Economic Impact of the Privatisation Programme in Rwanda: 1996-2003

By Moz Cherif1 The privatisation programme in Rwanda is an integral part of the governments policy of economic liberalisation. It is implemented through a comprehensive set of reforms and policies undertaken by the Government of National Unity after the tragic events of 1994, under the guidance of the World Bank and the IMF. The pre-war Rwandan formal economy was dominated by the public sector. The war and genocide resulted in the destruction of the infrastructure of numerous state owned companies, but even more damaging was the loss of human capital through the death, flight or imprisonment of qualified employees and managers of these companies. This paper assesses the impact of the privatisation programme in Rwanda between 1996 and 2003, in the context of post-conflict reconstruction of the Rwandan economy. We first outline the historical and legal background of the programme, its objectives, methods and degree of realisation. Then we attempt to quantify the impact of the programme on public finances. The next section assesses the impact of the programme on the performance of privatised companies; case studies are used to complement a partial quantitative analysis. Finally, we draw conclusions and recommendations for public policy from our analysis.

Background to the Privatisation Programme

Legal background The privatisation programme was established by a law dated 11 March 1996 on Privatisation and Public Investment. The Presidential Decree dated 3 May 1996 put in place the institutions to implement this programme. In October 1997, the Privatisation Secretariat actually started its work. In addition to the privatisation programme, the government decreed other laws with the aim of reviving and strengthening economic activities in Rwanda, including the Tax Law of 1996, the Investment Code of 1998, and the measures to liberalise foreign exchange put in place in 1996 and 1997. Why privatise? Here are some of the main objectives of the privatisation policy in Rwanda: 1. To reduce the shares held by government in public companies, thus alleviating the financial burden on its resources (through the elimination of subsidies and state investments) and reducing its administrative obligations in these enterprises;

The author is an ODI Fellow at the Privatisation Secretariat, Rwanda. Views expressed in this paper are those of the author. They do not represent the official position of the Privatisation Secretariat or the Overseas Development Institute (ODI).

2. To generate revenues for the government through the sale or lease of state owned enterprises (SOEs); 3. To ensure better management and financial discipline in privatised companies; 4. To restructure and rehabilitate public companies, particularly those damaged by the war of 1994; 5. To attract foreign investment in Rwanda and the accompanying transfer of technology and know how; and 6. To encourage Rwandan citizens to invest in the private sector and to stimulate their entrepreneurial spirit. How are companies privatised? In almost all cases, the objective of the government is to withdraw completely from the management and ownership of state-owned enterprises (SOEs). Most companies are sold to a private owner, but some are also leased, particularly when the activity of the company involves the direct exploitation of natural resources, e.g. Kigembe Fishery, Rubirizi Grazing Fields. Regardless of the size of the company, privatisations are usually realised through a public call for tender, followed by the submission of technical and financial bids by interested buyers. Only those bidders who meet minimum technical requirements are retained and the highest bidder among them usually wins. One can however distinguish between several main types of privatisation: 1. Small and medium SOEs (mainly in the agri-business sector or small hotels): the call for tender is usually advertised in the national media only and the company is sold to a single entrepreneur, company, cooperative or association; 2. Mixed ownership companies (only partly owned by the State): shares owned by the State are sold to other shareholders in priority if they have pre-emption rights or to other private investors, e.g. BCK (food retailing) and Tabarwanda (cigarette manufacturing); 3. Larger companies: international consultants are hired to advise the government on a privatisation strategy and to evaluate the companys market value. Then the call for tender is published in both national and international media, and a detailed contract is negotiated with the successful bidder, e.g. Rwandatel, tea production units; 4. Companies that are in difficulties but not bankrupt can be restructured before being privatised and the government can take over responsibility for some of their long term debts, e.g. BCR, a commercial bank, where the Government is injecting fresh capital before privatising it; 5. Bankrupt companies are liquidated. A liquidator is appointed who is in charge of selling assets and repaying debts that can be repaid. Any money left after all debts are repaid is transferred to the shareholders (including the State)

before the company ceases to exist. E.g. Air Rwanda, Petrorwanda (oil product distribution); 6. Electrogaz, the water and electricity utility, is a special case. The government has signed a five year management contract with a private company in September 2003. After those five years, the government will decide whether to keep the company under state ownership or to privatise its ownership. How advanced is the privatisation programme? Out of a total of 74 companies to be privatised, 30 have already been transferred to the private sector, 3 others have reverted temporarily to State control after the buyers failed to comply with their obligations, 6 are being liquidated, 10 are at an advanced stage in the process of privatisation and 25 are yet to be privatised. The first company to be privatised in 1997 was Kabuye Sugar Works, the only sugar manufacturer in the country, which was sold to the Madhvani Group. In 1998, eight companies were privatised: three in the agri-business sector, two hotels, three industrial companies and Petrorwandas petrol stations were sold to Shell. In 1999, only five companies were privatised out of which there were two coffee processing factories. In 2000 also five companies were privatised, the largest of which was Sopyrwa, a pyrethrum processing and exporting company. The pace of privatisation picked up again in 2001 with the sale of seven more companies, plus the governments 31% share in Tabarwanda, which was sold for $1.5Mn. Another five companies were sold in 2002. No company has been sold in 2003, but some of the largest companies are in the process of being privatised. The management contract with a private company for Electrogaz was signed in September 2003. Two tea estates and a bank (BCR) are being sold. In addition, Rwandatel, the national fixed telephony company, is in the process of being brought to market, with 80% of the shares to be sold to a strategic investor.

Impact on public finance

Before privatisation, the government invests in and subsidises SOEs. In exchange, it receives dividends and fiscal revenues. After privatisation, the government receives a one off payment if the company is sold (or an annual income if it is leased). Investment from the government and dividends cease, but fiscal revenues remain. In order to assess the impact of privatisation on public finance, we must analyse the impact of that policy on these various elements shown in Figure 1. It is, however, difficult, to isolate the impact of privatisation from that of other government policies and general macroeconomic conditions.

Figure 1 Fiscal impact of privatisation

State-owned enterprise (SOE)

Privatised company

Investments

Other things being equal, we expect privatisation to increase transfers from the productive sector to the government. There is first the direct impact of privatisation proceeds and the reduction in transfers from the government (there is also an opposite impact as dividends from SOEs are expected to fall). But, because the private sector is usually more efficient than the public sector, we also expect tax revenues to rise after privatisation as sales and profits increase.
Table 1 Financial transfers between Government and productive sector (Bn Rwf)2
Profit taxes on corporations Turnover/VAT taxes Dividends from SOE Net revenue from privatisation Total transfers from productive sector Gvt trasfers to productive sector Net transfers from productive sector 1998 20.10 18.10 0.86 1.62 40.67 36.11 4.56 1999 12.40 20.30 0.86 0.24 33.79 32.57 1.22 2000 15.20 20.10 0.86 0.34 36.50 30.13 6.37 2001 17.30 28.00 1.69 1.11 48.10 43.32 4.78 2002 18.20 29.70 1.60 0.27 49.77 43.39 6.37

Source: Ministry of Finance and Economic Planning, Rwanda In practise, the direct impact of privatisation has been rather small and unexpected. Privatisation proceeds over the last five years have reached a total of some 3.57 Bn Frw (approx. $7 Mn), less than 4% of total transfers from the productive sector to the government in any one year. Dividends from SOEs have also been small, but they have approximately doubled between 2000 and 2002, despite privatisation. The increase in dividends can be attributed to economic growth and improved performance from SOEs, which more than compensated for the fall in dividends from privatised companies.

Dividends
2

Dividends for 1998 and 1999 were not available, so it was assumed that they were at the same level as in 2000.

Taxes

Subsidies

Taxes

one-off payment from buyer

Government

It is therefore taxes on companies, both public and private, that had the largest impact on transfers from the productive sector. Profit taxes on corporations dropped slightly between 1998 and 2002, from 20Bn Frw to 18Bn Frw, but that was more than compensated for by the increase turnover and value-added taxes (VAT), which rose by 11Bn Frw between 1998 and 2002. This is mainly due to the introduction of VAT in October 2000, which replaced the less systematic turnover tax. The overall increase in tax revenue and therefore total transfers to the government was quite independent from the privatisation programme, given the relative small scale of the latter.
Figure 2 Financial transfers between the government and the productive sector
60.00

50.00

40.00

Bn Frw

30.00

20.00

10.00

0.00 1998 1999 2000 Gvt trasfers to productive sector 2001 2002 Net transfers from productive sector

Total transfers from productive sector

Source: Ministry of Finance and Economic Planning, Rwanda Transfers to the productive sector, or economic services as defined by the World Bank, comprise support for economic activities, such as agriculture, industry, commerce and infrastructure3. Surprisingly, these have also risen in tandem with privatisation, from 36Bn Frw in 1998 to 43Bn Frw in 2002. This is not so surprising, however, when one considers the modest size of privatisation so far and the fact that Rwanda, after the war of 1994, had a low level of government expenditure on productive activities. So, regardless of the privatisation programme, there was a need to increase expenditure on these services, particularly in the field of infrastructure; and since the private sector is still under-developed, there is a need for the government to shoulder part of those expenses. Thus, the overall impact of the privatisation programme on public finance has been quite small so far. It is dwarfed by other policies such as taxation and rehabilitation of the countrys productive sector. This is quite normal, given that none of the major state-owned utilities, Electrogaz and Rwandatel, had been privatised by 2002. Nevertheless as shown in Table 1 and in Figure 2, there has been a steady net flow of financial resources from the productive sector to the government between 1998 and
3

The other types of government expenditure being military/security, social and administrative services.

2002, as transfers from the productive sector to the government exceeded transfers in the other direction, which is consistent with the overall policy of liberalising and privatising the economy. Revenues and costs of the privatisation programme
Table 2 Revenue

and expenditure of the privatisation programme Expenditure (Mn Frw) 178 1753 739 1114 230 4014 % 4% 44% 18% 28% 6% 100%

Experts and consultants Restructuring and payment of company debts State investment in companies Advance to the State Other privatisation activities Total Source: Privatisation Secretariat, Rwanda

Table 1 shows the break-down of expenditure of the revenue from privatisation. Considering that the costs of consultants, restructuring and payment of debts and other privatisation activities, such as advertising, are necessary for the privatisation operations and enhance the value of the companies to be sold, we have a total operational cost of 2,161 Mn Frw. Other expenditures, State investments and advances to the State, can be considered as transfers of funds to the Treasury. Total revenue from privatisation between 1997 and 2002 is 4,021Mn Frw. Subtracting total operational cost from total revenue, we have net revenue of 1,860 Mn Rwf, which is equivalent to about $3.7Mn (46% of total revenue). Out of total earmarked revenue from privatisation of 4021Mn Frw, as of September 2003, there were 694 Mn Frw left to be paid by the new owners of privatised companies, which represents a recovery rate of 85%.

Impact on the performance of companies

In order to assess the impact of privatisation on the performance of companies, ideally one would have to develop performance indices showing the performance of these companies before and after privatisation, as in Boubakri and Cosset (1998). Due to the difficulty of collecting data on the performance of Rwandan companies before privatisation4, a more pragmatic approach had to be adopted. We rely on case studies where we explore the impact of privatisation on a number of companies from various sectors. Nevertheless, it is still illuminating to start by looking at performance indices after privatisation. Out of 30 privatised companies so far, 20 are in operation (representing a success rate of 66.7%), 7 are not operational and 3 have been liquidated as they were bankrupt before privatisation. This compares favourably with the situation of those 30 companies before privatisation, where 15 only were in operation.
4

This problem is related to the human and physical destruction of the war in 1994, particularly of company records and archives.

The current failures are concentrated in the small agro-industry (4 companies) and the hotel sector (2 companies). We now look at a sample of 13 companies for which we have collected performance data. This sample is biased in that it contains mostly companies in operation, since data was generally not available for companies that are not operational. In order not to reveal any commercially sensitive information, the names of companies have been replaced by code names taking the form of Ci, which are used consistently for the remainder of this paper. Performance indices
Table 3 Company performance indices for 20025 Company code name C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11 C12 C13 Status before privatisation Leased, slow motion Stopped Rented, slow motion In operation Rented, in operation Stopped Destroyed In operation In operation In operation Stopped In operation In operation Year of sale 2000 1998 1998 1998 1998 2001 2000 1997 2002 1998 1999 2000 2001 Status now In operation In operation In operation In operation In operation Refurbishment In operation In operation (temporary refurbishment) In operation In operation In operation In operation In operation % of purchase price paid 100 100 50 100 23 100 100 100 50 100 100 50 100 Sales per employee (Mn Rwf) 85.2 1.8 0.3 12.0 n/a n/a 1.9 4.1 n/a 8.1 10.4 4.7 37.3 Profitability6 (%) -17 44 53 0 n/a n/a -39 -21 n/a -26 5 -3 0

Source: Privatisation Secretariat, Rwanda The table above shows that for the 13 sample companies, 9 of the new owners have fully paid, three have paid 50% and one company has only paid 23% of the purchase price. Only two of the companies, C3 and C5 run the risk of being confiscated from the current owners, due to their difficulties in repaying the full purchase price. Using profitability as a measure of success of the privatised companies, the picture that emerges is rather bleak. Out of the 13 companies, only 3 have positive profits and all three are small companies with turnovers of less than 150 Mn Frw each ($300,000). Two companies are breaking even in accounting terms. Two companies have not provided profit accounts. (Lack of accounts in small companies is a serious problem that has repercussions on tax collection and the general monitoring of their performance.) Five companies are showing profit losses, which is rather worrying since these include the four largest companies in the sample by annual sales (except for C13). In the case of C12, it made a small loss in 2002, after a very good profit
5 6

Or 2001 if 2002 is not available. Net profit as a percentage of sales.

rate of 33% in 2001. For some analysis of the reasons for these losses, see the case studies below. We also calculated annual sales per employee (turnover divided by the number of permanent employees) as a measure of the commercial efficiency of the companies in the sample. Out of 13 companies, four companies had sales per employee of more than 10Mn Frw ($20,000), 6 were below that threshold and three did not supply sales figures. Strangely, there does not appear to be any positive correlation between sales per employee and profitability. On the contrary, some of the most commercially efficient companies had negative or nil profitability. This could indicate that profit figures are not very reliable, in the absence of generally applied accounting standards in Rwanda. It could be that some of the more successful companies commercially are also able to show under-estimated profit figures in order to minimise their tax burden. Employment
Table 4 Employment data

Company

Nb. employees Nb. Employees after % change before privatisation privatisation C1 80 42 C4 105 25 C6 0 25 C7 0 14 C8 285 335 C10 45 32 C12 48 102 C13 123 53 Total 606 628 Source: Privatisation Secretariat, Rwanda

-48 -76 n/a n/a +18 -29 +113 -57 +4

We use a sample of 8 companies for which we have data on employment before and after privatisation to get a feel for the impact of privatisation on employment. These figures are approximate since no exact time series were available for the evolution of employment before and after privatisation. Again the sample is biased toward the larger and more successful companies, which are more likely to keep employment data. For these reasons and because of the small size of the sample, it is not possible to draw any firm conclusions about the impact of privatisation on employment in Rwanda. Overall, the figures show a small increase in employment. However, closer analysis allows us to identify different trends for different types of companies. Two of the companies were not operating before privatisation; therefore employment could only rise once the new owners started operations. With larger companies that were in operation before privatisation, the picture is mixed. Three of these companies experienced drastic reductions in employment: C1 (-48%), C4 (-76%) and C13 (57%). C8 experienced a modest increase in employment (+18%), whereas C12 more than doubled the number of permanent employees (+113%).

Case studies In order to complement the quantitative analysis presented above, we will add some more details about a number of the companies that were visited and asked to fill in a questionnaire for the purpose of this study. Case studies enable us to present qualitative information that makes up for the lack of quantitative data and shed some light on the factors that influence the success or failure of privatised companies. In each case, we first look at the situation of the company before privatisation. We then describe the privatisation process and the business plan (if any) presented by the new owners at the time of privatisation. Finally, we look at the current situation of the company and the extent to which the business plan has been realised. Seven companies were selected for these case studies. The choice was guided by two considerations: representing the various sectors in Rwanda and particularly the strategic sectors with a good potential for growth and export. The selected companies are also those for which we have the most complete data; therefore, they also tend to be the larger and more successful privatised companies: C1 operates in coffee bean trading and packaging. Coffee is the second largest export of Rwanda after tea and was identified by the government as a priority sector for development; C4, a printing company; C6, a metal smelting factory; C7, a hotel: the tourism sector was identified by the government as a priority sector for development; C8, a sugar refining company; C12, a pyrethrum processing and exporting company; and C13, a tobacco manufacturing company, was a mixed-ownership company before privatisation

C1 C1 was part of Ocir-caf, the parastatal in charge of the coffee sector in Rwanda before privatisation. It buys, packages and exports raw coffee beans. Several attempts at leasing the factory were made before privatisation. In 1996, A foreign investor signed a lease contract with the Government for C1 and invested an estimated 471Mn Frw. If we exclude investments during the lease period, C1s value was estimated at 274Mn Frw. The foreign investor was the only company to bid: they offered to pay 190.5Mn Frw and invest 463Mn Frw in the company. The sale contract was signed in 2000. However, it is unclear whether the investment was meant to be over and above what had already been invested during the lease period or not.

Post privatisation, it appears that the foreign investor only invested 34Mn Frw. In 2001, the company had a turnover of 2.3Bn Frw. The company, however, has made net losses in both 2000 and 2001, though it had been breaking even in 1998 and 1999. It had been repaying their debts to a commercial bank on a regular basis. The explanations offered for losses made are: The fall in coffee prices; The lack of reputation of the new owner as a relative newcomer to Rwanda; Crops of coffee beans are too small and because of seasonality, the company is idle most of the year; and the Cost of finance in Rwanda. C1 is currently paying 16% interest on its commercial bank debt.

During the leasing phase, C1 employed 80 people on a permanent basis. After privatisation, that number was reduced to 42, a 48% drop. C4 C4, a printing company, was evaluated before privatisation at 510 Mn Frw. After bidding, the company was awarded to Investor 1 for 350Mn Frw (part of a building belonging to C4 was sold separately for 70 Mn Frw) in 1999. The sale price represented 82% of the reference price. In July 2002, Investor 1 sold its shares to two Rwandan companies, one in the metal sector and the other an investment company. It is not clear whether the contractual obligations, including the investment plan, have been transferred to the new owners. Part of the privatisation conditions were to invest 120 Mn Frw in renovating and rehabilitating the company and to buy new machines within one year. So far, C4 has invested only 60Mn Frw in renovation and rehabilitation. Despite its good sales figures, C4 has been showing negative profits in the last five years. This is attributed by the company to: Failure to invest sufficiently. Due to its lack of colour printing machinery, potential customers have to go abroad. C4 was planning to invest an extra 120 Mn Frw to buy colour printing machines; Expensive finance: all the companys long term loans are from the shareholders as a result of high interest rates; and Lack of technicians in Rwanda to repair machines when needed. As a result, the company uses Belgian technicians who are expensive.

C4 is facing competition from four Rwandan companies and from foreign companies based in Uganda, Kenya and South Africa.

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The new owners were expected to keep current employees whenever possible, but the government took responsibility for indemnifying any employees who were made redundant as a result of the privatisation. In practice, most of the employees lost their jobs during the renovation and rehabilitation phase. After that, C4 recruited a new and much smaller workforce. C6 Before its privatisation, C6, a tin smelting factory, belonged to Redemi, the State owned mining company. It had been started in 1986 by another Rwandan company, Somirwa, with a processing capacity of 3000 tonnes of cassiterite. In 1985, Somirwa went bankrupt and C6 was bought by the government for 269Mn Frw and incorporated into Redemi. In 2001, the government decided to privatise C6 ahead of the other Redemi assets. Two foreign companies took part in the tendering process. The reference price was 446Mn Frw, but the government accepted a price of $300,000 (133Mn Frw at the time) from the highest bidder and a pledge to invest $4Mn (some 2Bn Frw) in renovating the company and expanding its capacity. The new owners investment plan includes the following: Rehabilitate the tin smelting plant; Build a lab for metal analysis; Build a metal processing plant; and Build a plant to produce ferro-niobium.

All these investments were estimated at $2.5Mn, plus $1.5Mn as a cash injection into the business. The tin smelting plant rehabilitation was completed in November 2002 and the lab in February 2003. The metal processing and ferro-niobium plants, however, were not ready yet in June 2003. It is now estimated that these latter developments will require an extra $1Mn and an extra 6-9 months compared to original plans. The company has not started commercial operations yet. In 2002, about $1Mn was invested in the C6 and it is ready to start producing processed tin before the end of 2003. The main problem encountered by C6 was the fact that import duties were higher than expected. C7 C7, a small hotel, was built as a cooperation project between the Rwandan and Belgian governments to facilitate access by tourists to the mountain gorillas, in the Ruhengeri region. It had become a property of the Rwandan tourism agency (ORTPN). During the war in 1990-94, it had been gradually abandoned and had fallen into disrepair. The reference price of 19.6Mn Frw corresponded to the expropriation compensation fee requested by ORTPN. When it was brought to market in 2000, two offers were 11

made for C7. The highest bidder was a Rwandan association working for the benefit of women and children, with an offer of 10.2Mn Frw; so C7 was attributed to them. The new owner presented a detailed business plan for rehabilitating and modernising existing buildings and buying new equipment, for a total cost of 167Mn Frw and within one year. The targets of the business plan have been achieved by the association. In addition, the new owners have had a positive social impact on the surrounding villages. They have: Organised local groups of women and attributed plots of land to them. Their produce is then sold to C7; Provided water supply points for the population; and Created folk dance groups associated with the hotel.

C7 appears to be well managed. It made a loss in 2001, but the profit made in 2002 almost balanced it out. The new owner being an association, it is expected that their primary objective is not profit making. They make regular monthly repayments of their long term debt and they have paid the full balance on the purchase price of the hotel. The guest house now has 15 employees. The main problem facing C7 is lack of access to the electricity grid due to their remote location. Using a small generator is very costly. The other problem is the bad state of the unpaved road from Ruhengeri to the guest house. C8 C8, a sugar refining factory, was created in 1969. In 1987, it was granted the legal status of a rgie, which means that it under direct management of the Ministry of Industry. It was looted during the war of 1994. Operations only restarted briefly in 1995 and the company was then on hold until its sale to a multinational company, which has extensive experience in the sugar industry in Africa, in November 1997. The factory was sold for $1,5Mn, subject to the following conditions: Up to 20% of the share capital should be sold to Rwandan investors at a future unspecified date. This has still not been done; Equipment should be repaired within 6 months and capacity should be expanded from 200 to 550 tonnes/day. In March 2003, they had reached a capacity of 350 tonnes/day. C8 also undertook to meet 100% of national sugar consumption, but so far they have only achieved 40% of that.

The Government also granted a 50 year lease for a total of 2735 hectares of land for the cultivation of sugar cane. So far, C8 has only paid 50% of the purchase price; they have the money to pay the balance, but the title deeds have not been prepared yet by the Ministry of Land.

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The factory crushes and processes sugar cane into refined sugar. C8 faces competition from imported sugar from Malawi, Swaziland and Brazil. In the last two years, C8 has made heavy losses. This is mainly as a result of floods in 2000-01 that affected about 31% of sugar cane planted areas. Nevertheless, C8 has managed to increase cane prices paid to out-growers as well as the price of refined sugar. Apart from the 370 permanent employees, C8 employs 4000 labourers on a casual basis. C12 C12 buys dried flowers from peasant growers; these are then processed into raw pyrethrum extract, which is used as an insecticide. It was created in 1978 as a SOE under supervision from the Ministry of Agriculture. During the 1994 war, the buildings and equipment were not significantly damaged. It was sold in December 2000 to a private Rwandan company for 550 Mn Frw. So far, the new owner has only repaid 50% of the sale price. The main points in the business plan were to: Rehabilitate the buildings and machinery of the factory; Increase the purchase price of dried flowers; and Increase dried flower production by providing assistance to peasant growers.

C12 has fulfilled all conditions above through significant investment of 140 Mn Frw in 2001 and 162 Mn Frw in 2002. Recently, C12 has branched out into a secondary activity by opening a hotel in the same region. The company has significant long term debts towards BRD, a Rwandan development bank, but these are repaid regularly, despite the high interest rate (17%). The company made very significant profit in 2001 of 254 Mn Frw, but it made a loss of 15 Mn Frw in 2002, which is mainly due to: A rise in the price of dried flowers (the input); A fall in the world market price of raw pyrethrum (the output) from $64/kg in 2001 to $49/kg in 2003; and A fall in production.

A major problem facing C12 is that it sells all its production to the US market through one wholesaler (Sumitomo), with whom it has little bargaining power. The solution to this problem would be to start refining pyrethrum at the factory. C12 could then either export refined pyrethrum at a better price or sell the end products (pesticides) to the local market. Machines for refining were bought by C12 in the 1980s, but have never been operated commercially. It is reported that these machines had been sabotaged before 1994

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under instruction from South African refiners. The rehabilitation of the refinery would cost some one million US$, but there is a strong will from the government and the private owners that this should happen. C12 has been informed that in the future buyers will only be interested in refined pyrethrum and not in raw extract. C13 C13, a tobacco manufacturing company, was created in 1975 as a joint-venture between the Rwandan State and a Belgian company. The ownership of the company was as follows: State Belgian company BRD Ocir-caf 23.55%; 47.88%; 21.43%; 7.14%.

When C13 was put on the market, the Belgian company, having itself been acquired by a multinational company, requested to exercise its pre-emption right. After negotiations, the government decided to sell its direct shares as well as those held by the coffee parastatal, Ocir-caf, to the multinational for a total sum of $1.5Mn; BRD, a State-owned development bank, retained its shares. The contract was signed in September 2001. In addition, the Government granted C13 the exclusive right to manufacture tobacco in Rwanda for a 5-year period, in exchange for $50,000 and the commitment to develop tobacco agriculture in Rwanda. C13 never developed tobacco agriculture in Rwanda, as it was estimated to be cheaper to carry on importing tobacco leaves. The government, therefore, allowed other tobacco manufacturers in Rwanda. For its long term debts, C13 managed to obtain a slightly lower interest rate than other companies: namely 13.75% from a local commercial bank. In 2001 and 2002, C13 invested 356Mn Frw and 218Mn Frw respectively in expanding its own operations. In the case of C13 we have some sales and profit figures for the period before privatisation, which allows us to compare the companys performance before and after privatisation. Sales per employee in the years 1997-1999 were below 20Mn Frw, but by 2002 they had reached 37Mn Frw (this is before the large number of redundancies in 2003). Profitability, however, was positive in 1998-99 but dropped to zero in 2001-02. Out of the 123 employees before privatisation, 70 were made redundant in 2003 in order to enhance the efficiency of the company. Those made redundant were provided with training so that they can become self-employed.

Conclusions
Out of a total of 74 companies, the Privatisation Secretariat has sold 30 companies to the private sector and it is liquidating another six companies, whereas three

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companies have reverted temporarily to State-control. So far, the privatised companies have been of a small or medium size. However, the state-owned water and electricity (and potentially gas) utility Electrogaz will be managed by a private international utility for a five-year period from October 2003. In addition, Rwandatel, the fixed telecommunication company, is expected to be sold to a strategic investor in the second quarter of 2004. Beyond that, the companies left to be privatised are mainly in the agri-business and financial sectors. So has the privatisation programme achieved its objectives so far? What has been its impact on the Rwandan economy? To answer these questions we have considered two areas of impact: public finance and the performance of the privatised companies. With respect to public finance, the impact has been rather small. The total proceeds from privatisation between 1998 and 2002 have reached $7Mn, which is less than 4% of financial transfers from the productive sector to the government. In fact, the largest increase to government revenues from the productive sector came from a large rise in Value Added Tax (VAT) that affected both public and private companies. Simultaneously, transfers from the government to the productive sector rose due to the need for rehabilitation after the 1994 war, particularly in the case of infrastructure. Overall, there has been a net flow of income from the productive sector to the government of some 23Bn Frw ($46Mn) between 1998 and 2002, which is consistent with the liberalisation and privatisation policies. Crucially, the sale of Rwandatel in 2004 is likely to have a much larger impact on public finance than all the other privatisations so far. As far as the performance of companies is concerned, it is difficult to quantify the impact of privatisation due to the lack of data on the performance of these companies prior to their sale to the private sector. Nevertheless, we have developed performance indices for a sample of companies post-privatisation. With respect to the preprivatisation period, we had to rely on a qualitative case study approach. Out of 30 privatised companies so far, 20 are in operation (representing a success rate of 66.7%), seven are not operational and three have been liquidated as they were bankrupt before privatisation. This compares favourably with the situation of those 30 companies before privatisation, where 15 only were in operation. With regard to payment of the transfer prices, the Privatisation Secretariat has recovered 85% of due payments. However, several companies were sold for less than the reference price. This either means that the reference price was over-estimated7 or that the government sold these companies at less than their market values. Despite the fact that our sample of companies was biased toward the larger and more successful cases, only 23% of the companies made a profit and 15% broke even in 2001-02. Sales per permanent employee, which were used as a measure of efficiency, ranged between 0.3 and 85.2 Mn Frw ($600-170,000), the average being 16.6Mn Frw (about $32,000) per year. With regard to the impact on employment, the sample of companies used shows an overall slight increase in employment after privatisation, but that trend hides a great
7

This could be because the valuation studies prior to privatisation under-estimated the damage to the companies assets, market and access to human resources after the war of 1994.

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variation between companies. At one extreme, we have a reduction of 76% of the workforce by C4 and, at the other extreme, we have an increase of 113% at C12. Some of the companies were not operating before privatisation, which explains why the workforce could only increase once the new owners restarted operations. The case studies allow us to identify common causes for the relative success or failure of privatised companies. These are some of the common themes behind the improvement in the performance of privatised companies: 1. The significance of investments into rehabilitation of buildings and buying new machinery by the private owners (e.g. C6, C8, C12, C13); 2. Respect for the business and investment plans presented by the companies before privatisation (e.g. C7, C12) 3. Reduction in the workforce when these were unnecessarily inflated prior to privatisation; and 4. Introduction of new technology (e.g. C6, C12) and better management which is harder to measure. As to the recurrent difficulties experienced by companies and, in some case, cited by them as reasons for their poor performance, these were the main ones: 1. Lack of investments or respect of the business plans by the new owners (e.g. C1, C4); 2. Fall in the prices of the products of the company; this is particularly the case with exported commodities, such as coffee and pyrethrum; 3. The high cost of medium/long term finance in Rwanda; loans from commercial banks have typical annual interest rates of 16%; 4. Delays in obtaining title deeds from the Ministry of Land even when the investors have enough cash to settle the entire purchase price of the company8; 5. Unreliable and insufficient production of raw materials used as inputs in some factories, such as sugar cane, pyrethrum flowers and coffee beans. This is partly due to inefficient farming techniques; and 6. Higher than expected tariffs on imported goods and machinery, e.g. C6.

Lessons learnt and recommendations for the remainder of the programme

The first lesson of this impact study is that privatisation in Rwanda does work. Despite all the problems encountered by private investors and a certain number of failures, overall privatisation has allowed 6 companies that were idle to restart
8

The lack of property titles hinders the companys access to credit, as the former could be used as collateral.

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operations (one company that was operating before privatisation has stopped operating afterwards) and, as the case studies suggest, it has led to significant investments into and improved the performance of former SOEs. In some companies, it has led to job losses; but there is no evidence that it has led to an overall drop in employment. It has also provided the government with a small non-fiscal source of income, which is likely to increase significantly in 2004 with the sale of Rwandatel. The case-studies, through the collection of data and opinions from company managers, enable us to draw some recommendations as to how to improve the privatisation process in the future: 1. Investors have to be screened carefully for their experience in the sector of the company to be privatised and for their financial ability to pay the agreed sale price and to make necessary investments. 2. Investors of agri-business companies have to be screened for their ability to move up the quality ladder and the value added chain. Exporting raw commodities only is risky for the country due to falling prices. 3. The Privatisation Secretariat should play a more active role in monitoring investors respect for their own investment and business plans. There has to be sanctions against those investors that fail to honour their pledges. Some steps have already been taken in this direction through the hiring of a member of staff in charge of monitoring privatised companies and the creation of a data-base of SOEs and privatised companies. 4. The government should impose Generally Accepted Accounting Practices (GAAP) on Rwandan companies and the tax authorities should monitor more closely the way profit figures are calculated. 5. The financial sector should be liberalised and privatised, so that interest rates can fall through increased competition between banks. So far, the cost of finance has been a hindrance to investment into privatised companies. 6. Capacity and motivation has to be reinforced at the Ministry of Land so that title deeds can be provided for new owners at a faster pace. 7. Policies for increasing the productivity of farmers should be stepped up, particularly for those crops that are used as inputs in agri-business, e.g. coffee, tea, pyrethrum, sugar cane. 8. The government should clarify, through the Rwandan Investment Promotion Agency, its policy on tariff reductions on imported capital goods for new investors and make sure that it is applied by customs officers.

References
Abt Associates, under contract to USAID (1999), Assessing the Impacts of Privatisation: the Experience of Morocco

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Asian Development Bank (2001), Special Evaluation Study on the Privatisation of Public Sector Enterprises: Lessons for Developing Member Countries Boubakri, N. and Cosset, J.-C. (1998), Privatization in Developing Countries: An Analysis of the Performance of Newly Privatized Firms, in Public Policy for the Private Sector, Note No. 156, World Bank Boubakri, N., Cosset, J.-C. and Guedhami, O. (2001), Liberalization, Corporate Governance and the Performance of Newly Privatized Firms, William Davidson Institute Working Papers Series No. 419, December 2001 Nellis, J. (2003), Privatization in Africa: What has happened? What is to be done?, Center for Global Development Working Paper

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Annex List of companies to be privatised in Rwanda

Company Sector of % State Privatisation activ ownership status ity for mixed ownership companie s9 AgriAdvanced business AgriAdvanced business Advanced 80.0% Advanced Advanced Advanced 23.5% 51.0% Advanced Advanced Advanced Advanced (4 out of 5) Liquidated Liquidated Liquidated. Not yet Not yet Not yet

1. Gishwati Dairy 2. Lake Kivu Fishery Kibuye 3. Scieries de Nyungwe (2) 4. BCR 5. Mulindi

Agribusiness Finance Tea plantations and factories 6. Pfunda Tea plantations and factories 7. Sorwath Tea plantations and factories 8. Rwandex Trading 9. Rwandatel Utility 10. Centre National Agride Petit Elevage business (5) 11. ETIRU Agribusiness 12. Sopab Agribusiness 13. Bunep Services 14. Bugarama Rice AgriMill business 15. Butare Rice AgriMill business 16. Couvoir AgriNational de business Rubirizi (Hatchery) 17. Rwamagana AgriRice Mill business 18. Soproriz Agri9

Not yet Not yet

Other companies are/were 100% State-owned.

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Company

19. Bacar 20. Banque de Kigali. 21. BRD 22. Caisse Hypothcaire 23. Sonarwa 24. Gte Touristique Ituze 25. Bralirwa 26. Imprisco 27. Papeterie du Rwanda 28. Magerwa 29. Gisakura 30. Gisovu 31. Kitabi 32. Mata 33. Nyabihu 34. Rubaya 35. Shagasha 36. Onatracom 37. REDEMI 38. Kigembe

Sector of % State Privatisation activ ownership status ity for mixed ownership companie s business Finance 33.0% Not yet Finance 50.0% Not yet Finance Finance Finance Hotel Industry Industry Industry Services Tea plantations and factories Tea plantations and factories Tea plantations and factories Tea plantations and factories Tea plantations and factories Tea plantations and factories Tea plantations and factories Mining Agri55.0% 80.0% Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Not yet Partly (Karuruma Smelting Factory privatised) Reverted to State

30.0%

50.0%

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Company

Fisheries 39. Hotel des Diplomates 40. Hotel Izuba

41. Sodeparal 42. Caisse d'Epargne Du Rwanda 43. OPROVIA 44. Petrorwanda 45. Air Rwanda 46. Stir 47. Rwantexco 48. Coffee Factory Nkora 49. Lake Ihema Fishery 50. Minoterie de Gatare 51. Mukamira Maize Mill 52. Hotel Akagera 53. Hotel Kiyovu 54. Projet Chaux (PVC) 55. Abattoir de Nyabugogo 56. Coffee Factory Gikondo 57. Coffee Factory Masaka 58. Dairy PlantNyabisindu

Sector of % State Privatisation activ ownership status ity for mixed ownership companie s business ownership Hotel Reverted to State ownership (with private management contract) Hotel Reverted to State ownership (with private management contract) AgriUnder liquidation business Finance Under liquidation Retailing Retailing Transport Transport Industry Agribusiness Agribusiness Agribusiness Agribusiness Hotel Hotel Mining Agribusiness Agribusiness Agribusiness Agribusiness Under liquidation Under liquidation Under liquidation Under liquidation Ownership under litigation Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

49.7%

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Company

59. Dairy PlantNyagatare 60. Kabuye Sugar Works 61. Lake Kivu Fishery Gisenyi 62. Lake Kivu Fishery (Cyangugu) 63. OPYRWA 64. Sonafruit 65. Guest House Kibuye 66. Hotel Rgina 67. Kinigi Guest House 68. Briqueterie de Ruliba 69. Imprimerie Nationale du Rwanda 70. Ovibar 71. Sorwal 72. Tabarwanda 73. BCK 74. Electrogaz

Sector of % State activ ownership ity for mixed ownership companie s Agribusiness Agribusiness Agribusiness Agribusiness Agribusiness Agribusiness Hotel Hotel Hotel Industry Industry Industry Industry Industry Retailing Utility

Privatisation status

Yes Yes Yes Yes Yes

88.4%

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes (management contract signed)

29.5% 30.7% 29.0%

Source: Privatisation Secretariat, Rwanda

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