Structure of the Rwandan Economy
Senior 6 · Economics
Structure of the Rwandan Economy
Lesson 3 of 4
25 min
The Banque Commerciale du Rwanda (BCR), Rwanda's first commercial bank, was incorporated in 1963. In 2004 the government sold 80% of it to Actis, a private-equity investor, and kept 20%. In 2012 Actis sold its stake to I&M Bank of Kenya together with two development-finance institutions, DEG and Proparco, and the bank became I&M Bank (Rwanda) (Actis, press release, 18 July 2012).
Think: why would a government sell most of a bank it owned? What might it gain, and what might it lose?
Definition
Privatisation: the transfer of ownership or control of enterprises or assets from the public sector to the private sector. In a wider sense it also includes contracting out public services to private firms and opening state monopolies to private competition (deregulation or liberalisation).
Nationalisation: the opposite: the state takes ownership of private enterprises.
State-owned enterprise (SOE): a business owned wholly or mainly by the government that sells goods or services, for example an electricity or water utility.
Privatisation is not one act but a range of arrangements, from contracts in which the state still owns everything to outright sale.
Rwanda's programme rests on a law on privatisation and public investment of 11 March 1996; a Privatisation Secretariat began work in 1997, and its functions passed to the Rwanda Development Board (RDB) in 2008. In 2023 the government proposed a new law to replace the 1996 one (allAfrica, 10 August 2023). According to The EastAfrican, 94 state enterprises were listed for privatisation when the process began, and by 2009 56 had been privatised and 7 liquidated.
| Enterprise | What happened | Lesson |
|---|---|---|
| BCR (bank) | 80% sold to Actis in 2004; sold on to I&M Bank, DEG and Proparco in 2012 | A partial sale to an experienced investor, followed by a second private sale |
| Rwandatel (telecoms) | Sold in 2005; the government cancelled the deal when the buyer missed its investment targets and sold the company to LAP Green Networks; its mobile licence was revoked in 2011 (Wikipedia, "Rwandatel") | A buyer's failure can undo a privatisation; regulation must enforce obligations |
| Tea factories | Most government tea factories were sold to private investors from the 2000s; in March 2022 about 5,000 smallholder tea farmers became owners of the Mulindi factory (allAfrica, 29 March 2022) | Ownership can be widened to the farmers who supply the factory |
At the same time the state still owns or creates firms where it judges markets too thin or the service strategic: for example Rwanda Energy Group (REG), WASAC and the national airline RwandAir. Rwanda is therefore not simply "privatising"; it is choosing, sector by sector, between private, public and mixed ownership.
Worked example
Worked example 1: sell or keep? (illustrative figures)
A state-owned firm pays the government a dividend of Frw 2 billion a year, expected to continue indefinitely. The government can borrow at 10% a year. An investor offers Frw 25 billion for the whole firm. Should the government sell?
Step 1: value of keeping it. The present value of a constant annual payment for ever, at interest rate , is :
Step 2: compare. The offer (Frw 25 billion) exceeds the value of the dividends (Frw 20 billion) by Frw 5 billion, so on these figures selling makes the state better off.
Step 3: what the numbers leave out. If private ownership also raises efficiency, the economy gains more. But if the buyer gains a monopoly and raises prices, consumers lose; if jobs are cut, workers lose. The price test is necessary, not sufficient.
Worked example
Worked example 2: efficiency and jobs after a sale (illustrative figures)
Before privatisation a tea factory processed 6,000 tonnes of green leaf a year with 400 workers. Three years after the sale it processes 9,000 tonnes with 300 workers.
Output per worker before: tonnes. After: tonnes, a rise of .
Judgement. Labour productivity doubled and output rose by half, which also raises demand for farmers' green leaf. But 100 factory jobs were lost. Whether the sale was good depends on whose welfare we count, and on whether farmers and laid-off workers share in the gains.
Warning
Privatisation is not the same as competition. Selling a monopoly creates a private monopoly. Benefits to consumers need competition or a regulator; in Rwanda, utilities are regulated by the Rwanda Utilities Regulatory Authority (RURA).
Tip
For "evaluate privatisation" questions, always ask three questions: Is there competition or regulation after the sale? Was the price fair and the sale transparent? Who gains and who loses: taxpayers, consumers, workers or the buyer?
Important
Privatisation transfers ownership or control from the state to private owners, by management contracts, leases, concessions, partial or full sales, or liquidation. It can raise efficiency, relieve the budget and bring investment, but it risks private monopoly, job losses, cheap sales and neglect of social goals. Rwanda has privatised banks, telecoms and tea factories since its 1996 law, with mixed results, while keeping state firms in strategic sectors.
EconplusDal, "Privatisation". An A-level revision video. Note the arguments for and against, and the point about natural monopolies; then apply them to Rwanda's cases in the table above.
Practice
Sources and credits
Written by Ganzaa: the text, the diagram, the tables, the worked examples and the practice items. The figures in both worked examples and practice item 5 are illustrative. This lesson adapts CC BY-SA material and is shared under CC BY-SA 4.0.
