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Privatized Cigarette Enterprises and
Public Health
By
Ayda A. Yurekli, Ph.D
World Bank
Meeting of Mediterranean Countries, Malta, September 2001
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
Reasons for State Enterprises
1. increase government revenues and control prices
2. insufficient or lack of private investment
3. control economy and be self reliant;
4. protect national security.
Why Privatize State Enterprises?
• Became burden on the government budget and slowed down economic growth.
(i) Overstaffed (ii) Paid excessive wages and benefits to employees(iii) Lacked autonomy and poor incentives to managers(iv) Operated inefficiently and unproductively(v) Had old and inefficient technology(vi) Higher corruption and(vii) Produced low quality products
• Emerging Capital Markets(i) Increasing private and foreign investment
Structural Reforms
• To reinforce macroeconomic policies
• To promote efficiency
• To reduce macroeconomic imbalances– Privatization– Reform tax system and administration– Financial and trade liberalization
Sectoral Distribution of Privatization by Region,
1988-1993 Regions/
Sectors
Primry Sector
Industry Infrastructure Financial Services
Other Total Amount US $ billion
LAC 15 18 41 24 2 55.2
ECA 8 50 11 21 10 17.9
EAP 6 29 45 10 10 16
SA 22 44 4 24 6 6
Africa 25 7 1 4 63 2.4
MENA 7 39 8 34 12 0.7
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
Private Investment in Cigarette Production in Ukraine and Turkey, 1990s
Country Investor Joint Venture or Subsidiary Investment
US $ million
Ukraine BAT Priluki (JV) 28
RJR/JTI Lviv and Kremenchuk (JV) 26
Reemstma Cherkassy and Kiev (JV) 76
Philip Morris Kharkiv(JV) 50
Turkey Philip Morris Torbali (S) 230
RJR/JTI Izmir (S) N/A
BAT Izmir (S) 250
Source: USDA, World Tobacco Files, Kravosky, 2000
Expected Benefits and Outcome of Privatization
Efficiency
and
Productivity
Lower Prices
Higher Quality
More Variety
• Increased
- Consumption
- Users
- Accessibility
- Affordability
EXPECTED OUTCOME
EXPECTEDBENEFITS
LEADS TO
How does Privatization of Cigarette Enterprises affect Public Health ?
• Increased
- Consumption
- Users
- Accessibility
- Affordability
EXPECTED OUTCOME
TO PUBLIC HEALTH
Increasing deaths and diseaseIncreasing health care costsIncreasing burden on • smokers• non-smokers• families• society• economy
Do Private Enterprises Operate Efficiently? Higher Labor Productivity
Labor productivity in Private and State Cigarette Enterprises in Turkey, 1998
2847
1953
784
0
500
1000
1500
2000
2500
3000
3500
RJR Philsa Turkish
1000
pac
ks o
f cig
aret
te p
rodu
ctio
n pe
r em
ploy
ee
Do Private Enterprises Operate Efficiently? Higher Labor Productivity
Labor Productivity in Cigarette Enterprises in Ukraine and difference in productivity (%) compared to UkranianCigarette
Factories
2%
122%
551%
568%
352%
30%83%
328%367% 281%
0
200
400
600
800
1000
1200
1995 1996 1997 1998 1999
1000
pac
k p
rod
uce
d p
er
emp
loye
e
Philip Morris Reemstra Ukranian Factories
Increasing Labor Productivity: What consequences for employment ?
Years Food, tobacco and beverages
Tobacco manufacturing
Cigarettes
Public Private Public Private Public Private
1980 113104 75056 50142 2665 N/A
1990 80524 107849 27045 5098 10574 0
1995 60048 108779 19053 5078 7338 N/A
1997 54510 122870 16027 6578 6535 1400
1998 6519 1119
TBT:Food Beverages and Tobacco Manufacturing: Source: Kasnakoglu, Cakmak 2000, Onder 2001
Labor Adjustment Prior to Privatization in Turkey
Employment in Tekel Cigarette Factories in Turkey, 1987-1998
104339933
8495
11315 11238
10574
11024
73387018
6535 65196000
7000
8000
9000
10000
11000
12000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Em
plo
ymen
t
Labor Adjustment: Post Privatization,State Cigarette Enterprises in Ukraine
Employment in Ukrainian State Tobacco Enterprises, 1995-1999
1587
1458
1329
1200
1625
1000
1100
1200
1300
1400
1500
1600
1700
1995 1996 1997 1998 1999
Em
plo
ymen
t
Efficiency: Why adjust wages after privatization?
Average annual gross wage in public sector, state cigarette enterprise, and private sector in Turkey
for selected years
0
2000
4000
6000
8000
10000
12000
1995 1997 1998
An
nu
al w
age/
emp
loye
e
US
$
State Cigarettes Public sector Private sector
Efficiency: Why adjust wages after privatization?
Average annual wages paid to cigarette industry and other Ukraine industries, 1996-1999
0
200400
600
800
10001200
1400
1996 1997 1998 1999
Hry
vnas
/em
plo
yee
Cigarette industry Ukranian Industry
Privatization and Production:Is production higher after privatization?
Cigarette Production by State and Private Cigarette Enterprises in Turkey
0
20000
40000
60000
80000
100000
120000
Cig
aret
tes
(to
n)
Total Cigarette TEKEL Private
50% increase since 1992
21% increase since 1992
730% increase since 1992
Private production started
Privatization and Production:Is production higher after privatization?
Pre and Post Privatization Period Cigarette Production in Ukraine and % increase in
production since 1993
11%
13%
6%28%
39%
27%
38%
0
20
40
60
80
100
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
bill
ion
pie
ces
Privatization started92% produced by private
Would privatization increase consumption?
Trend in Cigarette Consumption in Turkey, 1987-1999
0
20000
40000
60000
80000
100000
120000
140000
Mill
ion
Pie
ces
Total consumption
TEKEL
Private
Does privatization increase consumption?
Pre and Post Privatization Cigarette Consumption in Ukraine and % increase in consumption since
1993
43%
1%
16%
68% 78%56%
50%
0
10
20
30
40
50
60
70
80
90
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
Bil
lio
n o
f p
iec
es
Privatization
Do prices increase or decrease after privatization?
Efficiency and Consumer Prices on Cigarettes produced by Private and State Cigarette
Enterprises in Turkey, 1998
0
500
1000
1500
2000
2500
3000
RJR (Camel85mm)
Philsa(Marlboro
85mm)
Turkish(Tekel 2000,
85mm)
pro
du
cti
vit
y p
er
10
00
pa
ck
/em
plo
ye
e
0
50000
100000
150000
200000
250000
300000
Pri
ce
/p
ac
k T
urk
ish
Lir
a
productivity Price US $
Operating Environment: Monopolistic Competition: Follow the leader
Cigarette Prices for Selected Brands in Turkey
00.20.40.60.8
11.21.41.61.8
US
$/p
ack
Tekel 2000 Bafra nofilter Marlboro short
Private Production
Why doesn’t an efficiency gain reduce prices?
Price Control: Below Market Rate Prices
Brand/
Price
Samsun 100mm
pack
Tekel2000 100mm
pack
Maltepe 85mm
pack
Birinci 68mm
pack
Production Cost +Taxes
362,325 601,404 323,873 318,223
Retail Sale Price
325,000 650,000 275,000 200,000
Profit/Lost Per Pack
-37,325 48,596 -48,873 -118,223
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.
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.
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
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
Cons1. Reduced employment (maybe)2. Lower salaries and benefits (maybe)3. Worse working conditions 4. Aggressive marketing, promotion may raise consumption
Solution:Negative effects of privatization 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