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Role of capital market in privatisation

By Dr Lawrence J. Gomes
The active and broad-based capita] market (trading stocks and bonds issued by the corporations) is essential to the success of a privatisation programme. Privatization, has become a key feature in improving productive efficiency in developed and .developing countries like Bangladesh.
In developing countries, the push for privatisation has also emerged as a policy issue to halt the debt crisis and worsening fiscal performances of the early 198Os. The economic rational for this policy push is that the profit stream that can be extracted from the assets in the hands of private owners is higher than those operated under public ownership.
Privatisation Increases total factor productivity and factor income which would increase the tax revenue base in the developing countries. Broadly defined. privatisation embraces denationalisation or selling-off state-owned asset, competitive tendering, together with the introduction of private ownership and market arrangements.
The economic principles that highlight th* move from public ownership to privatisation as a vehicle to improve productive efficiency has rested on two main arguments. First, it Is claimed that private ,ownership promotes produc-'
five efficiency through the incentives ana disciplines provided by the free market.
The production and the sale of goods and services by the state-owned enterprises in the. market are not compatible* with the pursuit of efficiency because, the waste of resources. poor quality of products. and losses' incurted by the enterprises do not result in any monetary losses to the management and other employees.
Second, as economist Alchian has pointed out. the Inherent efficiency differences between public and private enterprises arises from property rights: the argument that the broadly dispersed ownership rights combined with the nontransferable ownership rights reduces ftie incentives of public owners (voters or tax payers) to monitor the performance of public managements.
On the other hand, the more incentive-based and transferable ownership structure of private enterprises generates incentives for shareholders In the capital market to monitor the managerial performance.
The privatisation and the growth of the capital market are complimentary to each other. Tne capital market
would provide the venue through which State-Owned Enterprises (SOEs) wit! float new shares to the prospective investors in the primary market. To make the primary market attractive to the new investors in buying shares of the newly privatised enterprises. a smooth functioning of secondary market Is a must. The secondary market provides the opportunity to buy and sell the_prevtously-issued shares of different companies. Privatisation alsp heralds the development of a broad and deep capital market.
Large scale privatisation leads to higher nfarket capitalisation and greater liquidity.
In developing countries like Bangladesh, where the capital market is very narrow and thin, privatisation would help expand the capital market by attracting foreign capital The capital markets in other Asian countries are being invigorated with increased liquidity by the inflow of foreign capital The local and regional newspapers , are running the headlines, i.e..
"Foreign funds pouring into Asian Stock markets" and are reporting that in 1996 the voltime of funds would surpass the record Inflows of 1993.
Unfortunately, due to the political uncertainties in the country. Dhaka Stock Ex
change is being deprived of this inflow of funds — an important source of liquidity in the market.
The holding of equities in privatised companies by the general population could create a broadly-based “shareholder culture" while giving the public at large a direct stake in the performance of privatised companies
Recently the World Bank noted that where privatisation is politically unattractive and widely perceived as benefiting only the rich and powerful, popularising share ownership can provide policy-makers and legislators with the "political cover" necessary to push painful reforms through resistant legislative bodies.
The greater public partici pation through broad-based ownership would reinforce support for and the sustainability of the privatisation agenda
In many countries, govern ments have undertaken pro grammes to encourage popular equity ownership Some alstri-bution schemes have given preferential treatment to small investors in share allocation and sales to small investors are done at preferential prices
In some cases incentives are offered for small Investors to retain their shares for spe cific periods Marketing of
shares * entails advertising campaign in mass media to. persuade the public which may never have owned equity before, to purchase share.
The Dhaka Stock Exchange should advertise In the electronic and print media the benefits of enlisting publicly held companies with the Exchange.
The experience of most countries Is that institutional investors are becoming dominant players In the capital market. In those countries where the institutional Investors community lags behind. the government will have to consider measures to foster their expansion. An additional step toward modernisation of the Institutional market could come in the form of further deregulation of the rules governing investments by institutions especially the pension funds Currently no Bangladesh pension funds invest any por lion of their assets in stocks
It could be safely said that the active participation of pension funds will help solve the poor liquidity situation of the Dhaka Stock Exchange and would provide a solid support to the privatisation programme In Bangladesh
The donor countries and international development agencies should realise that the privatisation agenda of the
SOEs In Bangladesh cannot be frilly materialised without the growth and development of the capital market.
The recent criticism of the World Bank mission in Dhaka of inadequate progress towards the privatisation programme as agreed during the last consortium meeting In Paris loses its punch- unless the bank also pushes vigorously for the growth of an active capital market — the engine of pri vatisation
tenches Economics at the Uni versify of Wisconsin. West Bend and Milwaukee ISA A recipient of Rotary Interna tlonaI Foundation Award for teaching in developing coun tries. Dr Gomes us now to his home country as a visiting professor,