy Paper, Second Proposal, Council of Ministers
of BiH, Ministry of Foreign Trade and Economic Relations, Office of the PRSP Coordinator for BiH, Sarajevo, 2003. .
Public survey for UNDP - Privatisation of Natural Monopolies, PRISM Research, September 2003.
33
official statistics, do not include water
consumption in the structure of household
expenditures, whilst, on the other hand, they do
deal with issues such as the consumption of
brandy liqueurs wine, and beer. The average
consumption of alcoholic and soft drinks is
known, while we can only speculate about the
consumption of water. This attitude perfectly
depicts the view of BiH society regarding this
important life-giving resource, because if this were
not the case, Sarajevo streets would surely not be
washed and city greenery would not be watered
from the city mains.
Recommendations
There are numerous examples of negative
effects arising as a consequence of the entrance of
large multinational companies into the water
supply and waste water treatment sector in
undeveloped and developing countries. An
alternative to privatisation can be restructuring by
means of external, expert-based consultorts and
by managerial improvement of the organization,
the available resources, infrastructure, and of the
price determination system and revenue
collection. There are also experiences around the
world of a successful application of the concept of
the so-called 'public partnerships' in the forms of
various models: for example, Public-Public
Partnerships36
(PUPs), Participatory Water
Management37, Consumers Cooperatives38, and
Trade Union Co-operatives39. We can recognize
parts of these models in the earlier practice
adopted in this field in BiH, when development of
water supply infrastructure was funded with
various types of self-contribution, funding and cofunding by future users. In selecting a method of
privatisation of water supply systems one needs to
answer the question whether the public interest
36
37
38
39
34
could be satisfied by a system driven by the
interests
of
profit-motivated
companies.
Opponents of privatisation have a predominant
view that managing water as a strategic and
irreplaceable resource should be guided by public
rather than private interests.
Of course, we are not here recommending
retention of the status quo in this important field.
We believe it can be considerably improved even
without privatisation of this sector by improving
the organisation, management and efficiency of
the existing utility companies, and through
facilitating, access to credit support by
international
financial
and
development
institutions. In order for this to be realised, it is
necessary to think about the creation of conditions
for moderate increase of prices for these services
although unpopular with the public (and
politicians), would create the conditions for
investing in the rehabilitation and reconstruction
of the existing network and the building of a new
system, as well as developing new capacities for
exploitation and delivery of drinking water and
treatment of waste water. Current local experience
with development of local water supply and
sewerage networks indicates that the possibilities
for improvement via this model have not been
exhausted.
Finally, if the local public companies employed
a commercial approach and charged their services at
prices which cover their expenses with the
improvements in efficiency, internal organization
and management - any talk of their privatisation
would be superfluous. Such restructuring would
surely support not only their current position but
also development goals, given by the guaranteed
supply of the population with sufficient quantities of
high quality drinking water and adequate treatment
of waste water.
Meaning another company or other companies in the public sector, which have the required experience and capacities, in
the utility sector, implement projects for the improvement of utility infrastructure. These companies can be local and/or
foreign. This model was successfully applied in Baltic States (Estonia, Latvia and Lithuania), but also in semi-rural areas of the
North West Province in South Africa. A project (Kaunas) is being realized in Lithuania in cooperation with the Finnish State
Environment Institute, whilst other countries of this region cooperate with Swedish municipal companies which have more
experience in implementation of similar projects.
The quoted model of "participatory management" has been successfully used in Brazil for fifteen years in the water supply of
the city of Porto Alegre with 1.4 million inhabitants of whom 99.5% have access to drinking water. The Departemento
Municipal de Agua e Esgoto (DMAE) Company represents a state, non-profit, self-financing company, financially independent
from the state, which offers to users high quality services at prices which are among the lowest in Brazil.
The "consumer cooperative" model has been applied in Bolivia (Santa Cruz) since 1979 and is considered to be very successful
for urban centres. All consumers are jointly members of the Cooperativa de Servicios Publicos Santa Cruz Ltda (SAGUAPAC)
and take part in the election of the members of the assembly. In the period between 1988 and 1999, the percentage of
population connected to the water supply system rose from 70 to 94%.
The "trade union cooperative" model has been successfully implemented in the capital city of Bangladesh (Dacca) which has
over 10 million inhabitants.
5. CHARTING A WAY
FORWARD:
CONCLUSIONS AND
RECOMMENDATIONS
The evidence reviewed draws us to a mixed
conclusion on the role privatisation has to play in
the future strategic management of natural
monopolies within BiH, and in securing a
successful transition to a modern European market
economy.
Global experience, from both developed and
developing worlds, and particularly progress and
practice in the ex-socialist transitional countries,
demonstrates that the great potential offered by
privatisation is tempered and limited by a series of
risks, pitfalls and negative socio-economic spin offs.
Above all privatisation is not some 'breakthrough
medicine' which will solve all of the problems of
these crucial sectors of the economy, but merely a
tool to be used within a wider transition strategy
alongside liberalisation and effective regulation.
Some of the numerous examples of the negative
effects arising from large multinational companies
entering the natural monopoly sectors in
developing countries mentioned above, provide
empirical real world evidence that privatisation in
these areas should be well thought-out and
conducted carefully.
It is important to emphasize that after signing
long-term concession agreements or purchasing
the enterprises, the strategic investor moves
forward in four main stages/phases:
1) Improvements in organisation and management, with the objective of increasing in the
efficiency of utility companies, and almost
inevitably, reducing staffing levels;
2) Increasing prices to levels which fully cover
business expenses and create conditions for
the return of future loans and ensuring a
projected profit for the multinational company;
3) Ensuring and realising favorable long-term
investment credits from international financial
and development institutions and implementing
reconstruction projects, rehabilitation and/or
development of infrastructure; and
4) Managing the whole system until the total
investment is returned and the concession
agreement expires with the sale or return of the
whole system to the State in its capacity as the
substantive owner.
Preparation and processes issues have a
particular importance; privatisation with undue
haste and without proper consideration and
foresight of the social economic political
dimensions is likely to do more harm than good.
Overall therefore we caution against the dash for
privatisation advocated by certain sections of the
international community, and we call instead for a
debate and the building of a consensus within BIH
on this necessarily sensitive issue.
In essence that debate needs to address the
four topic areas listed below, and we summarize
our thoughts on each:
First, the definition of the strategic goals of
privatisation of natural monopolies and what
the linkages with the wider social and
economic agenda. This is in essence a
question of efficiency versus equity, and the
trade-off between the two. Our analysis and
the polling carried out for this study leads us
to believe BiH citizens view both as being
important, but would define the concept of
efficiency more widely than short term
economic gain. This implies there should be
no blanket application of privatisation.
A pr ope r ly phas e d and we ll r e gulat e d pr oc e s s
comes a close second in the list of priorities.
Indeed, all of the empirical evidence and a
growing body of theory indicate that
privatisation is not something to be rushed
into. Questions about market and ownership
structures, service obligations and regulation
need to be addressed at the outset. Reforms
need to be sequenced and the mechanisms
for transferring assets (sales versus vouchers,
versus assignment) need effective governance
and oversight.
The 'shape' of the ownership structures to
be adopted provides our third area of
consideration. All of the evidence presented
above calls for an eclectic approach to these
questions governed by an appraisal of the
economic and political realities of each sector
and locality. An early task would be an
examination of which enterprises form 'pure'
natural monopolies and which do not, and
hence the need for retention in state ownership
or sale and the extent of regulation required.
Compelling political and social considerations
are also pertinent to the eventual structures to
be adopted.
Finally, the issues of regulation, ownership
and accountability have to be considered.
These raise perhaps the most serious political
concerns. The sale of national assets which
deliver what amount to essential services is
necessarily a sensitive issue. And contrary to
the pronouncements of some voices within
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the International Financial Institutions, the
case for public ownership of some sectors
and sub-sectors, particularly in the case of
natural monopoly is more than merely
ideology. Strong and accountable regulation
of business entities is essential in any industry
which displays natural monopoly characteristics
and in many others where a strong public
interest exists.
In essence we argue for a balanced approach
to the issue of privatisation, which recognizes
some of inadequacies of the status quo, and the
potential that privatisation offers, but also is aware
of the dangers and risks - and what is politically
and socially achievable.
The above
assessment will certainly
disappoint those who anticipate considerable
budget inflow on the basis of 'privatisation' of
these important sectors. An alternative to
privatisation can be restructuring through external,
expert-based, managerial improvement of the
organization, available resources, infrastructure,
and also improvement of price setting and bill
collection system. Also, if the Government played
a more responsible role in addressing the difficult
issues within the sectors as opposed to waiting for
private investors to address them, the restructuring
and management capabilities of these companies
would be much better.
Many strategic alternatives exist to the generic
'full blown' models of privatisation including:
Restructuring and cultural change through
the external, managerial improvement of
organizations, coupled with better revenue
collection and commercialization of operations.
Successful application of Public-Public
Partnerships (PuPPs); which includes initiatives
like Participatory Management, Consumers
Cooperatives and Trade Union Co-operatives.
These models are useful not least because they
are recognisable in the pre-existing practices in
BiH.
Establishment of public and local corporations,
facilitating access to credit support from local
and international financial and development
institutions, and allowing industries moderate
increases in prices for services.
In selecting a method of privatising the
natural monopolies one needs to answer the
question of whether the public interest is
inevitably different to the interests of the profit-
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36
motivated companies. Opponents of privatisation
have a predominant view that managing natural
recourses as a strategic and irreplaceable resource
should be guided by public rather than private
interests.
Of course, suggesting retaining the status quo
in this important field is not the best solution. The
situation can be considerably improved even
without the privatisation of these sectors by
improving organization, management and
efficiency in the existing utility companies. In
order for this to be realised, it is necessary to think
about the creation of conditions for moderate
price increases, for some of the services (for
example in local fixed line telephony) and most
definitely reducing prices of international calls or
electricity prices for large electricity-driven
companies. Although unpopular with the public
and politicians, this would create conditions for
better investment management and rehabilitation
and restructuring of companies making them more
competitive and efficient.
Finally, a conclusion can be drawn that,
except for those who believe in the strictest form
of capitalism, based exclusively on private
ownership, the privatisation of natural monopolies
is not a remedy, nor is it the primary objective. The
privatisation, or partial privatisation, of natural
monopolies should be viewed as a means of
achieving other goals, such as:
Facilitating the introducing of competition into
a market which was monopolized;
Clearly separating the regulatory role from the
role of company management and care for
operative business;
Creating a more dynamic professional
environment;
Creating stronger motives and incentives to
company leadership; and
Reducing trade union influence.
The privatisation of natural monopolies is not
the only and exclusive way to realize the
mentioned objectives. Similar effects can be
achieved in other ways, too, such as, for instance,
transforming state administrations into a company
with a public holding40, changing the way of
appointing senior managers in such companies,
breaking up large companies and creating
subsidiary companies, or by eliminating the legal
basis which ensures the privileged monopoly
position of the company.
Like Deutsche, France, British and many other European telecoms
The introducing competition is potentially a
more important instrument of economic policy to
achieve the commercialisation of infrastructure
services which were rendered before by public
monopolies. Competition policies ensure the rules
of the game and resolve the objective aspect of
market development. Competition makes it
possible for improvements made with regard to
efficiency at the company level to be translated
into lower prices for end users and achieve a more
efficient allocation of resources in the economy as
a whole.
In a narrow economic sense privatisation is
indisputably an effective policy. It ensures
companies have the necessary profit maximisation
motivations and access to financial markets. But
again to deliver these benefits, privatisation has to
be accompanied by the potential for effective
competition. In the case of natural monopolies this
may well be illusory in the short run and inefficient
in the longer term.
Drawing on our sectoral analysis given above,
we recommend:
For the Electricity Sector, restructuring of the
industry into three component parts;
generation, transmission and distribution.
This to be followed by the privatisation, using
a mixture of methods, of the distribution
companies as regional concessions, following
the consent of local stakeholders, fully
recognising that some may remain in public
ownership.
As for the generation as a sub-sector (power
stations and unused potential) retention of
state ownership should be viewed as strategic
export resource. Privatisation of unexploited
potential should be done on concession base
and time limited. The current and potential
electric-generating capacity of BiH should be
strategically analyzed and addressed. BiH has
the potential to be regional suppler of
electricity, especially renewable and clean
sources of electricity, and this should be one
of the strategic imperatives of the
Government's long-term agenda. The
transmission mechanism, which represents a
'pure' natural monopoly to remain as a state
owned but arms-length managed entity. A
powerful a regulator acting as an overseeing
mechanism for each of the economic entities
and sub sectors should be set up prior to any
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privatisation measures. Its brief would be
both to foster efficiency in the sector and
ensure consumers share equitably in the
resulting gains.
In the case of the Telecommunications we
acknowledge that technological advances
have done much to mitigate the strictures of
natural monopoly permitting competition and
creating a dynamic commercial environment.
Thus we conclude in favour of a more liberal
approach in this sector, and we can see no
benefit for retaining the existing companies
wholly in state hands, save for the need to
ensure access to the fixed line networks they
operate.
Since this is one of the most profitable sectors
in BiH retaining a majority of state share of
the equity is probably the best way forward41.
Proceeding with liberalisation should be seen
as one of the priorities and this is to be
accompanied with the strengthening the
powers of the Communication Regulatory
Agency. The Agency should be tasked with
acting both as a champion for end-consumers
and a manager of the market place to secure
both the gains, and avoid the costs, of
competition in a fully liberalised market
place.
In contrast, with respect to Water Services in
BIH, we find in favor of retaining much of the
industry in public or municipal hands. We
consider that this, of all the sectors examined,
presents the clearest example of natural
monopoly and the scope for useful
competitive
pressure
is
necessarily
constrained. We also consider that social and
political issues mean that the transfer of the
sector out of the publicly accountable sphere
would present unjustifiable risks. We do
however acknowledge that this sector, like the
others, would benefit from the introduction of
modern and commercial management
practices; and that there is a desperate need
to make substantial new investment in the
water supply infrastructure, something which
as yet the public agencies (Entity, Cantonal
and Municipal) are neither not able nor
prepared to make. Thus we recognise that
there may be some score to develop
management contracts along the lines of the
public partnerships discussed above.
Privatisation directly to the citizens, preferably within the Stock Market, should continue and would probably have positive
effects both on the company itself and on the financial markets of BiH.
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Finally, it is vital that proper attention is given,
throughout the reform process, to the political and
institutional dimensions. This is especially vital in
the context of BiH and its fractured governance
structures. It is not only about pursuing the right
policy but securing support, with the right
dynamics, and at the right time, which yields
successful outcomes for each of the industries
under consideration. Policies in these sectors must
be developed in cooperation with both national
and international experts, and be open for debate
by the BiH population, since they are the users and
the true owners of the assets to be privatised.
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