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, Regions/ Sectors Primry Sector IndustryInfrastructureFinancial Services OtherTotal Amount US $ billion LAC ECA EAP SA Africa MENA 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 CountryInvestorJoint Venture or SubsidiaryInvestment US $ million UkraineBATPriluki (JV)28 RJR/JTILviv and Kremenchuk (JV)26 ReemstmaCherkassy and Kiev (JV)76 Philip MorrisKharkiv(JV)50 TurkeyPhilip MorrisTorbali (S)230 RJR/JTIIzmir (S)N/A BATIzmir (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 EXPECTED BENEFITS LEADS TO

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

Do Private Enterprises Operate Efficiently? Higher Labor Productivity

Increasing Labor Productivity : What consequences for employment ? YearsFood, tobacco and beverages Tobacco manufacturing Cigarettes PublicPrivatePublicPrivatePublicPrivate N/A N/A TBT:Food Beverages and Tobacco Manufacturing: Source: Kasnakoglu, Cakmak 2000, Onder 2001

Labor Adjustment Prior to Privatization in Turkey

Labor Adjustment: Post Privatization, State Cigarette Enterprises in Ukraine

Efficiency: Why adjust wages after privatization?

Privatization and Production: Is production higher after privatization?

Would privatization increase consumption?

Does privatization increase consumption?

Do prices increase or decrease after privatization?

Operating Environment: Monopolistic Competition: Follow the leader Private Production

Why doesnt an efficiency gain reduce prices? Price Control: Below Market Rate Prices Brand/ Price Samsun 100mm pack Tekel mm pack Maltepe 85mm pack Birinci 68mm pack Production Cost +Taxes 362,325601,404323,873318,223 Retail Sale Price 325,000650,000275,000200,000 Profit/Lost Per Pack -37,32548,596-48, ,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 Subsidies Who 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 consumers taste and demand Cons 1.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