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BUSINESS WORLD

Public Enterprises and Private Sector Development in Sierra Leone
Posted by on Jan 9, 2009, 15:40

 

In the 1960s the Sierra Leone Government time made the achievement of economic growth a primary goal.  In line with development thoughts at the time, the Government placed so much emphasis on promoting industrialization, which was perceived as an integral part of the development process and was expected to facilitate the transformation of the predominantly agricultural economy to modern industrial economy.  The share of industry in the economy was expected to rise, generate opportunities for employment, raise levels of productivity and raise the incomes and living standards of the majority of the populations.  As a result the government adopted or rather copied the Import Substitution Industrialization (ISI) strategy. Such a policy sort to increase the proportion of goods supplied to both the domestic market and foreign market

 

State Owned Enterprises

The adoption of the ISI policy led to the establishment of many domestic industries in the country. These Public Enterprises (PEs) were set up by the government as statutory companies to perform specific functions, or carry out specified commercial activities.  They were expected to produce at home industrial goods that were imported with the view to dampen the effect of unfavourable terms of trade by reducing (or even eliminating) imports and by diversifying exports; and hence improve living standards of the people by increasing the rang of choices of food and other manufactured products in the domestic market. 

 

By the end of 1966 23 enterprises had already been established; and by the 2002 there were 44 state owned enterprise established, involved in manufacturing, trading, mining, transportation, services, and the provision of utilities. Government established these industries behind high protective walls aimed at shielding them from competition from industries of the West. The reason for protecting these infant industries was to limit competition in from abroad in the domestic market. These public enterprises were established so that they can make substantial financial contributions to the government in the form of profit, royalties and taxes.

 

They also created employment for the citizenry, especially in the 1960s. However, the strict control system put in place to protect these industries led to a situation were allocation of resources become Lopsided- interest rate on bank deposit become unattractive because they were not competitive in real terms nominal interest rate being lower than then the rate of inflation. These industries became revenue devourers rather that revenue generators, as their cost was far greater than their costs.

 

Why Privatization?

The privatization is defined as the deliberate sale by a government of state-owned enterprises, public enterprises (PEs) or assets to private economics agents. The term privatization is regarded as one of the most prominent trends in finance over the last two decades since it allows the market to allocate resources. It could be said that privatization has became the policy of choice in both developed and developing countries based on the belief that government-owned firms are less efficient than comparable private firms.

 

Many research studies have widely shown that privatization leads to enhancing the financial and operating performance of state-owned enterprises, public enterprises (PEs) following divestiture. As a policy, privatization could not only motivate privatized PEs but, equally important, it could also motivate public firms, including banks and utility providers, to readily face future changes in the economic system through its spill over effects. However, little is known about privatization around the country, even with the establishment of the National Commission for Privatization (NCP) in 2002.  The motive of privatization varies from country to country.

 

However, there are at least four reasons behind the privatization drive in Sierra Leone. The first reason is privatization occur as a part of the overall transitioning from a controlled economy to a more market oriented economic system. This is particularly true for countries like Sierra Leone that have been implementing the Import Substitution Industrialization (ISI) policy since the 1960s. Secondly, in our case, there is a program underway to denationalize the limited number of sectors and firms that are state-owned. Thirdly, since 1992 there is an ongoing effort to deregulate the overall economic system under the IMF structural adjustment programme (SAP); and thus privatization is a necessary tool. Lastly, the Sierra Leone government has the primary objective of raising funds for the government itself and privatization is a one of the revenue generation strategies.

It should be pointed out that the large portions of the global assets are privatized over the last two decades. This suggests that the factors that cause the transfer of the global banking system, for example, from the state ownership to the private hands are the inefficiency of the state ownership and the evidence that the private sector development promotes the economic growth of that country. The empirical studies have supported the inefficiency of the state ownership of enterprises. In addition; there is little doubt that the private sector, especially the banking sector, plays an important role in promoting the economic growth of countries.  In summary, the objectives of privatization, among other things, include the following: to raise revenue for the state; to promote economic efficiency; reduce government interference in the economy; promote wider share ownership; provide the opportunity to introduce competition; to subject PEs to market discipline; and to develop the national capital market




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