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