Promoting the Private Sector

In cooperation with member governments, the World Bank is helping

strengthen the role of the private sector

Mary Shirley

Since the early 1980s development stra- growth and contributed to expanding public is through its lending to assist private sector
tegies have been changing. During the 1960s debt; neglect of maintenance has led to a rapid investments. Second, in its lending to public
and 1970s public policy in much of the deterioration of public assets; excessive and sector agencies the Bank normally looks
developing world was characterized by a poorly designed and implemented regulations beyond the immediate project to the long-
confidence in the capacity of government to have contributed to growth in the under- range goal of enhancing the agencies' effi-
act as the main spur to development, and to ground economy. Furthermore, trained public ciency and effectiveness. This improves the
correct market failures. The underdeveloped servants are in short supply in most develop- provision of public services that are needed
state of indigenous private sectors and capital ing countries; by trying to do too much by the private sector. Third, the Bank
markets in many countries; a mistrust of the governments have spread this "scarce re- encourages countries to adopt a policy frame-
private sector, stemming partly from the source" thinly over many activities. work conducive to private risk-taking, innova-
experience of the depression of the 1930s; a As a consequence, there has been a tion, and economically rational decision making
fear of the power of multinational companies, reexamination of the role of the state and a and resource allocation. In addition, through
and their identification with the colonial past growing awareness of the need to reassess its cofinancing activities the Bank not only
in some cases; and the faith of some influential priorities, prune what has become unmanage- brings additional private funds into developing
economists in central planning combined to able, and use all resources, including man- economies, but also helps to build confidence
convince many governments that only they agerial resources, more effectively and effi- on both sides for future cooperation.
had the resources and purpose to promote ciently. The emphasis has shifted toward With the expansion of policy-based lending,
development. tapping private skills and resources wherever the Bank has increased its emphasis on
In many countries, however, the expansion possible and strengthening the state's core policies designed to improve the efficiency
of the public sector has stretched managerial responsibilities, such as providing adequate and competitiveness of the private sector and
capacity to the point where serious ineffi- social and economic infrastructure and a the economy as a whole. This article de-
ciencies result. Time and again bureaucratic supportive policy and regulatory environ- scribes the Bank's activities in this area and
failures have proved to be at least as costly ment. the new initiatives now being planned.
and prevalent as market failures. For exam- Together with its affiliate the International The characteristics of the private sector
ple, prices set low to benefit consumers have Finance Corporation (IFC), the World Bank vary widely among developing countries, and
discouraged producers, creating scarcities is an important source of foreign finance for this must be taken into account in the Bank's
and greater dependence on imports; credit private enterprise in the developing world, lending operations. At one extreme are the
allocation and subsidized interest rates have having provided about $28 billion over the dynamic, well-established private sectors of
resulted in a bias toward capital-intensive last five years. The Bank helps countries to newly industrializing countries with more
industry; low-yielding public investments and strengthen the private sector's contribution developed capital markets, such as Brazil or
inefficient public enterprises have slowed to economic growth in several ways. The first the Republic of Korea, ranging from large
40 Finance & Development I March 1988
 modern firms active in international markets the private sector can complement efforts to commercial banks. The loans increased
to the small, family-run businesses typical of alleviate poverty by increasing the productiv- production, expanded farm employment,
all developing economies. At the other ity of the poor, expanding their employment, and met or exceeded the rates of return
extreme are the nascent private sectors in, and adding to their purchasing power. estimated at project appraisal. An agricul-
for example, much of Sub-Saharan Africa. tural credit project in Morocco, for exam-
Here private activity consists mostly of very
Support for projects ple, assisted some 350,000 farmers to
small-scale businesses concentrated in sub- Loans and credits from the Bank to increase their incomes through mechaniza-
sistence agriculture and tertiary activities in agriculture and to development finance insti- tion, purchases of equipment and livestock,
the so-called informal sector. In between tutions, for use by small- and medium-sized and land improvements.
these two extremes are the private sectors enterprises, benefit the private sector di- Bank support of the private Industrial
of countries such as Cote d'lvoire, Peru, or rectly, as do the operations of the IFC. Credit and Investment Corporation of India
Tunisia, moving tentatively into large-scale Indirectly, the Bank affects the conditions for (ICICI) promoted private investment in
modern activities, but still mainly in small- private business through its loans to public chemicals, textiles, electrical machinery,
scale traditional agriculture, trading, and sector agencies that provide essential automotive ancillaries, rubber products,
services. infrastructure and services. mining, and the like, and also helped ICICI
A significant proportion of the private Direct support. Over the past five years expand and diversify. ICICI is a profitable
sector in developing countries is made up of direct support to the private sector from bank which is now able to mobilize re-
subsistence farmers, informal sector busi- the Bank has totaled about $26 billion, or sources both domestically and in interna-
nessmen, and small traders. Efforts to foster 25 percent of the total lending (see table). tional markets. Not all development finance
a vigorous private sector often benefit these This includes most of the lending to institutions are as successful as ICICI,
groups directly—as with lending to small agriculture and lines of credit to financial particularly those publicly owned develop-
farmers and business people—and indirectly, intermediaries that were used to finance ment finance institutions which have been
for example by providing infrastructure, private investment. For example, agricul- subject to government pressure to lend to
health services, and a more supportive tural credit projects in India financed over certain sectors or projects. The Bank has
regulatory environment. The promotion of 250,000 loans to farmers by state and been encouraging governments to pursue

Nature of World Bank and IDA tending, fiscal years 1981-87

(In millions of US dollars)

Total Percent of total

1981 1983 1985 1987 1981-87 lending 1981-87

Private sector orientation

Small- and medium-scale enterprises
(through development finance
institutions) 1,342 1,769 1,126 2,719 11,680 11.26
Agriculture and rural development1 2,311 2,570 1,762 2,014 14,622 14.10

Subtotal 3,652 4,339 2,888 4,733 26,302 25.37

Infrastructure and services

Transport2 977 1,590 2,035 1,669 11,976 11.55
Power 1,323 1,768 2,250 3,017 15,926 15.36
Telecommunications 329 57 122 682 1,803 1.74
Water, sewerage, and urbanization 1,036 1,365 1,165 2,439 9,684 9.34
Agriculture3 1,450 1,107 1,277 741 8,207 7.92

Subtotal 5,115 5,888 6,849 8,548 47,596 45.90

Policy-based lending4 1,120 1,848 1,045 2,991 13,760 13.27

Other lending
Social sectors5 748 666 1,119 494 5,775 5.57
Heavy industry, coal, oil, and gas 1,526 1,683 2,374 804 9,509 9.17
Technical assistance 131 53 110 104 743 0.72

Subtotal 2,405 2,402 3,602 1,402 16,026 15.46

Total 12,292 14,477 14,384 17,674 103,684 100.00

Source:
Source: World Bank data.
For example, credit and area development, agroindustry, fisheries, forestry, livestock, and perennial crops.
3
Including roads, railways, ports, and airports.
4
For example, research, extension, and irrigation.
For example, structural adjustment and sector policy adjustment.
Education, training, population, health, and nutrition.

Finance & Development I March 1988 41

 policies that assure the independence of of greater benefit to the private sector than Bank supported the establishment of the
DFIs, increase competition and financial any direct lending. Export Development and Investment Author-
discipline, expand domestic resource mobi- Projects to expand and improve the ity to attract new investment and increase
lization by providing a variety of depository reliability of, say, the electric power or the exports.
and nondepository instruments that pay telephone system, to build and maintain The Bank has been instrumental in the
competitive returns, and generally support roads, or to increase the capacity and creation of the Multilateral Investment Guar-
the development of resilient and robust efficiency of ports benefit the private antee Agency (MIGA) (see "Increasing Pri-
financial structures. sector. For example, a power project in vate Capital Flows to LDCs," by Ibrahim
IFC, the Bank's affiliate, lends and makes Brazil helped to integrate the two most Shihata, Finance & Development, December
equity investments directly in the private important service centers, the Southeast 1984). This is an autonomous organization
sector. Although small compared with the and the South, and upgraded the efficiency which insures investors against such risks as
World Bank and many private banks (in June of the major industrial and commercial losses due to nationalization or loss of control,
1987 its portfolio of disbursed loans and centers. Transport projects in Korea sup- war, or civil disturbance, and restrictions on
equity was $1.9 billion, with investments ported the transformation of the economy the exchange conversion or transfer of
in 404 companies in 77 countries), its by linking major ports with the industrial profits. In addition, MIGA will do research,
activities have an important catalytic effect. complexes around Seoul and provincial provide information and policy advice to
Private financial institutions participate in capitals. Bank assistance to the Telephone governments, and generally act to encourage
many of IFC's loans; during the last fiscal Organization of Thailand improved local and the flow of direct investment to and among
year IFC disbursed $165.5 million in funds long-distance service throughout the coun- developing countries.
from participating banks and other financial try. Deregulation. The Bank has given sup-
institutions, For example, IFC recently port for the rationalization or abolition of
arranged for a $50 million syndicated loan Policy environment regulations affecting private enterprise in
with commercial banks to Morocco's tour- Through its policy dialogues with client such countries as the Central African
ism and housing development bank, to governments and increasingly through its Republic, Indonesia, Mauritius, Mexico,
finance private tourism projects in Mo- structural adjustment and sectoral adjustment Nigeria, and Pakistan. The Bank is support-
rocco. IFC has supported growth-oriented loans, the Bank works to promote economic ing Indonesia's efforts to promote foreign
investment funds in such countries as the policies that, among other things, support a investment through changes in the regu-
Republic of Korea, Malaysia, and Thailand, competitive and efficient private sector. Over latory environment, such as relaxing the
which attract foreign equity and also serve the last five years Bank policy-based lending requirements for local participation in joint
to familiarize foreign investors with local has been 13 percent of total lending; in ventures and extending the validity of
securities and improve local companies' addition, a number of traditional projects investment licenses. A study of licensing
access to world capital markets. IFC is contain conditions directed at policy reform. restrictions on private investment is under
working to promote the conversion of debt Often these loans assist the private sector way as the first step toward extensive
owned by developing countries into equity by removing distortions and increasing access deregulation. In Mauritania the Bank, in
in local companies. to markets. Examples of the types of collaboration with the International Mone-
IFC also assists private development measures supported are the replacement of tary Fund, is assisting in the revision of the
through advice, services, and guarantees. controls with market prices, where appropri- investment code to stimulate private invest-
For example, through the Guaranteed ate; the pricing of public services to cover ment and in the abolition of import licens-
Recovery of Investment Principal, IFC economic costs; reduction of trade barriers ing. It will also help to improve assistance
shares risks with foreign equity investors; and the introduction of more realistic ex- to local entrepreneurs for project pro-
the Africa Project Development Facility change rates; use of market-determined motion and management and expand the
provides technical assistance to small- and interest rates and the curtailment of credit credit, training, and advice available to
medium-sized businesses in Africa; the allocation by governments. Increasingly, the private business. The Bank has supported
African Management Services Company Bank has been promoting measures that Pakistan's efforts to introduce a range of
finds senior executives from around the affect private sector development by encour- incentives for private industry, improve the
world to work with African companies; the aging foreign and domestic private invest- export credit guarantee scheme, and change
Foreign Investment Advisory Service as- ment, deregulating private activities, and the collateral practices of banks to help
sists governments to review and adjust streamlining and rationalizing regulations. small exporters obtain credit.
policies, regulations, and institutions to Promotion of new private investment This The Bank also emphasizes improving
facilitate direct foreign investment; while has taken a variety of forms, including governments' capacity to manage their
IFC's capital markets department gives schemes to refund import taxes paid by interactions with the private sector. Gov-
advice to governments on how to organize, exporters, improved private sector access ernments tend to overregulate, partly
modernize, and internationalize their finan- to credit, removal of restrictions on invest- because they mistrust the market's ability
cial markets. ments, removal of tax disadvantages and to curb private sector excesses. Paradoxi-
Lending for infrastructure, services. selective introduction of tax incentives, secu- cally, particular interests in the private
Much Bank lending aims to accelerate rity against expropriation without com- sector may welcome government regula-
economic growth by removing bottlenecks pensation, and the like. In Ghana, Kenya, tion because they are able to manipulate the
—whether caused by inadequate infrastruc- Liberia, the Philippines, Papua New Guinea, rules to serve their own ends. Bank-
ture, poor public services, lack of trained Yemen Arab Republic, and Zambia, Bank- financed technical assistance is increasingly
manpower, inefficient investments, or low financed consultants are helping governments helping to strengthen the public institutions
worker productivity attributable to poor with the preparatory work necessary to responsible for promoting private develop-
health or malnutrition. The resulting sav- attract foreign oil companies for exploration ment, curbing monopoly practices, and
ings in the costs of doing business may be and petroleum development. In Mauritius the regulating private activities.

42 Finance & Development I March 1988

Rationalizing public activities countries the Bank is promoting the creation changing regulations on private agriculture
The Bank has also supported programs to of funds that will assist indigenous private or industry, while projects would continue to
rationalize the public sector and reduce the buyers of state-owned enterprises with loans provide credit to promote and rehabilitate
"crowding out" of private activities (see to rehabilitate their newly acquired enter- private enterprises and assistance in market-
"Privatization and the Public Sector" by prises. ing or manpower training.
Samuel Paul, Finance & Development, De- The Bank also assists with reviews of The Bank's planning of country strategies
cember 1985). Where appropriate, these public expenditures, designed to concentrate for its lending will also reveal new areas that
programs eliminate public monopolies, priva- scarce funds on high priority activities and to need analytical work, followed up with prac-
tize public activities, and redirect public assure that the public sector does not crowd tical advice. For example, besides continuing
expenditures. out the private from access to labor, credit, support for the sale and liquidation of SOEs,
The elimination of public monopolies has or other resources (see "Reviewing Public where appropriate, the Bank will explore
been an important stimulus to private activity Investment Programs" by Basil Kavalsky, opportunities for private delivery of public
in many cases. For example, in 1981 the Finance & Development, March 1986). Many services and for management contracts,
Somalia Government with Bank support of these reviews are undertaken in the leases, and joint ventures. Indonesia's experi-
eliminated the monopoly power of the Agri- context of structural and sectoral adjustment ence in contracting a Swiss firm to run its
cultural Development Corporation in maize lending. In a similar vein, the Bank is customs service, or Thailand's lease of
and sorghum marketing; by 1984 ADC's supporting Pakistan's move to restrict public passenger transport on certain rail lines to the
share of total purchases of these crops had industrial investment to the completion of private sector, could have wider applicability.
dropped to 1.6 percent while production had ongoing projects in order to avoid crowding Contracting out or leasing may be appealing
almost doubled. In Morocco an agricultural out private industry; the private sector's in theory, but many government officials are
sector adjustment loan is supporting the share of total investment is expected to grow wary about their capacity to negotiate and
Government's efforts to put the public and from 36 percent in 1986–87 to 50 percent in monitor agreements. While Bank studies will
private sectors on an equal footing in fertilizer 1987–88. The Bank is supporting Senegal's inform them about the experience of other
marketing and to close 80 percent of the adjustment program, which aims progres- countries, Bank projects will assist them to
outlets of the public enterprise as its sales sively to withdraw the state from direct draw up and manage contractual agreements
decline in the face of private competition. In involvement in production and promote pri- with the private sector, as well as to devise
Niger, when private traders were allowed to vate sector initiative and investment, while ways to assist the private sector to respond
compete with the public food-importing enter- achieving greater efficiency of public resource to the expanded demand.
prise, more foodstuffs became available, at management and restoring internal and exter- Another area that is receiving increased
lower prices, even in formerly neglected nal creditworthiness. attention is the development of capital mar-
remote areas. kets. In even the relatively more developed
Divestiture has become increasingly wide-
Future Bank programs countries, the limited size of capital markets
spread in the developing world. While the sale The Bank plans to increase its support of is an important barrier to efficient develop-
of enterprises is complex and politically a more efficient and competitive private ment. Too frequently banks operate in
difficult, more and more governments intent sector both by strengthening ongoing lending segmented markets under heavy regulation
on stemming deficits, improving efficiency, and economic work and by developing new and public borrowing crowds the private
and reducing the management burden are approaches. Country teams within the Bank sector out of formal credit markets. Thirty-
selling, leasing, or liquidating government will develop strategies appropriate to each five developing countries have equity mar-
assets. Some 41 of the projects approved by country's circumstances and coordinate the kets, but most of these are small, poorly
the Bank from 1980 to 1987 include elements various actors in the Bank group. Coordina- regulated, and dominated by a few large
supporting the divestiture of state-owned tion between the Bank and IFC has increased traders. IFC provides advice and support for
enterprises (SOEs), either through liquida- in recent years; IFC officers participate in the development of stock markets; the Bank
tion, sale, contracting out their management, Bank country strategy meetings and there through its SALs and financial and industrial
or leasing. These elements include the are regular consultations between country sector adjustment loans will increase its
conditions in structural adjustment or sectoral managers in the Bank and IFC. The Bank has efforts to eliminate subsidized interest rates,
adjustment loans, studies to help identify created a new division, the Public Sector credit rationing and centralized allocation,
divestiture candidates and to design sales Management and Private Sector Develop- improve the capital markets, and create
programs, and financing for legal, accounting, ment Division, to enhance cooperation and competitive, multipurpose banking systems.
or investment-banking advice. devise new approaches.
Liquidation of nonviable enterprises has The Bank will design private sector assess-
been a condition of structural adjustment ments for selected countries as a basis for
lending in, for example, Burundi, Malawi, developing strategies where knowledge of the Mary Shirley
Panama, and Thailand. In Togo the Bank has private sector is limited. On the basis of these a US national, is an econo-
supported privatization through policy-based assessments, country teams will be better mist and Public Enterprise
lending and by funding technical assistance; able to work with IFC colleagues, govern- Advisor, Public Sector Man-
IFC has assisted the Government to evaluate ment officials, and private sector repre- agement and Private Sector
bids on its SOEs and has invested directly in sentatives to develop programs that encour- Development Division.
one of the privatized enterprises. In countries age private sector development at the macro, Before joining the Bank
as diverse as the Congo, Jamaica, the sector, and enterprise level. For example, at staff, she worked at the
Philippines, and Turkey, the Bank is support- the macro level, structural adjustment loans Organization of American
ing the preparation of privatization programs, would more explicitly address reform of the States.
the identification of private buyers, and the investment code or the tax laws; at the sector
negotiation of sales. In several African level, adjustment loans would concentrate on

Finance & Development I March 1988 43