Privatized Cigarette Enterprises and Public Health

1. Privatized Cigarette Enterprises and Public Health By Ayda A. Yurekli, Ph.D World Bank Meeting of Mediterranean Countries, Malta, September 2001

2. The Objectives • To examine the privatization of cigarette enterprises from public health perspective • Why were state-enterprises established, why privatize • What are the expected benefits of privatization • Why these benefits may undermine Public Health • Are Public Health concerns valid? • Do private enterprises operate efficiently? • Do they have higher productivity? • Do production and consumption increase? • Does privatization reduce the consumer price? • To discuss the Pros and Cons of Privatization

3. Reasons for State Enterprises • increase government revenues and control prices • insufficient or lack of private investment • control economy and be self reliant; • protect national security.

4. Why Privatize State Enterprises? • Became burden on the government budget and slowed down economic growth. • Overstaffed • Paid excessive wages and benefits to employees • Lacked autonomy and poor incentives to managers • Operated inefficiently and unproductively • Had old and inefficient technology • Higher corruption and • Produced low quality products • Emerging Capital Markets (i) Increasing private and foreign investment

5. Structural Reforms • To reinforce macroeconomic policies • To promote efficiency • To reduce macroeconomic imbalances • Privatization • Reform tax system and administration • Financial and trade liberalization

6. Sectoral Distribution of Privatization by Region, 1988-1993 Source : Sader 1995, LAC : Latin America, ECA, East and Central Asia, EAP : East Asia and Pacific, SA : South Asia; Africa : Sub-Saharan Africa, MENA: North America and Middle East

7. Private Investment in Cigarette Production in Ukraine and Turkey, 1990s Source: USDA, World Tobacco Files, Kravosky, 2000

8. Expected Benefits and Outcome of Privatization EXPECTED BENEFITS LEADS TO EXPECTED OUTCOME Efficiency and Productivity Lower Prices Higher Quality More Variety • Increased • - Consumption • - Users • - Accessibility • - Affordability

9. How does Privatization of Cigarette Enterprises affect Public Health ? EXPECTED OUTCOME TO PUBLIC HEALTH • Increased • - Consumption • - Users • - Accessibility • - Affordability • Increasing deaths and disease • Increasing health care costs • Increasing burden on • smokers • non-smokers • families • society • economy

10. Do Private Enterprises Operate Efficiently?Higher Labor Productivity

11. Do Private Enterprises Operate Efficiently?Higher Labor Productivity

12. Increasing Labor Productivity: What consequences for employment ? TBT:Food Beverages and Tobacco Manufacturing: Source: Kasnakoglu, Cakmak 2000, Onder 2001

13. Labor Adjustment Prior to Privatization in Turkey

14. Labor Adjustment:Post Privatization,State Cigarette Enterprises in Ukraine

15. Efficiency: Why adjust wages after privatization?

16. Efficiency: Why adjust wages after privatization?

17. Privatization and Production:Is production higher after privatization?

18. Privatization and Production:Is production higher after privatization?

19. Would privatization increase consumption?

20. Does privatization increase consumption?

21. Do prices increase or decrease after privatization?

22. Operating Environment:Monopolistic Competition: Follow the leader Private Production

23. Why doesn’t an efficiency gain reduce prices?Price Control: Below Market Rate Prices

24. How can prices be lower than costs? Subsidies • TEKEL has been incurring loses and owes USD 100 million to international tobacco enterprises. • TEKEL receives high subsidies from the government budget.

25. Impact of SubsidiesWho gains, who loses? • Government finances its subsidies from government tax revenues and also internal and external borrowing. • Government subsidies create a substantial burden on government budget in Turkey • Government increases prices of state enterprise products to finance loss-making enterprises. • As a result, consumers face higher prices. In the long run, consumers and society lose.

26. Will consumer prices decrease after privatization?Depends on pre-privatization environment. • If the industry is heavily subsidized- NO • If the government controls the price with soft budget- NO • If the current prices are below the market rate- NO

27. Pros and Cons of Privatization Pros • Increases foreign investment • Increases government revenues • Funds can be reallocated to other good uses • No conflict of interest for government (increasing cigarette production and reducing demand) • In the short run, price may increase • Products meet consumer’s taste and demand Cons • Reduced employment (maybe) • Lower salaries and benefits (maybe) • Worse working conditions • Aggressive marketing, promotion may raise consumption

28. Solution:Negative effects ofprivatization on public health minimized if : • Regulatory tobacco control framework is set to protect consumers • Government controls tobacco epidemic through tax policies • No pre-tax adjustment discussion with the private enterprises