Professional Documents
Culture Documents
Techniques of Privatization
of State-Owned Enterprises
Volume I
Methods and Implementation
CharlesVuylsteke
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No. 41.
No. 42.
Campbell, Administrative and Operational Proceduresfor Programs for Sites and Services
and Area Upgrading
No. 43.
No. 44.
de Haan and Nissen, Animal Health Services in Sub-Saharan Africa: Alternative Approaches
(also in French, 44F)
No. 45.
Sayers, Gillespie, and Queiroz, The International Road Roughness Experiment: Establishing
Correlation and a Calibration Standard for Measurements
No. 46.
Sayers, Gillespie, and Paterson, Guidelines for Conducting and Calibrating Road Roughness
Measurements
No. 47.
No. 48.
No. 49.
Gunnerson and Stuckey, Anerobic Digestion: Principles and Practicesfor Biogas Systems
No. 50.
Turtiainen and Von Pischke, Investment and Finance in Agricultural Service Cooperatives
No. 5 1.
Shuval and others, Wastewater Irrigation in Developing Countries: Health Effects and
Technical Solutions
No. 52.
Armstrong-Wright,
Spanish, 52S)
No. 53.
No. 54.
No. 55.
No. 56.
No. 57.
Obeng and Wright, The Co-composting of Domestic Solid and Human Wastes
No. 5 8.
Levitsky and Prasad, Credit Guarantee Schemes for Small and Medium Enterprises
No. 59.
No. 60.
Okun and Ernst, Community Piped Water Supply Systems in Developing Countries:
A Planning Manual
No. 61.
Gorse and Steeds, Desertification in the Sahelian and Sudanian Zones of West Africa
No. 62.
No. 63.
No. 64.
Hillel, The Efficient Use of Water in Irrigation: Principles and Practicesfor Improving Irrigation
in Arid and Semiarid Regions
Techniques of Privatization
of State-Owned Enterprises
TECHNIQUES
OF
PRIVATIZATION
OF
STATE-OWNED
ENTERPRISES
Volume I
Methods and Implementation
Charles Vuylsteke
This volume (World Bank Technical Paper No. 88) reviews how privatization of
state-owned enterprises has been accomplished by drawing upon a broad sample
of experiences. It describes and illustrates methods which have been tried
out and some of the available options.
Volume II
Selected Country Case Studies
Helen B. Nankani
This second volume (World Bank Technical Paper No. 89) presents country
case studies analyzing transactions carried out by seven countries with a
significant record of experience, namely Canada, Chile, Italy, Malaysia,
Spain, Sri Lanka, and Togo. They were written in support of the analysis of
techniques of privatization presented in the first volume.
Volume III
Inventory of Country Experience and Reference Materials
Rebecca Candoy-Sekse
with the assistance of Anne Ruiz Palmer
This third volume (World Bank Technical Paper No. 90) contains an inventory
of planned, ongoing and completed privatization transactions in 83 countries
indicating the methods used. It presents data collected for the purpose of
examining the record of experience with varying techniques of privatization.
A systematic listing of relevant reference material is also included.
Techniquesof Privatization
of State-OwnedEnterprises
Volume I
Methods and Implementation
Charles Vuylsteke
Copyright () 1988
The International Bank for Reconstruction
and Development/THE WORLD BANK
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
All rights reserved
Manufactured in the United States of America
First printing July 1988 Second printing July 1989
Technical Papers are not formal publications of the World Bank, and are circulated to encourage
discussion and comment and to communicate the results of the Bank's work quickly to the
development community; citation and the use of these papers should take account of their
provisional character. The findings, interpretations, and conclusions expressed in this paper are
entirely those of the author(s) and should not be attributed in any manner to the World Bank, to
its affiliated organizations, or to members of its Board of Executive Directors or the countries they
represent. Any maps that accompany the text have been prepared solely for the convenience of
readers; the designations and presentation of material in them do not imply the expression of any
opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries
concerning the legal status of any country, territory, city, or area or of the authorities thereof or
concerning the delimitation of its boundaries or its national affiliation.
Because of the informality and to present the results of research with the least possible delay,
the typescript has not been prepared in accordance with the procedures appropriate to formal
printed texts, and the World Bank accepts no responsibility for errors.
The material in this publication is copyrighted. Requests for permission to reproduce portions
of it should be sent to Director, Publications Department at the address shown in the copyright
notice above. The World Bank encourages dissemination of its work and will normally give
permission promptly and, when the reproduction is for noncommercial purposes, without asking
a fee. Permission to photocopy portions for classroom use is not required, though notification of
such use having been made will be appreciated.
The most recent World Bank publications are described in the catalog New Publications, a new
edition of which is issued in the spring and fall of each year. The complete backlist of publications
is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of
subjects, authors, and countries and regions; it is of value principally to libraries and institutional
purchasers. The latest edition of each of these is available free of charge from the Publications
Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.,
or from Publications, The World Bank, 66, avenue d'1ena, 75116 Paris, France.
Charles Vuylsteke is senior counsel in the Legal Department of the World Bank.
Library of Congress
Cataloging-in-Publication
Data
88-20699
A B S T R A C T
vii
TABLE OF CONTENTS
Page
No.
PREFACE ..........................................
xi
11
16
20
23
26
29
34
2.
41
3.
57
57
59
71
74
1.
4.
1.
59
62
68
69
75
75
80
87
90
91
- viii
Page No.
2.
94
97
98
100
101
101
107
107
108
...
3.
109
4.
116
.
...
129
129
131
138
7.
139
139
116
121
122
125
141
141
144
146
147
149
149
ANNEX C
ANNEX D
ANNEX E
ix
157
165
168
LIST
OF TABLES
AND
FIGURES
Page
No.
Tables
Table 1
Table 2
45
64
ANNEX E
Table I
Table II
Table III
Figures
Figure 1
CHILE:
84
Figure 2
95
Figure 3
96
Figure 4
Figure
JAMAICA
Figure 6
- NCB
- EMPLOYEE
134
xi
PREFACE
xii
This complex subject has been and is currently being addressed by other
work sponsored by the World Bank.
Finally, it should be pointed out that
many privatization transactions have aroused substantial debate and that
several (including some referred to in this report) have been or are
intensely controversial.
Case illustrations in this report do not imply
endorsement of the economic merits of specific transactions.
The report is largely the result of a cooperative effort by a
large number of contributors within and outside the World Bank. However,
the views expressed herein are those of the author only, and should not be
attributed to the World Bank or to individual contributors.
Sources for this report include World Bank operational experience
as well as surveys and studies of country experiences.
The country case
studies written by Helen Nankani (Consultant to the Bank) and the surveys
of techniques applied world-wide prepared by Rebecca Candoy-Sekse with
the assistance of Anne Ruiz Palmer were found to constitute such valuable material that it was decided to publish them separately in companion
Volumes II and III. All three contributed extensively to Volume I as well
and Rebecca Candoy-Sekse prepared all statistical tables.
Their very
substantial contribution is gratefully acknowledged.
The author is greatly indebted to Anil Sood, who headed the World
Bank's Industrial Restructuring Division, for his support and advice at
all stages of preparation. Mary Shirley, Myrna Alexander and John Nellis,
who have developed and managed much of the Bank's policy work on public
sector reform, have contributed extensively. Anne Ruiz Palmer and Chantal
Willot-Toussaint (Consultant to the Bank) have done major research, and
Linda Thompson and Vivian Richardson have greatly assisted with the collection of materials.
The author further acknowledges the helpful contributions and comments by other World Bank staff, and in particular, Mamadou
Dia, Dennis Flannery, Alan Gelb, Pierre Guislain, Sven Hegstad, Ian Knapp,
Roger Leeds (IFC), Ian Newport, Andres Rigo, John H. Stevenson (IFC),
Jean van den Eynde (IFC) and Alan A. Walters. The author is grateful for
the overall support of the Bank's Legal Department, the editorial suggestions made by Whitney Watriss (Consultant), and the great help of Nahed
Mahmoud in overall processing and of Amina Andrews, Jean Cerick, Kathia
Coupry, Jacqueline Hall, Mercedita Miguelino and others in typing various
drafts of the report. Alfred Imhoff helped process the manuscript to the
publication stage.
Particular homage is paid to the late Mrs. Nahed
Mahmoud whose loss has created great grief to the many of us who knew her.
Contributors outside the Bank include governmental and corporate
offices in several countries who have graciously assisted with the preparation of the case studies and surveys contained in Volumes II and III.
The report includes several of the many useful and critical
comments and suggestions made by David Heald (Glasgow Business School),
and Alessandro Ovi and Alberto Pera (Istituto per la Ricostruzione
xiii -
Industriale, Roma).
Finally, the author wishes to acknowledge contributions or suggestions by Thierry Aulagnon and Christian Noyer (Direction
du Tresor, Ministere de l'Economie, des Finances et du Budget, Paris),
Leo Konomis (Office of Privatization and Regulatory Affairs, Ottawa),
Clare Pelham and Richard Bent (H.M. Treasury, London), Jose Juan Ruiz
(Secretaria de Estado de Economia, Madrid), Richard Lloyd (Morgan Grenfell
& Co., London), Guy de Selliers (Shearson Lehman Hutton Inc., New York),
D.P. Savill (British Telecom, London), and Denis Bouvelle (La Lyonnaise
des Eaux, Paris).
I
t
Government initiatives in the area of privatization of stateowned enterprises (SOEs)l and assets have increased substantially in recent
years. Many governments have effectively privatized SOEs. An even larger
number have announced privatization programs but are only at the earliest
stages of implementing them in any substantial way.
In at least 83 countries, privatization is an inherent part of efforts to rationalize the SOE
sector as a whole, in most cases to reduce their burden on the national
budget, to improve the efficiency of individual enterprises, to assure
wider distribution of business ownership, or to achieve a combination of
objectives. The World Bank and other financing agencies have been providing support and financial assistance to facilitate these efforts, and an
expansion of this area of activity is envisaged. The question increasingly
has become not only whether to privatize, but also how to overcome or
address the numerous difficulties associated with the process.
There is
now sufficient experience with privatization that it can be used as a tool
for discussing or recommending appropriate techniques for use in developing
countries.
A few governments have already drawn on this experience to
devise improved techniques for their own divestitures.
This report reviews what is known about the techniques of privatization.
It uses the universally accepted term of "privatization"
despite its vagueness. At the broadest level, privatization refers to the
introduction of market forces into an economy. In this report, privatization covers more specifically the transfer of commercially oriented SOEs,
activities or productive assestsof the government (e.g. those in the fields
of agriculture, manufacturing, and public services, such as transport and
communications) to total, majority or minority private ownership or to
private control. That is, it goes beyond the strict transfer of ownership
to cover, as well, leases and management contracts.
The meaning of the
term for purposes of the report is narrowed down on page 8.
By way of
context, it is important to remember that privatization is often only an
element of a broader economic policy (or reform) that may include deregula2
tion and liberalization as weall.
- 3 are well covered in the literature.4 Similarly, it does not seek to establish economic criteria for measuring the results of privatization transactions such as, e.g., the risks of transferring state monopolies to
private ownership.
It further does not cover the efficiency aspects of
privatized SOEs or sectors, and in particular the effects on competition
and the needs for regulation.5 Finally, it refers to but does not go into
detail on standard corporate divestiture procedures, since the focus is on
SOE related issues.
The report contains an analysis of the specific methods and
implementation procedures for the privatization of SOEs or productive
assets of a government, as well as the issues each method is likely to
raise; options for dealing with them are described mostly in reference to
actual experiences. It is divided into two Parts. The first provides an
overview of methods, the experience with privatization and the factors that
affect the choice of method, while Part II goes into selected implementation aspects in more detail.
Principal Themes
Before proceeding to the text, it is useful to review briefly the
principal themes which are addressed in our review:
o
and
Competition",
Fiscal
- 4 -
be paramount.
When setting the objectives of a privatization program, it may be necessary to allow for trade-offs,
based on the feasibility of techniques relative to a given
set of objectives.
Privatization is not in all cases the
sale of existing assets; it may be achieved through new
private investment and a dilution of the state ownership.
In this context, specific techniques, their advantages and
determinants of applicability are described in Part I.
o
Serious constraints to privatization exist. The more difficult issues are commonly the financial condition and excessive liabilities of many SOEs (pages 59 to 62), and in some
countries, a lack of financial markets (pages 68 to 69).
These constraints are extremely limiting.
Some creative
approaches have been developed to these and other problems
(such as, e.g., political opposition), but in many economies
privatization transactions will be difficult to accomplish.
Employment effects are commonly considered a major constraint to privatization as well, but SOE restructuring (as
part of government austerity/adjustment programs) without
privatization may similarly need to address the employment
This does
consequences rather than privatization per se.
not mean that solutions should not be sought to the employment effects as part of the privatization process (pages 129
to 137). Similarly, the problems of excessive debt of many
SOEs may need to be resolved irrespective of privatization,
but specific
solutions will need to be devised when
governments undertake divestment.
Every
privatization
undertaking
needs
to be carefully
planned and managed (pages 74 to 93).
The organizational
capability and technical expertise must be there to initiate
and implement the transaction.
Various models have been
adopted to organize departmental responsibilities to manage
and implement privatization programs and implement individual transaction.s. The emphasis is generally placed on centralization,
simplicity, flexibility,
speed and transparency. When designing an action plan, it is advisable to
assess the respective merits of alternative techniques.
The process should be open. In most instances, it is helpful to adopt clear guiding principles or minimum standards
with respect to implementation, such as in the areas of
valuation, prequalification of purchasers, need for competitive bidding, terms of finance offered, etc. Such measures
should be des:igned to ensure an orderly disposition, to
maximize the return to the state, to preserve a fair process
for the genera:Lpublic and to assure that the purchaser is
qualified to run the acquired enterprise productively.
PART I
METHODS OF PRIVATIZATION
- 8 -
1.
features
Introduction of competitive
performance-related incentives).
Economic policy reforms, such as demonopolizing certain activities or liberalization (e.g., C6te d'Ivoire's recent decision
permitting private operators to provide public transportation
into
an SOE
(e.g.,
- 9 -
in Abidjan alongside to Sotra, the SOE handling urban transport, and similar steps for the transport system of Rabat), or
reducing regulatory constraints on business; these reforms may
be combined with divesture of state-owned assets.
-
Privatization by "attrition" (e.g., an SOE operating as quasimonopoly but not renewing investments, gradually permitting
the private sector to invest in plants and related facilities
and take over alL or part of the SOE's operations).
7/ There is an increased trend for the private sector to take equity in,
itself directly from new
for and remunerating
provide management
public
sector
projects
which were traditionally
infrastructure
undertakings only. An increasing proportion of construction contracts
now being tendered is on a build, own and operate basis or on a build,
operate and transfer basis (BOT contracts provide for transfer of
ownership to the state after a given period). Examples are found in the
United Kingdom, Spain, Hong Kong, Pakistan, Singapore, Turkey, Thailand,
Australia, Malaysia, United States. They cover mainly roads and bridges
and power generation and distribution. Techniques are emerging for such
arrangements under different sets of constraints and the role of lenders
is being assessed. These are not within the scope of this report. An
extensive body of documentation and expertise in this respect has
developed recently. A summary of these specific methods may be provided
separately at a later date.
10
8/ A very important trend for contracting out has taken hold in several
countries including the U.S.A.
A United Kingdom law of 1986 requires
six basic urban services
to be contracted out on the basis of
competitive tendering. Extensive literature exists on the subject. The
President's Commission on Privatization in the U.S.A. has recommended on
this subject that: "The Federal government should rely on the private
sector for provision of commercially goods and services.
Because
contracting provides a means to procure the same level of service at
reduced costs, it is not in the public interest for government to
perform functions in competition with the private sector."
The March
1988 Report of the Commission entitled "Privatization Toward More
Effective Government"
reviews the contracting out experience and
procedures. See further Volume Three, Part II on "Contracting Out".
11
Characteristics
Under this transaction, the state sells to the general public all
or large blocks of stock it holds9 in a wholly or partly owned SOE, which
is assumed to be a going concern set up as a public limited company.
Technically this transaction amounts to a secondary distribution of shares.
When a government decides to sell only a portion of its holdings, the
result is joint state/private ownership of the enterprise. The government
may pursue this approach as a deliberate policy to maintain its presence or
Where there is already private
as first step toward full privatization.
shareholding, the transaction may simply be a further privatization.
Many privatizations have occurred in which, prior or concurrently
with the public offering, a private sale of blocks of shares was arranged
(for reasons indicated below).
Procedures
While technically the public offering is a secondary distribution
of existing government-held shares, it is commonly handled largely as a
primary issue. A prospectus is prepared for the offering, and normally the
The bank or a
services of an investment bank as adviser are required.
(ii)
- 12 -
syndicate may also underwrite the offering. The offering may be on a fixed
price or on a tender basis.1 0 The shares may be marketed internationally or
only domestically.
In the case of a listed company whose shares are
already traded, the government may simply sell the shares on the stock
exchange.
The offering may involve, aside from sales to the general
public, incentives for employee participation.
There may be restrictions
on the size of individual shareholdings and on purchases by foreigners. In
certain instances, shares may be distributed to employees or the general
public for a token (see page 115).
To be eligible for a public offering, the SOE must comply with
certain legal, financial and disclosure requirements, governed by the
applicable laws of the country of offering (and usually enforced by a
securities and exchange commission or similar agency).
If an enterprise
does not meet those criteria, it may need to be readied (see pages 94 to
97).
For example, a public corporation, or a government department, may
need to be transformed into a public limited company as was done for
completed
for
the
Malaysian
British
Telecom
and
is being
telecommunications,
respectively.
If the enterprise is a strongly
performing
public
limited
company with an established
record of
profitability, the process will be straightforward and relatively simple.
Offerings may be underwritten (France, Malaysia, U.K.).ll Many
developing country markets have no underwriting capacity to support an
offering of any magnitude, while overseas underwriting is not feasible
either. In such a case, the government as seller will necessarily take the
risk of the sale on its own account.
This was the case for the public
offering of shares in National Commercial Bank in Jamaica.1 2
In large public offerings, one or more financial advisers and/or
intermediaries must normally be retained. The transactions typically raise
very substantial amounts of revenue (or equity in the case of primary
issues) and the possibly substantial expense involved in necessary fees and
commissions to investment banking firms and other intermediaries should
normally be assessed in relative terms.
10/ The respective advantages of fixed price and tender offerings are
described on page 112 in the section on valuation and pricing.
11/ See Mayer and Meadowcroft, "Selling Public Assets: Techniques and
Financial
Implications";
Privatization
and Regulation:
The U.K.
Experience,
edited by John Kay, Colin Mayer and David Thompson,
(Oxford: Clarendon Press, 1986), for a discussion of the merits and
costs of underwritings of privatization offerings in the U.K.
12/ John Redwood and Oliver Letwin, "New Directions in Privatization,"
R.M. Rotschild & Sons Ltd., manuscript, 1986.
- 13 -
13/ Report
of the Public
February 28, 1987.
Sector
Divestment
Committee,
Singapore,
14 -
- 15 -
14/ In the case of the offering of the last slice of BP shares in the U.K.
in 1987, the Government intervened in the market following "Black
Monday".
All shares were underwritten, and the Government maintained
that the risk of insufficient applications was indeed the underwriters'
risk. But because of the disturbed state of the market, the Bank of
England was authorized to offer to repurchase shares at the price at
which the shares where then trading, protecting holders against a
further fall.
Only a small portion was bought back.
This was an
exceptional measure which H.M. Treasury does not consider a normal
policy. No other examples are known of such protective measures.
- 16 -
Marketing.
Alerting and educating
successful subscription of a public offering.
the public
is key
to the
Characteristics
Under this transaction, the state sells all or part of its shareholding in a wholly or partly owned SOE to a pre-identified single purchaser or group of purchasers.
It is assumed the SOE is a going concern
set up in the form of a corporation represented by shares. The transaction
can take various forms, such as a direct acquisition by another corporate
entity or a private placement targeting a specific group, for example
institutional investors.
The privatization can be full or partial, with
the latter resulting in mixed ownership enterprises.
- 17 -
A private sale of shares may also be carried out before, or sometimes simultaneously with, a.public offering.
Procedures
The sale of a government's shares in an SOE can be handled in a
variety of ways.
Two common ways are full competitive process, with prequalification of bidders, and direct negotiation, with ad hoc procedures
for identifying potential buyers (often involving a wide investor search).
Senegal's privatization law requires a competitive process.1 5 A law and
implementing decrees in Argentina16 initiating the privatization of some
manufacturing enterprise and petrochemical concerns, require individual
calls for bids to purchase all of the state-held shares in these SOEs
(unless preference rights of existing shareholders are exercised).
When
deciding whether to transfer ownership of the shares, the government will
look at the purchasing party's general business reputation, financial
strength, record of performance, etc. With a mixed enterprise, the government may simply agree to sell its shares to the existing private shareholder.
The government's method may involve a staged process involving
gradual disposal of shares.
Often the purchaser is engaged in the same
line of business or has some special interest (diversification, market,
The sales potential of enterprises must be
etc.) in the particular SOE.
carefully assessed.
All operational aspects and assets of the enterprise
must be carefully reviewed (e.g., the SOE may occupy an attractive market
In preparing for the Rumasa
niche which is underutilized or neglected).
group privatizations in Spain, much emphasis was placed on the potential of
various companies.
While a sale of shares obviously implies that the enterprise
would be sold as a going concern with all its assets and liabilities,
readying activities such as balance sheet restructuring (e.g., alleviation
of liabilities) may be carried out prior to offering the shares.
Discretionary procedures carry the danger of lack of transparency
(apart from standard economic arguments in favor of auction-type mechanisms). The sale of SOEs is different from divestiture by private parties
essentially in that a government seller must generally be concerned with
the operation of the enterprise after the sale. A number of countries have
introduced mandatory procedures or guidelines for private sales that cover
matters such as price-setting, selection of purchasers (prequalification,
bidding), uniform terms of finance, etc.
(page 90 and Annex C give more
detail on these procedures.) France has developed detailed procedures for
the selection, on the basis of competitive bidding, of a group of stable
investors to whom shares of SOEs will be sold prior to an offering of
shares to the general public.
15/ The preamble of which specifically states the intent to avoid direct
sales to predetermined buyers and the need for a transparent process -see Annex C.
16/ See Annex C.
- 18 -
As far as marketing procedures are concerned, as well as procedures for inviting and screening investor proposals, similar methods may
apply to the private sale of shares, the sale of assets as well as the
solicitation of new private investment by way of a capital increase of a
SOE.
In the case of the Philippines, the Operating Guidelines of the
Asset Privatization Trust provide minimum standards for bidding.
The use
of sealed bids must be followed; negotiated offers can be resorted to only
if bidding should prove unsatisfactory, impractical or inappropriate under
specific circumstances.
In Argentina and Brazil various laws govern
bidding (cum prequalification) and auction procedures (See Annex C). In the
case of Togo, the Ministry of State Enterprises has formulated detailed
guidelines for the purpose. They essentially provide for the preparation
of a dossier (in terms of items to be addressed by interested parties) and
a brochure for each enterprise, to be distributed through all available
channels such as local and foreign banks, chambers of commerce and foreign
Interested parties are invited to make a
trade offices, and embassies.
field visit; following initial contact, the Minister of State Enterprises
authorizes plant visits and the gathering of further data and information.
Upon receipt of an offer from an interested investor, the Ministry verifies
specified
in the dossier in respect of investor
if all elements
qualifications and contents of proposal are included. An Interministerial
The best
Commission them will meet to consider the investor's proposal.
source to review bidding and auction mechanisms are the offering memoranda
for particular transactions.
Private sales of shares are often used as a first step to, or in
This procedure may be an important
conjunction with, public offerings.
step where the presence of a core of stable shareholders in the company is
regarded as essential. It was used extensively in France.
Finally, there are a few instances where the private sale was
In the case of
used as a first step to wider share distribution.
Montedison, in which ENI, Italy's energy sector holding company, had
acquired a controlling interest of about 30%, ENI concluded an agreement
for GEMINA, a largely private financial holding company, to acquire this
interest; GEMINA further disposed of this interest to investors in the
The private sale to holding trusts (see also page 149)
private sector.
might thus also be an intermediate step to further sales to the wider
investing public.
Preferred Applications/Special Features
Because of their flexibility, private sales are the preferred
method with weak performing SOEs or SOEs in need of strong owners with
relevant industrial, financial, commercial and other experience and a high
financial stake in the success of the firm.
19
- 20
Characteristics
Under the previous two methods of privatization, the private
Here the
sector purchased shares in an SOE that was a going concern.
transaction consists basically of the sale of assets, rather than shares in
a going concern. A government may sell the assets directly; the SOE may
dispose of major assets. Generally, while the purpose may be to hive off
separate assets representing distinct activities, the sale of separate
assets may be only a means of selling the enterprise as a whole. Thus, the
assets may be sold individually or be sold together as a new corporate
entity. Assets can only be sold privately (unless the government embodies
the assets and activities into a new company established for purposes of
privatization, in which case a public offering or private sale of shares is
possible).
In some cases, assets are not technically sold, but are contributed by the government to a new company formed with the private sector.
The shares received by the government for this contribution may then be
sold (see sale of shares, sections 1 and 2 above).
Procedures
The sale of assets can be based on open competitive bidding 17 or
- 21
pany.
(i)
(ii)
(iii)
When IRI sold Alfa Romeo to Fiat, i: did not convey it as a comRather, Alfa Romeo sold all its assets (plants, trademarks, etc.)
- 22
ties.
The main implementation issue is how to handle existing liabiliUnlike the sale of shares in a going concern, the assets are often
- 23 -
Characteristics
This method involvessthe breaking-up or reorganization of an SOE
into several separate entities or into a holding company and several subsidiaries.19
Procedures
There are several possible ways to proceed that will depend on
the legal form of the enterprise.
Aside from the sale of some of the
assets, as described above, the options include:
-
- 24 -
Transformation
of the SOE into a holding company that
acquires the shares of the subsidiary companies which have
taken over the assets and liabilities of the original SOE
(as happened in the case of Cooperative Wholesale Establishment in Sri Lanka). This method permits a gradual spin-off
of some or all of the now smaller entities as purchasers are
found. (A purchaser can buy several subsidiaries, but this
method typically looks to a wider market for the transfer of
ownership.)
Hiving off of some activities, with the government retaining
others (e.g., the non-commercial ones). Such hiving off
often amounts to a simple sale of assets.
In the case of
Turkish Airlines (THY) several activities were incorporated
in new subsidiairies
to be privatized
before THY is
privatized.
-
Once one of the above steps is taken, privatization of the individual components may be carried out through any of the other methods.
A prime example of a hive-off is British Rail in the United
Kingdom.2 0 British Rail had, in addition to its railway assets, a portfolio
of interests in other industries where it competed directly with the private sector. British Rail decided in principle to privatize some of those
activities,
which included ferries, hovercraft, hotels, properties, consultancies, freight cars and advertising. A holding company, British Rail
Investments Limited, was set up to acquire some of the non-rail activities,
with the sole purpose of privatizing them.
Many of the companies and
assets occupied attractive market niches but were run down and badly
managed.
It was thought that small-scale entrepreneurs would take part in
the privatization.
One intended result of the removal of these operations
from British Rail was to free more resources for its core railway operations. Although a few hotels were sold directly to private parties, it was
decided to sell the remaining 21 by open tender (effectively an auction).
In addition, the sea transport company, Sealink, was sold to a foreign company through competitive bidding. British Rail Hovercraft Limited (English
Channel hovercraft ferry) was, after being merged with a Swedish firm,
given to its work force for a nominal sum.
Surplus property of British
Rail is still being disposed of, and other privatization transactions are
under way as well.
25
Singapore, Guinea
de Constructions
on keeping only a
the subsidiaries
reason for fragmenting an SOE may be that it is a monogovernment would like to fragment it into separate entercompetition.
British Shipbuilders was mentioned as an
The questionaarises further in the U.K. in respect of the
21/ M. Pirie and P. Young, The Future of Privatization (London: Adam Smith
Institute, 1987) p. 6.
22/
- 26 -
Characteristics
A government may wish to add more capital to an SOE (mostly for
rehabilitation and for expansion) and achieve this by a capital increase
opening equity ownership to the private sector. The main characteristic of
such a privatization method is that the state is not disposing of any of
its existing equity in the SOE. Rather, it increases the equity and causes
a dilution of the government's equity position.
The resulting situation
will be joint private/government
ownership of the enterprise (often
referred to as joint venture).
If the SOE is not wholly state-owned but,
say, majority-owned, then the new capital subscription will simply result
in a further dilution of the government's interest, possibly resulting in
private majority holding.
In a large number of instances, the state has brought in the
assets of an SOE (with or without accompanying liabilities) as a contribution in kind to the capital of a new corporation, while new private
investors' cash contribution to the capital of the new corporation will
2_/
- 27 -
restoration of working
capital, or an
24/ There are cases where, as part of financial restructuring measures, the
capital is first reduced to absorb losses and subsequently increased to
raise new equity money -- naturally, in such cases the end result may
not be a substantial capital increase.
E.g. , in the case of Societ6
(Fluobar) in Tunisia, the
Miniere de Spath Fluor et de Barytine
existing
share capital was written
down by more than a third
representing the amount of accummulated losses; however a new equity
issue (subscribed by t:he Arab Mining Company and the International
Finance Corporation) re-increased the share capital (to a higher level
than the initial). The Government's ownership was reduced from 95% to
45%.
25/ Depending on the existing capital structure, another option for the SOE
needing additional funds would be a debt issue in conjunction with the
sale of the government's shares. If the resulting offering could not
be easily absorbed, yet another alternative would be to attach warrants
to the debt securities.
Of course, privatization would be deferred
until the warrants are exercised (and no certainty exists that they
will be exercised).
But, then again, the technique can be applied to
part only of the government's shares.
26/ Examples of this are provided on page 42.
27/ See page 21, paragraph (ii).
- 28
28/ Whose investment was made through the IFC's GRIP facility (Guaranteed
Recovery of Investment Principal) referred to on page 151.
29/ Thomson is still a SOE but included in the list of enterprises to be
privatized.
- 29 -
- 30 -
The term management buy-out (MBO) generally refers to the acquisition of a controlling shareholding in a company by a small group of
managers.
It often also designates a similar transaction where employees
or management and employees acquire a controlling interest. This section
focuses particularly on acquisitions by management and work force. For the
sake of clarity, the transaction is referred to here as a management/
employee buy-out.
The leveraged management/employee
buy-out (LMBO)
involves the use of credit to finance the acquisition, with the assets of
the acquired company generally used as security.
As explained by Blackstone and Franks:
"the special characteristic of the financing arrangements for management buy-outs is that the financiers provide the bulk of the funds but
take a disproportionately small proportion of equity; on the other
hand, the buy-out team obtains a large share of the equity but provides
a small proportion of the funding. High gearing ratios, where borrowings can be initially as much as five times the amount of share capital
in the company, are not unusual and in some cases may even be higher
than this. In such cases it is naturally important that the projected
cash flow is sufficient to allow for the payment of large sums of
interest and capital repayments without placing the viability of the
business in jeopardy."3 2
There are not many examples of management/employee buy-outs in
developing countries and the few known instances are described in (c)
below.
But cases like the leveraged buy-out of the National Freight
Company Ltd. in the United Kingdom (described below in paragraph (c)) are
essentially replicable.
The management/employee buy-out constitutes a
significant and promising technique for SOE privatization.
Procedures
There is more experience with employee buyouts outside of the
privatization sphere, the experience of which is, however, directly applicable to acquisitions of SOEs.3 3
In most cases of buy-outs, a holding company is created through
an equity issue subscribed to largely by management and employees.
The
holding company then acquires the SOE which is to be privatized, using
equity funds and, in the case of leveraged buy-outs, substantial borrowed
funds.
- 31 -
- 32 -
for CORFO. The guarantees for the CORFO loan were the assets of ECOM and
the shares of SAECOM.
When workers took control of ECOM, they begun a
total restructuration of the company, which included major organizational
changes, salaries and wages adjustment, a more aggressive commercial policy
and sale or lease of disposable assets. The most important asset of ECOM,
the main building, was leased and the offices moved to a smaller and less
expensive building.
The results are reportedly impressive.
Though no
alleviation of liabilities occurred, in six months of the new management
losses of about US1.5 million dollars were turned into profits of more than
US250,000 dollars in 1986 and for 1987.
Profits are expected to reach
about US900,000 dollars equivalent.
EMEL is a component part of ENDESA, the state-owned electricity
power generating and distributing corporation, which was reorganized into
several corporations for purposes of privatization.
EMEL was the first
electricity utility to be privatized, and the fact that it would be offered
to its employees was regarded as a constitutive element of the decision to
break up ENDESA. Performance of EMEL has improved after privatization.
In both the case of ECOM and that of EMEL, the vendor (CORFO,
through its Normalization Unit -- see page 84) and the enterprise have
repeatedly played an important role in easing the process and helping
organize workers.
Similar support has also been given to workers in
partial acquisitions of various other SOEs.
In C6te d'Ivoire, Les Caoutchoucs de Pakidie (government-owned
only for part of the capital) was acquired through a management buy-out.
Local management bought out a French company (SCOA) -- with bank financing
secured by the cash flow of the company. FOREXI, a 100% state-owned water
prospecting
and well drilling company, was sold entirely to Ivorian
interests through a management buy-out.
The management, faced with
imminent firing as the company was being liquidated, organized itself to
buy the enterprise from the government.3 4
In France, the Institut de Developpement Industriel (IDT), a
large venture capital firm largely held directly and indirectly by the
state, was sold in June 1987 to a new holding company in which the management and employees hold 50 percent. Purchase money was borrowed and financial guarantees were provided by six investors who, in exchange, obtained
the other 50 percent of the holding's capital.3 5
Employee acquisition are strongly encouraged, and two small-scale
transactions have recently occurred, in British Columbia (Canada).
34/ See the forthcoming case study on Cbte d'Ivoire by E. Wilson, under a
joint UNDP/Kennedy School of Government project.
15/
- 33 -
Employee buy-outs require extensive programs to inform and educate workers as to the benef'its,and most employee buy-outs are managementled transactions.
There has been much discussion recently 36 on the possibilities
of replicating the U.S. model of Employee Stock Ownership Plans (ESOPs) in
other countries.
ESOPs are a financing technique for the acquisition of
shares by employees.
They are used to foster employee participation but
may also be used to organize a leveraged employee buy-out. By this method,
employees may acquire stock without any payment (cash payment, salary
deductions) on their part.
The stock to be acquired may be newly issued
shares to expand the capital base of the enterprise. Or it may be existing
shares.
The ESOP fund borrows from banks the necessary money to acquire
the stock (and the bank has no recourse on the employees). It is the company which undertakes to provide the funds to the ESOP to service such
borrowing.
It is generally considered that either increased productivity
(U.S. experience
seem to indicate that enterprises with significant
employee ownership have shown substantially improved performance results)
or new earning capacity (in the case of a capital increase) or both will
permit to generate the funds for servicing the loan. The major incentive
in the U.S. for such a scheme is the tax advantage for the company in
making the required contributions to the ESOP. ESOPs are a regulated trust
device, similar to a pension fund. Banks also receive a tax incentive in
respect of the income tax payable on interest profits generated by the ESOP
loan.
The incentives fo:r ESOPs are not presently available in such a
form in other countries. However, considerable interest exists in developing schemes which, adapted to specific countries' characteristics, might
similarly encourage such plans.
Preferred Applications/Special Features
Management/employee buy-outs are a relevant means of transferring
ownership to management and employees with little wealth or knowledge of
share ownership and may be a solution for SOEs not otherwise saleable.
They also constitute an enormous incentive to productivity. Clearly, it is
a solution to the employment issues where the alternative is liquidation;
the management/employee buy-out should minimize lay-offs and the substantial other costs of closing an SOE.
- 34 -
Characteristics
Both leases and management contracts are arrangements whereby
private sector management, technology and/or skills are provided under
contract to an SOE or in respect of state-owned assets for an agreed period
- 35 -
and compensation.
While there is normally no transfer of ownership3 7 and
therefore no divestiture of state assets, these arrangements can be used to
"privatize" management and operations and thereby possibly increase the
efficiency and effective use of state assets.
Although sometimes regarded as an intermediate step toward full
privatization, leases and management contracts are more often used as
temporary measures, e.g. to return an SOE to an acceptable level of
operations and profitability.3 23
The government may then decide whether to
retain the SOE and operate it itself or to divest itself of the assets and
operations, which would now be more attractive to, and command a better
price from, the private sector. In either case, the injection of private
management,
presumably selected for its operational or other skills,
represents an important and effective non-sale form of privatization.
While there are many variations, the basic differences between a
lease and management contract can be summarized as follows:
- 36 -
Lease
38
- 37 -
Management Contract3 9
The management contractor (normally a company in the same line of
business as the enterprise) assumes responsibility under a contract to
manage the enterprise for compensation.
Unlike other arrangements
providing for management services or technical assistance, the management
group is given full management control and the authority to manage.
The
contractor derives its authority from the contract and must manage the
operation within that confine.. Whereas a lessee pays the state for the use
of assets or facilities, a management contractor is paid by the state for
its management or other skills.
While the contractor might be given
extensive management powers and operational control, it has no financial
exposure and receives its fee regardless of the profitability of the
enterprise.
(Where performance or incentive payments are part of the
overall
compensation
package, these are forfeited if the level of
performance or other criteria are not met.) The SOE continues to bear the
full commercial risk and is responsible for all working capital and debt
financing.
To this extent, the state is not relieved of any financial
burden and, in fact, takes on a higher short-term burden in the form of the
management fee.
The advantage of this arrangement is, however, that
ownership is retained, a defined degree of control is maintained, and a
high level of management and other skills is injected into the enterprise,
enhancing its overall efficiency and profitability.
Comments
The distinctions between these
depending on the specific terms.
For
contractor to take an equity participation
the lessee may negotiate a reduction in
falls below an agreed level.
Procedures
Lease
There are no standard procedures for lease arrangements, and they
are therefore best discussecl by reference to actual cases.
The main
underlying features are normally the conduct of the business by the lessee,
in its own name, the right to use specified facilities for a fixed period
and the obligation to pay the owner (government or SOE) a fee for use of
the assets. Variables may include the level of financial contribution by
the lessee (e.g. investment for rehabilitation), performance bonds, maintenance/renewal
obligations,
duration, etc.
Leases of equipment are
sometimes substituted to outright sales as an asset-based financing device.
39/ The reader interested in detailed features and design issues related to
the effective use of management contracts is referred to Sven Hegstad
and Ian Newport: Management Contracts: Main Features and Design Issues,
World Bank Technical Paper No. 65, Industry and Finance Series,
(Washington, D.C.: The World Bank, 1987).
- 38
- 39 -
- 40 -
actual
- 41 -
2.
statistical
data
on
country
experience
with
43/ Our survey indicates more than one thousand four hundred cases of
privatization planned, underway or completed (excluding management
contracts). A substantial number of presently planned transactions may
not materialize.
About 56 percent of these cases are either underway
or are already completed with completed transactions comprising over a
third of the documented cases (i.e. , about 530 SOEs have been
privatized).
The numerous companies sold under major reprivatization
exercises such as in Bangladesh, Chile, Spain and several in the
Philippines and Uganda are not counted in these numbers.
It is
recognized that a count in terms of assets, employment, or other
parameters
may be more informative
than in terms of entities
privatized, but the lack of data renders this task too extensive at
this stage.
Volume Three does, however, provide some data in this
respect.
Our data as well as Table 1 include SOEs in which the
government held less than 50 percent of the capital but decided to
further or fully divest itself of its holdings in the SOE.
- 42 -
L4/
- 43 -
45/ All the above transactions in Malaysia, Sri Lanka, as well as the ones
referred to for Togo below, are described in more detail in Volume Two.
- 44 -
,ABLE
I
Technioues
UsedinCertain
Completed
Privatization
Transactions
COUNTRY
1. PUBLIC
OFFERING
OF SHARES
2. PRIVATE
SALEOF
SHARES
Sub-Saharan
Africa:
Cameroon
7(b).LEASE
i
:Siricom
(bricks)
1
;Socase
(
1
Central
African
Republic
;Sicpad
(palsoil))
(Sitab
(tobacco) :Sotrooal
(industry) ;Sideco
:Sietho
)tourism)
:CMAC
(distribution)
(forestry)
tTrituraf
(soap)
!Sonageci
i
!~~~~Sogexi
(diversified) (public
works)
:Sonaco
(paper)
i
:Salci
(agri-business)
1
;Seric
(agri-business)
~Sodefor
~Forexi
Havecom(rubber)
Sucucam(sugar)
Shipping
line
~~~~~~~~~~~(tertilizer)
i
CoteOlIvaire
73.
SALEOF
ASSETS
!Procaci
(cocoa)
!SHAC(exports)
(mvoire
Conseil
)Soderiz
(agri-business)
lH~~~~arzattan
Hotel
:Abi(foundry)
:Ceram
Anten(ceramics)
I
:Sotropal
(matches)
(BNEC(bank)
(Ivoire
Outils(tools)I
:LesCacutchoucs :Palmindustrie
(oil);Atwaba
Hotel
; de Pakidie
:Sodefor
!SedanIvoire
(drillingl!Sdepalm(nalmoil)
(industry.~
:IctaVoyages
;Sietho
Sathn
Hotel
:API(agriculture)
Sareco(tourism)
; Lineas
Aereas
Equatorial
Guinea
:Empresa
de Energia
i
:~~~~Agencia
Maritima
:E.Transportes
Lujo
:Empresa
Forestal
lFabrica
Ladrillos
Gabon
Gambia
:Sonaga
(insurance) (Societe
deBois
i
;~~~~~Pizo
(oil)
!Standard
Ban1k
;CFAO(trading)
(Senegambia
Hotel
(Senegambia
HoteliFishing
company
!$PAShipyard
&
Ferries
!Atlantic
Hotel
(Seagull
ColdStores
:Sawmill
company
Ghana
SugarEstates
(
I
i
Guinea
sf
rns
aiKni
(tategold
Mining
Aluminus
~~~~~Volta
:Sugar
Estates
G6NTC
(Trading)
:~~~~~~~~~~~~~Ghaces
(Cement)
!oau
Airport
of Conakry(Portof Conakry
TABLE1
Techniques
UsedinCertain
Completed
Privatization
Transactions
COUNTRY
1. PUBLIC
OFFERING
OF SHARES
2. PRIVATE
SALEOF
SHARES
3. SALEOF
ASSETS
tEnta
Allomettes
(cigar))agri-basiness)
:~~~~~~~Briqueterie
Kankan !Maruis-Salants
!Part
of Conakry
:Sacrerie
Banian
!Sonacag
Carreaua
:Briqaeterie
de
!Enta
Tabac(cigarette)
I Kobaya
OUSBA
(farm
tools) :Ceramique
de
;Reem-Buinee
(chemicals):
Matoto
:Sipag
(flour
mill)
:Hailerie
De Kasesa
7(b).LEASE
SGuites
I
lSopag
(oils)
GSomoa
L'Imprimerie
(printing)Ilgat
;Sipeco
(paints)
OUsines
Nodernes
:Soprag
(matches)
de ConakryI
:Snbragai
(brewery) :SOFAB
:U.Jusde
Fruit
(juice)
OUsined
dePanneaus
i
i
:~~~Scierie
NOZerekore
de Geredou
t~~~~~~SoprocimentlOani
Faranah
ii
:(Building
Material)i
lCasserverie
Maona i
!(Agri-business)
(Usine
deThe(Teal
:SOPEC
(Chemicals)
:Quinine
deSerdou
I(Agri-Business)(
i
i
Kenya
!Guitex
(teotile) :Sukoba
:~~~~Societe
Guineenne
:
Fabrication
I)SO6UIFAB)
~~~~~de
i
IiI
i
ii
ITeotile/sugar
firm
:Kenya
Neat
Liberia
i
Malawi
Mali
:ITEMA
(textile)
:Natl
Iron
Ore
!~~~~~~~Liberian
Iron
:Air
Malawi
1rand
B
Hotel
lAir
Mali
! Tavali
(tanning)
!Tamali
(tanning)
;Project
Sucre !
Mauritania
!ONC(cinema)
Niger
:CMAN
(arts
& crafts)ISNGTN
(civil ISNGTN
ISopac
(paper)
I works)
:Snoidep
:Sonidep
(petroleum)
Ii
:Sotramil
(food)I
:Soniteatil
:Leyma
(insurance)I
Ii
Food/sugar
company
i
i
Sonhotel
S5onidep ~
SPEGH
(hotel)
;Sonhotel
Sonidep
TABLE
1
Techniques
Usedin CertainCompleted
Privatization Transactions
COUNTRY
1.PUBLIC
OFFERIN6
OFSHARES
2. PRIVATE
SALE
OF
SHARES
3.SALE
OF
4. FRAGMENTATION
5. NEWPRIVATE 6. MANA6EMENT/7(a).MANA6EMENT7(b).LEASE
ASSETS (In combination
INVESTMENT$$ EMPLOYEE
CONTRACT
with 1, 2 or 3)
(Mostlyin
BUY-OUT
coebinationwith
1, 2 or 3)
i
i
:Usine
Allumettes
Rwanda
i
i
SaoTomeE Principe
Senegal
Sierra Leone
: BelaVista Estate
aUba BudoEstate
aSNCDS
'Natl PalmOil
Somalia
(fish processing)
:COSENAM
(shipping)
:SIV (textiles)
Siscoma(farm tools) 1
Zaire
'
ITT (textile)
!Togotex
:Sodeto (oil)
i
Sotcon(clothes) '
IOT0(palmoil) I
:MehtaSroup
National Textile I
Madhvani
6roup
Board
:LonrhoUganda
Ltd.
!Brit. American
Tobacco
I
:Data
ShoesLtd.
:MitchellCotts Ltd.
aShell
Zaire
State fires
Dyeing
aTanganyika
!Sotoma(marbles))
ITP (plastics) I
Hotel de la Paix
l2Fenrier Hotel
Hotel
Hotel
TropicanaHotel
aSarakawa
aBenin
a
'
Zambia
fire
Housingcnmp;ny
i
a
aAgri-business
aHotels
Fishingcompany
Uganda
Natl PalmOil
Tanzania
Togo
'
:ZaZbiaBreweriesi
SNS(steel mill)
(Sotexaa(fare tools)
STH(oil refinery)
Soprolait (milk)
Sotcon
ir aire
lMaritime
Zairoise
aPalmeza (pala oil)
'Cacaoza(cocoa)
(Teacompanv
(Sodimiza
(mining)
Palmoil company a
a(Cocoa
' a a cospany
i
ZambiaBreweries
:Nitrogen Chemicals I
TABLE
I
Techniques
UsedinCertain
Completed
Privatization
Transactions
I.PUBLIC
OFFERING
OFSNARES
COUNTRY
2.PRIVATE
SALEOF
SHARES
i
Asia::(
Bangladesh
Company
(cement):
(Japan
AirLines (Tohoku
Power
Company
(
(JNR
(railways) (Electric
(NTT(Telecom)
Stock
ExchangelSeveral
banks
:
Korea,
Republic :Korea
& Steel
:Korea
OilCompany
(Pohang
Iron
i
:~~~~Korea
Heavy
Industry
I
i
ft~~~~~~~~~Krean
AirLines
i
(Korea
Stock
Exchange(
Malaysia
Philippines
Singapore
Airlines
I
(Singapore
Lines
(
(Neptune
(BBS
(hank)
(Kenpel
(shiprepair)
I
(Intraco
(trading)
(
(Iron
A Steel
Mills(
(UIC
(detergent)
(Singapore
Printers
(
(Resource
Development:
(EPB
(publishing)
(
(Setsco
Services (
(SADE
(Dutyfree
shop))
SriLanka
(State
Rubber
i
Airways
l~~~~~~~~~~~IZambia
i
(B.Machine
Tools
i
i
Japan
i
i
(Over
30teotile
(mills
reprivatized
ii
Indonesia
LEASE
4.FRAGMENTATION
5.NEWPRIVATE i.MANAGEMENT/7(a).
MANAGEMENT 7(b).
CONTRACT
(Incombination INVESTRENTRA EMPLOYEE
in
BUY-OAT
with1,2 or3)
(Mostly
combination
with
0,2 or3)
3.SALE
OF
ASSETS
(Krakatu
Steel
i
(
i
(Japan
National i
Railways
(JNRI (
:NTT(Telecom)
!Mining
company
:~~~~~~~~~~~
Telecommunication
JNR
i
i
i
II
:PortKelang
i
:North
Kelang
Bypass
(Port
Kelang
Industrial
(K.L.
Kepong
Inter-(Aerospace
change
(National
Park
Facilities
(Labuan
Water
Supply
(
i
(
(Port
ofSingapore
! Port
ofSingapore
II
I(i
aI
(
iiIII
i
I
Iaai
lOept.
ofMachinery(
(
:~~~~~~Coastal
Engineering
(CWE
(trading)
(
(SOBO
TileFactoriesI
Sugar
Corporation
(CWE
CWE
Dev.
(Property
I
Teotile
Corp.(National
MilkBoard
(BOBO
! AirLanka
;Sugar
Corporation
Cement
Corporation
(~~~~~~~~~~~~~Lanka
Cement
TABLEI
Technigues
UsedinCertain
Completed
Privatization
Transactions
COUNTRY
1. PUBLIC
OFFERING
OF SNARES
2. PRIVATE
SALEOF
SHARES
3. SALEOF
ASSETS
~~~~~~~~~~~~~i
:Ceramics
Thailand
:ThaiAirlines
1SGEAlumFactory
Rainmaker
Hotel
~
F
~~
7(b).LEASE
Corporation:
CeylonSteelCorp.
:Ceylon
Plywood
Corp.:
600 CeylonSilts
~~~~~~
7(a).MANAGEMCNT
CONTRACT
1SOCAlumFactory
Pacific
Countries;
American
Samoa
::::Fuel
storage
Australia
F
Fiji
F
F
:Marine
raIlway
~~~~~Commonwealth
FijiBroadcasting
:Petrocorp
~~~~~~~~~Food
processing
:PrimaryIndustry
Bank :Belconnen
Mall :
Services:Williamstown
Dock!
Papua
NewGuinea :Air
Nougini
New Zealand
Air Pacific
i
:Petrocorp
of New Zealand
:New Zealand
Steel
~~~~~Bank :::
:
FF
Europe,
MiddleEastandF
NorthAfrica:
Austria
:Landerbank
:OMV(petroleum)
Denwark
!lryolitselskabet
: (food)
Egypt
: Cataract
Hotel
i
Germany,
Federal flIAG
(alumuminum):
Republic
:VebaEnergy
:Volkswagenwerk
:IVO(transport)
Lufthansa
:~~~~~~~~~Kalabasha
Hotel
iFF
i
i
!Lufthansa:FFFFF
ODVKB
(bank)
France
:StGobain(industry)!Matra
!Elf
Aguitaine
!Banque
do Batiment
IBNP(bank)
:Agence
Hayas
(Sogenal
(bank)
!Credit
Commercial
de
:Paribas
(bank)
France(C))
:CCF(bask)
:CGCT(Telephone)
:Matra
ICompangie
Generale
:1I1(industrial ![Water
distribution
holding)
Isystems]F
I:d'electricite:FF
:
:
(C6E)
:F
:FF
TABLEI
TechniquesUsedin Certain CompletedPrivatization Transactions
1. PUBLIC
OFFERIN6
OFSHARES
COUNTRY
TFI
(PIMP(bank)
RBanque
du Batiment IParibas
AgenceHavas
BIMP
Societe 6enerale (bank))
(C6E(power)
:Soc. Generale (bank(ICredit Agricola (bank) l
TF1(TV channel) I
II
Financiere Suez
Matra(aerosnace) I
Iceland
:Supermarkets
*Petrol stations
Car repair centers
Israel
(Haifa Chemicals
Ilion
Cables
IRI GROUP:
IRI GROUP:
!BancoCentro Sud
SIP (telecom)
,SEIAF(cosputers)
Cred. Fondiario
,Himont(chemicals)
Aeritalia
(Selenia(electronics)!Rivoira (gas)
,Cogea(steel)
(SIRTI (telecom)
Autostrade
(roadconst.)
Icelandair
i
(BeniMellal (sugar)
Natl SugarCo, Beht
(
I
(IRI)
INUI
I
I
I
'Sonamer(fishery)
Asmak(fishery)
llnternort (fishery)
(
I
Alfa Romeo
Iltalcableitelecom) Cementir
ENI 6ROUP:
Ceeentir
((building materials)hLanerossi(textiles)
IME6
'Ansaldo Trasporti
I
MhM
,Dalmine
Other Textile Companies;
Alitalia
RancaCoemerciale Ilemobiliare Metanonoli
Credito Italiano
EFIMGROUP:
ENI 6ROUP:
Tersedi Recoaro
Saipem(Oil & 6as) Colowbani-Lusuco
i
'Tai-Trimarin
I
IAlcot
I
'Panafin
I
Agri Alco
Morocco
Iraq
Italy
3. SALEOF
ASSETS
2. PRIVATE
SALEOF
SHARES
I
I
,
i
'
i
,
(
(Several hotels
(Several hotels
IONP(fishery)
TABLEI
TechniquesUsedin Certain ComoletedPrivatization Transactions
COUNTRY
1 PUBLIC
OFFERIN5
OF SHARES
3. SALEOF
ASSEIS
2. PRIVATE
SALEOF
SHARES
4. FRARMENTATION
5. NEW PRIVATE 6. MANAOEMENT/ 7(a).MANA6EMENT 7(b).LEASE
(In combination
INVESIMENINB
EMPLOYEE
CONTRACT
with 1, 2 or 3)
(Mostly in
BUY-OUT
combinationwith
1, 2 or 3)
'KLtl
NMB (bank)
Oman
:Oman
Flour Mills
1Oman
CementCompany
I
,Oman
Refinery Co.
:Copper company
Spain
'6esa (electricity)
'
RUMASA
group:
INi group:
(INIgroup:
nHotasa
(hotels)
:Potasas Navarra
Endesa(utilities)
6SaleriasPreciados
,SB (ball
Ensersa(fertilizer))Mantequerias Leonesas
bearings)
oEnce
(pulp & paper)l Loewe(fashion leatherl'
(Inisel (high-tech) (Sherry companies
INIgroun:
;Texhtl Tarazona
Marsan(travel)
IEntursa (catering)
ICesquisa
(chemicals)
IIngenasa
(biotech)
'
ILa Luz (meatprocess) I
,Igfisa (frozen food)
'Frigsa (food)
I
'Indugasa
IInisa
Secoinsa(computers)
!Telefonica
ISKF (ball bearings)
,
SEAT(car maker)
(
(ENASA
(trucks/buses) '
(San Carlos (goods)
I
I PATRIMONIO
group:
I
;Torres de Jerez
(BancoAtlantico
I
Fenix Peningular
I
,6arvey (wine)
!Ibernaves
(shipping'
(HispanoAlemana
Seeder
IPKBanken
SERO
(cutlery)
(Stichting Industrieel
Oarantiefonds
(financial trust)
:Luxor
--
U,
If
-
- -
--
--
- -
- -
- -
- -
- -
- -
- -
--
- -
- -
- -
--
- -
--
--
--
- -
_-_
- _--
TABLE1
TechniquesUsed inCertainCompleted
Privatization Transactions
COUNTRY
1.PUBLIC
OFFERING
OFSHARES
3. SALE
OF
4. FRAGMENTATION
5. NEVPRIVATE 6.MANAGEMENT/ 7(a).MANAGEMENT
ASSETS (In combination
INVESTMENTStt EMPLOYEE
CONTRACT
with 1, 2 or 3)
(Mostlyin
BUY-OUT
cDebinationwith
1, 2 or 3)
2. PRIVATE
SALE
OF
SHARES
Sweden
:PKBanken
!Luxor
Tunisia
!Hotel Ulysse
Fluobar(aining)
Hotel Hannibal
Hotel Miramar
,harbrerie de
1SRT(transport)
Thala(Marble)1
'Fluobar
------------- ------
Turkey
U.K.
NorthAmerica:
Canada
------------
-------
------
------
------
'
7(b).
LEASE
:Sitex (textile)
!Siter (textile)
i
I
------
--
- -
-- -
- --
-- --
--- -
-----------------
- - - ---
-- -------
---
------
- -_-
--
'Netas(Telecom) i
!Teletas (telecom
1 equipment)
,Cable6 Wireless Brit GasNytchFarm :Brit Rail Hotels !British Rail Hotels:Brit Aerospace!National BusCompany;Royal
NavyDockyards
British Telecoo
British Rail Hotels
;National BusCc,
' Natl Freight Coepanyl
British Bas
'Sealink
'
fLeylandBus
Amersham
Intl
!International Aeradio '
,Unipart (motor)
British Aerospace !North SeaOilLicenses
3rit
B Rail Hovercraft
British Petroleum !International Computerst
!DAB(buses)
;British Oil
lFairey (engineering) 1
Istel (service)
i
!Ass.
British Ports :Ferranti (electronics) 1
:British Shipbuilder::
EnterpriseOil
Inmos(computer
chips)
' BrookMarine
Jaguar
:British Sugar
: Vosper
British Airways :British LeylandTrucks
Swan
Hunter
British Airports !BritAir Helicopters
Vickers
'
British Shipyard
'Rolls Royce
RoyalOrdnance
(ares)
;British Shipbuilder:
'Victualic
(pipes)
Yarrow
' Hall Russell
Scott Lithgow
i
,National BusCompany
UKPlant Breeding
Federal
;Federal
Soquip-Alberta
: Privatizations:
Privatizations'PechesNewport '
:Panofor
,C.D.C.(industrials)'N Transportation
'Canada
Fishery
BDe
Havilland(aircraft):
i
; ProductsInt'l. Kid CreekMines
i
'Provincial
'CanadianArsenals
' Privatizations: :Canadair
'PecheriesCanada
Ouebec
'
Crustacesdes lles :Nansivik Mines
(Fishery)
N.Canada
Power
'
'
Brande-Entree
TeleglobeCanada
'
(Fishery)
'CNRoute
i
'
, Saskatchewan: Provincial
1 Privatizations:
'
'Saskoil
1N.Canada
Power
'
'
'
'
,
'
,
,i
'
I
--
--
--
TABLE
1
Transactions
Privatization
Completed
UsedisCertain
Techniques
1.PUBLIC
OFFERING
OFSHARES
COUNTRY
,Alberta: I . Quebec:
(sugar)I
Western (RS0
!Pacific
(transport) !Provigo
Colombia:lMadelipeche :
British
i
SGF(industry)
;Bric
!Peches
Nordiques
I
~~~~~Loaves
m
:Seleine
3~~~~~!.
Landry
:Crustaces
Ilies
LEASE
MANAGEMENT 7(b).
5.NEWPRIVATE 6. MANAGEMENT! 7(a).
4.FRAGMENTATION
CONTRACT
(Incombination INVESTMENTHH EMPLOYEE
BUY-OUT
(Mostly
in
with1,2 or3)
with
combination
1,2 or 3)
3. SALEOF
ASSETS
2.PRIVATE
SALEOF
SHARES
i
I
:i
:Grande-Entree
:Distex
:Lundel
i
:Filaq-SNA
U.S.A.
:Conrail
& theCaribbean-,I
America
Latin
:
Argentina
Cascades :
:Papiers
:Scierie
Outardes
lQuehecair
:
:Nordair
.British
Columbia::
~~~~~Urban
Transport
Corp. :III
Development
L
I:
(Satellite)lComnat
:Tomcat
rights
:IiI
!Various
landing
:Comnat
So)JetTravel
GasTube
!Siat
(airline)
;Austral
iI
:Comsat
i
I
I
Enta(transport)
Bolivia
Brazil
(public
works):
(textiles):Eceu
(textiles(lFabril
Tecidos
(CRVD
(mining) :Cia.
Dragagens
Celulose (Engematic (Cia.
(Aracruz
(Petrobras
(aeronautics) (dredging)II
doBrazil (Riocell
:Banco
(sugar)I
(COR(chemicals) (Ramior
e Editora
(Livraria
(robber) (CiaIncentivadoral
Olimpio (Coperbo
:Jose
)
()agri-business(
(paper)
(Inbrapel
(Eletrosiderorgica
daPraia I
(Hotel
(Hotel
Blumenau
S.A
Brasilesa
e
Nordeste(CiaFiacoa
(Piratininga
(SIBRA)
I
:TecePagee
: ~~~(machinery)
i
(textiles) Ii
:Nitriflex
I
S.A. (CiaAmerica
:M.Piratininga
Ii
OrganizacaoIFabril
(Metodo
IiI
I (consulting) :(Teotiles)
III
(Engematic
(wining)
(Fermag
II
TABLE1
Techniaues
UsedinCertain
Completed
Privatization
Transactions
COUNTRY
2. PRIVATE
SALEOF
SHARES
1.PUBLIC
OFFERING
OF SHARES
3. SALEOF
ASSETS
ii
!Federal
deSeguros !(Aeronautics)
;S.A.)lnsurance)
:lIens
de Palma
S.A.
(Agri-business)
;Cia
Tecidos
Dona
Isabel
(Teutiles)
andPaperll
:CELPAG
(Pulp
(CiaNacional
de
Tecidos
NovaAmerica
: SA (Textiles)
!Caraiba
Metais
S.A
:(Mining)
lCosim
(Iron
andSteel)
Chile
IIIII-- - - -- - -
- - - - -- - - - - -- - - - - - -:AFP
Union
(fund)
i
1AFPSta.Maria(fund)
Cruz(Insurance):
1AFP
Provida
(fond):Isapre
:Banco
de Santiago:I5apre
Lui5Pa5teur
:Banco
de Chile ilsapre
Colmena
;Entel
(telecom) :Banco
Concepcionn
:Chilmetro
:Banco
internacional
(electricity)
:Banco
Osorno
:BHIF
(bank)
lChilneger
(electricity)
(Aetna
Insurance
:Consorcio
Nacional
lChilguinta
:Inforsa
(forestry)i
(electricity)
:Indus
(agri-business)
!CAP
(steel)
(Soquimich
O9CU
(beverage)
(chemicals)(Copec
(gas/fornstry)
ilansa
(sugar) ;Ladeco
(airline)
!Panal
(teotile)
(Labchile
(pbarmaceutics(
:Polpaico
(cement)
(food)
:Chilec
(power) :Hucke-Mckay
:Telex
Chile
fEmel
(electricity)
(power)
!Pilmaiquen
;Enaex
(explosives)
(airline)
:LanChile
:Endesa
(electricity)
Dominican
Republic
(
Grenada
--
- -
- -
--
- - -
i
i
- --
- - -
- -
--
- -
- -
--
- -
- -
--
- -
--
- -
- -
CTC(telephone)
(Ecom(computer
(
services)
( Emel(pomer)
41
:Banco
de Colombia:
(ind,
holdings)
Colombia
CostaRica
- - -
7(b).LEASE
iii
Subproductos
Cafe
(
:State
SugarCo
(
I
BeachHotel
Grenada
TABLEI
Techniques
UsedinCertain
Completed
Privatization
Transactions
COUNTRY
Honduras
Jamaica
1.PUBLIC
OFFERING
OF SHARES
2.PRIVATE
SALEOF
SHARES
3.SALEOF
ASSETS
:National
Sugar
:JOS (bus
service)
!Port
Authority !National
Hotel
AirJamaica
:Jamaica
Broadcasting
Dairy
Cornwall
Fisheries
!Jamaica
Marketing
NCRGroup_(bank)
lVersair
(catering) :Jamaica
Broad- :Banana
!Caribbean
Cement :National
Hotel
i
casting
Company
!Jamaica
BroadcastinglZero
Cold
Storage i
:Rural
ColdStorage
i
:Hanover
Spices
:Jamaica
Oxygen
tei U....ica
:Jamaica
Sypsum)mining)
:Natl.
Hotel
Supplies
:W.Indies
Pulp& Paper
!Trans-Jamaica
Airlines
:Serge
Island
Dairies
:Hellshire
FishFarm
:Cocoa
Industry
Board
Co.
!Cotton
Polyester
!Ariguanabo
Mills
Cassava
Products
!Natl.
:Mechanical
Services
!Jamaica
Frozen
Foods
!Martins
Travel
Service
;Banana
Company
:Banana
Marketing
Co.
!Jamintel
(telecom)
:Bancomer
(bank) !Nacional
Hotelera
:Banamex
(hank) !Renault
de Mexico
BFanca
Serfin
!V.de Automotivos
IBan
amex
:Bancomer
in
:Banca
Serf
!Minera
de Cananew
(copper)
I
I
A large
number
of additional
transactions
areclose
tocompletion
andthistable
therefore
is notfully
representative.
Source;Volume
III.
7(b).LEASE
(Utensils)
MNetalsa
;Fundiciones,
S.A.
Mexico
MANAGEMENT
4. FRAGMENTATION
5. NEWPRIVATE 6. MANAGEMIENT/7(a).
CONTRACT
(Incombination INVESTMENT$$ EMPLOYEE
with1,2 or 3)
(Mostly
in
BUY-OUT
combination)
with
1,2 or 3)
Hfellshire
FishFarm
:Gray's
Inn
(tourism)
Palisades
:Fort
Clarence
Beach
:PortAntonio
Marina
- 56 -
Notes to Table 1
1.
2.
A large number of transactions reported as privatizations in
of
of the reprivatization
other sources but consisting essentially
companies or assets recently acquired from the private sector by state
banks in satisfaction of debt, or otherwise by the state as part of
financial rescue operations by the state, are not included in detail. It
is recognized, however, that techniques applied to such transactions may be
of relevance to the privatization of SOEs.
3.
A large number of additional transactions are close to completion
and this table is therefore not fully representative. Tables set forth in
Annex E provide further relevant data on techniques used.
- 57 -
3.
Methods
and procedures
for privatization
will be largely
determined by: (a) the objectives of the government; (b) the current
organizational form of the SOE; (c) the financial condition and record of
performance of the SOE; (d) the sector of activity of the SOE; (e) the
ability to mobilize private sector resources; (f) the degree of development
of the capital market; and (g) socio-political factors.
A review of
individual transactions indicates that no generalization can be made as to
the relative weight of these elements in choosing how to privatize.
A caveat is necessary.
The implication of this section should
not be that simple solutions exist for every problem. As indicated in the
country studies in Volume II of this report, certain techniques have been
used unappropriately.
Only the broad lines of possible determinants are
provided here.
The definition of an appropriate course of action with
respect to an SOE is a substantially more complex exercise, possibly
leading to a decision either riot to privatize (but possibly reorganize), or
to divest through liquidation in certain cases.
increased efficiency
privatization);
of SOEs
58 -
fostering
the
development of
559 -
The profitability
of a company obviously
determinants of how easy or difficult its sale will be.
is
one
of
the
60
- 61 -
- 62 -
determine
various
aspects
of
the
55/ For our purposes, public service sectors include electricity and gas,
water, telecommunications, public transport, ports and roads, and
hospitals and various other urban services.
56/ The absence of utilities on the privatization list of a number of other
countries simply reflects in part the fact that they were never
converted to state-ownership.
About one-third of SOEs for sale and
sold in OECD countries are public services.
- 63 -
57/ All these features can be further studied in available general and
company specificdocumentation.
58/ See Volume Two for further details on Chile (Telex - Chile, Compafniade
Telefonos de Chile), Malaysia (National TelecommunicationsCompany JTN) and Sri Lanka (Sri Lankan TelecommunicationsDepartment),and for
materials on the United Kingdom. See, in particular, Michael Webb,
"Privatizationof the Electricity and Gas Industries," in D.R. Steel
and D.A. Heald (Eds.), Privatizing Public Enterprises: Options and
Dilemmas (London:Royal Institute of Public Administration,1984), pp.
87-100, which includesan analysis of regulationissues.
Table 2:
PRIVATIZATION
OFPUBLICUTILITIESANDSERVICES
Country
Energy/GasDistribution
Water/Electricity
Argentina
Australia
Austria
Bangladesh
Belgium
Bolivia
Brazil
Cameroon
Canada
Chile
6ambia
Fragmentation (P)
Fragmentation(C)
Management
Contract (C)
Management
Contract (C) Leaset/Private Sale (C)
Private Sale (P)
Management
Buy-Out(C)
Lease (C)
Public Offering (PM
Italy
Jamaica
Mali
Mexico
Other Services
Managesent
Contract/
Lease (C)
Jordan
Korea
Liberia
Malawi
Malaysia
Infrastructure
(Ports, Roads)
France
Japan
Transport
Lease(P)
Public Offering (C)
China
Cote DIvoire
Management
Contract (C) Lease(C)
Equatorial Guinea Private Sale (C)
Fiji
Germany,Federal
Grenada
Guinea
Gulf States
Iceland
Indonesia
Israel
Comsunications
Management
Contract (C)Public Offering (U)
Management
Contract
(C)
Private Sale (U)
Table 2:
PRIVATIZATION
OFPUBLICUTILITIESANDSERVICES
Country
Energy/GasDistribution
Nater/Electricity
Communications
Netherlands
NewZealand
Fragmentation$ (C)
Niger
Panaaa
PapuaNewGuinea
Peru
Philippines
Singapore
Spain
Sri Lanka
Thailand
Togo
Transport
Private Sale (C)
Public Offering IU)
Sale of Assets (P)
Private Salett (Ut
Private Sale (C)
Public Offering (C)
New Investsent (P)
Private Sale (U)
Public Offeringt (C)
Private Sale::
Infrastructure
(Ports, Roads)
Frageentation (P)
Management
Contract (C)
Private Sale$ (P)
Public Offering (C)
Private Sale (U)
Trinidad I Tobago
Tunisia
Turkey
Fragmentation(Cl
Fragmentationt(U)
USA
Fragmentationt(C)
EmployeeBuy-Outt (C)
Public Offering (C)
Private Salett (C)
UK
Public Offering (C)
Zaire
Zaebia
Note; P=Wlanned,
U=Undermay
and CzCompleted;
'Planned does not in all
casesindicate a formal decision to proceed.
I Various other techniquesmereused in sameor other SOEs.
St Other SOEsin various stages of completion.
Source: VolumeIII
Management
Contract (C)
ContractsSt
Management
(C)
Other Services
- 66 -
67 -
In most instances, underlying assets had long been in existence. Under the
"affermage" the private party may be requested to make investments for
renewal.
When a distribution system must be expanded (e.g., doubling the
capacity of a water treatment plant), and the private party is to finance
and construct these expanded facilities, then a concession contract will be
entered into which will incorporate many elements of an "affermage" for the
facilities already in existence.6 0
Most concessions are in the power and water sectors. It should
be noted that the "concession"
and "affermage" systems are not recently
developed techniques.
They have been utilized for over a century in
France. They have, however, been considerably refined in recent years.
Port facilities lend themselves well to fragmentation into component parts or the hiving off of certain activities. For instance, stevedoring, transit and container activities can represent attractive propositions for the private sector which may handle them more efficiently.
A
case at hand is Guinea where a substantial response was observed from
private foreign operators in the privatization of various port operations.
Some governments have made policy decisions that retention of
full state ownership is necessary for utility SOEs or SOEs providing an
essential public service.6 1 As described above, others have found that the
public utility character of an SOE's business requires the state to ensure
the quality and continuity of a service at a reasonable price for
consumers, but that this can be achieved by applying appropriate regulatory
methods.62
While this paper is not concerned with the decision-making process on what to privatize or not to privatize, it should be observed that
parties in developed and developing countries have argued that partial pri-
60/
61/ Where categorized their SOEs into those of strategic importance and
those of a purely commercial nature. Public utilities and other public
services have often been classified in the strategic category not to be
privatized (this is the case of Senegal, Togo and Nigeria) or in which
the state must retain voting control (Brazil).
62/ Which raises the question ELs to whether the introduction of an adequate
regulatory framework may not be more relevant in preserving the
strategic character of su-ch enterprises than the extent of stateownership.
- 68 -
- 69 -
experience of Togo and Guinea, the lack of developed equity markets may
lead to the private sale or the new private investment as the leading
methods, but does not necessarily limit them to foreign investors as is
often argued.
Socio-Political Elements
- 70 -
- 71 -
4.
ANICILLARYARRANGEMENTS
preferably
before
of a monopoly
may be required,
it/ Break-up
privatization.
See A. A. Walters, "Privatization", Manuscript, 1987;
A. A. Walters, "Privat:ization: Some International Lessons", Paper
presented at Fifth Annual Convention of Private Argentine Banks, August
1987; and R. Hemming and A. Mansoor, op. cit.
69/ See Volume Two: Togo.
- 72 -
70/ Deepak Lal, Martin Cane, Paul Hare and Jeffrey Thompson, ApPraising
Foreign Investment in Developing Countries (London: Heinemann, 1975).
71/ Christopher
J. Maule,
"Privatization
Transportation
Development
Corporation
November 1987.
- The
Ltd.,"
Case of
Business
the Urban
Ouarterly,
- 74 -
PART II
SELECTED IMPLEMENTATIONASPECTS
Readying SOEs
DeterminingFuture Ownership
Cost of Privatization
- 75 -
1.
P]LANNINGAND MANAGEMENT
The first issue those in charge of assessing proposed privatization programs will face is to determine the organization and capabilities
of the agency or group to manage the process.
This section reviews the
institutional
and other arrangements necessary to assure an orderly,
transparent and expedient process.
It analyzes first the procedures for
initiating, planning, defining and authorizing a privatization program.
Second, it reviews the organization of departmental responsibilities and
the use of specialized implementation units.
Third, it comments on the
types of advisory and other needed external services. Fourth, it assesses
the need for mandatory guidelines or procedures to govern the privatization
process.
Initiating Measures
- 76 -
26/
77/ This section does not cover the information, to be provided as part of
the transaction
itself, such as information
to be included in
prospectuses.
- 77 -
78 -
relatively
- 79 -
80 -
83/ Mary Shirley of the Country Economics Department of the World Bank is
undertaking
a review of applicable methodologies in a sample of
countries.
.1/
a Ministry
of
responsibility.
State
81 -
Enterprises,
as
in
Togo,
it
may
be
assigned
- 82 -
headed by the Secretary of Finance, decides on what assets the APT (see
below) will be asked to sell, and COP approval is required for all sales.
Ghana has a Divestment Implementation Committee (DIC) that recommends
action to the Government. France, Guinea, Kenya and Tunisia have used still
other
variations
of the committee
approach,
with
different
responsibilities.
Sectoral
Ministry.
A number of countries have given the
responsibility to privatize SOEs to the sectoral ministry or department
most closely involved with their operations. In the United Kingdom and the
United States, for example, principal responsibility for privatization was
assigned to the Ministry (or Department, in the United States' case) of
Transportation in the case of airlines (U.K) or railways (U.S.), or the
Department of Trade and Industry in the case of telecommunications (U.K.),
etc.
In the United Kingdom, the Treasury plays a coordinating role that
should ensure consistent decisions across individual privatizations and to
preclude undesirable precedents.8 6 In the Philippines, the Committee on
Privatization has delegated some of its authority to specific ministries in
order to expedite the sale of enterprises reporting to them. In Brazil, as
stated above, the lead role in detailed implementation will be taken by the
sectoral ministry.
Allowance needs indeed to be made for the relevant
sectoral department or ministry to play a leading role since it knows most
about the candidate.
Ad Hoc Privatization Units. Where privatization is restricted to
specific companies or groups of companies and is not global policy
affecting all SOEs, ad hoc implementation units have been used.
The
Spanish government, for example, set up a special unit, the Rumasa Reprivatization Unit, under the leadership of a specially appointed director for
re-privatization to conduct the sales of the Rumasa subsidiaries. Members
of the unit were from the civil service, the private sector as well as from
the Rumasa Group.
Privatization by the Parent Holding Company. In many countries,
privatization is carried out by the parent or holding company, in some
cases as a routine part of corporate operations. Certain governments have
relied on the parent company to divest subsidiaries.
In Tunisia, the
textile holding company SOGITEX was requested by the Ministry of Industry
and Commerce to proceed with the sale of 10% of its holdings in each subsidiary through public offering. The privatizations by IRI, the industrial
state holding in Italy, are an example of privatization handled by the
holding group often at its own initiative.
IRI's Divestiture Committee,
composed of IRI officers, had as its main functions to (i) state criteria
for the selection of assets to be sold, (ii) coordinate the activities of
the various sub-holding companies in the divestiture process, and (iii) be
a reference point for potential buyers of enterprises.
It recommended
- 83 -
action plans but the final decision to sell rested normally with the
responsible sub-holding owning the enterprise. The Committee could, however, withhold subsidy to monety-losingenterprises that had been recommended for divestiture. To varying degrees, the Philippines,Brazil and
Turkey are also following this course. Obviously, the level of commitment
of the professional management of the parent company to the goals of the
proposed privatization is of paramount importance to the success of this
approach.
Other Options. Some countries have adopted alternativesthat do
not fit any of the above categories. As one example,Jamaica establisheda
special secretariat within the National Investment Bank of Jamaica (NIBJ)
to value and arrange for the sale or lease of publicly owned companies
referred to it by the governmeant. At the present time, they have been
given forty-five companies with action on at least half of them well
advanced. Although the government is still finalizing its divestment
policy, certain elements are clear. The governmentintends to transfer the
shares of most public enterprises to a new subsidiarycompany to be set up
under NIBJ. NIBJ will then offer shares or similar instrumentsin the new
company to the public, thus effecting the divestment gradually. It is not
clear whether there will be one holding company for all enterprises or
whether there will be a series of individual companies under which like
enterprises will be grouped, e.g., transport, hotels, telecommunications,
and financial services. There is precedent for this arrangement, in that
the NIBJ was the owner of the sh-aresand vendor in the case for instanceof
the privatizationof the National Commercial Bank by public offering. In
Turkey,8 7 privatizationof the state economic enterprisesis to be decided
by the Council of Ministers and the privatization of corporations,
affiliated ventures, enterprises and enterprise units shall be decided by
the Public Participation Fund. All SOEs to be privatized are deemed
transferred to the Public ParticipationFund for disposal. It is believed
that because the PPF is outside the normal bureaucratic structure, it will
constitute an efficient privatizationvehicle.
In Chile, SOEs are broadly classified into state enterprises
owned directly by the central government through ministries and goverment
institutionsand public corporationsowned by Corporacion de Fomento de la
Produccion de Chile (CORFO),the state development and holding corporation.
CORFO has been viewed as the most appropriate entity to carry out government's privatizationpolicies, and a privatizationstructure, described in
Figure 1, was set up within CORFO which has been responsible for most of
the privatizationtransactionsduring the last several months.
Another possibility, in those cases where the candidate enterprise has the necessary capabilities and sophistication,will be for the
government (or other entity acting as vendor) to appoint members of management to lead the process. To the extent management strongly favors the
privatization,this may expedite the exercise.
- 84
Figure 1
CHILE:
CORFO'S COUNCIL*
Composition
President:
Members:
Finance Minister
Planning Minister (ODEPLAN)
Minister Vice-President of CORFO
Additional member appointed by the Executive
Function:
Final responsibility for privatization strategies and decisions, as proposed by the Privatization Committee.
PRIVATIZATION COMMITTEE
Composition:
Members:
Executive Secretary:
Function:
Link between the Normalization Unit and the Council, supervising the implementation of actions approved by the Council.
NORMALIZATION UNIT
Composition:
The Normalization Unit is a Vice-Presidency within CORFO
Function:
Carrying out of policies approved by the Council and implementation of the selected method. Oversees the whole privatization transaction, including prior restructuring of SOE (if
needed), selection of investment bank or other financial intermediary, screening of prospective purchasers, negotiations if
required, and collection of proceeds from sales.
- 85 -
- 86
en
l'Homme
plus
au'en
l'Etat
(Paris:
- 87 -
With few exceptions,,governments have found it necessary or helpful to hire external assistance in preparing or carrying through privatization.
Brazil's privatization decree of November 1985 actually requires
that "In defining [a] privatization operation, the Minister of State
concerned shall be advised by a consulting firm from the private sector."8 9
While the higher civil service will provide some of the required skills,
outside advisers usually have to be hired to provide the requisite
corporate divestiture skills.
The degree of reliance on external advisers is primarily a function of the type of transaction or transactions envisaged and of the specific tasks to be carried out. Advisers may also assist in developing the
overall policy approach and basic orientation of a program.
This section
reviews in general terms the main areas of work and possible contributions
of external advisers as well as common modes of remuneration.
Public offerings normally require a range of traditional investment banking services usually involved in large equity issues.
They
include readying the SOE for sale, advice on all aspects of the sale
(including pricing), preparation of the documentation (prospectuses, etc.),
and follow-up on the mechanics of the sale. The investment bank may simply
advise, or in many cases it may be required to back up the sale (mostly by
an underwriting).
Recent United Kingdom, French and other privatizations
effected through public offerings, most of them underwritten, illustrate
the type of assistance provided. Well-established firms were selected as
both financial advisers and underwriters.
In most instances, the government and the enterprise to be privatized each used its own merchant bank
and in addition hired legal advisers and auditors. In the public offerings
of Malaysia Telekom and Malaysian Airline Systems, a local investment banking firm was selected in a joint arrangement with a major British investment bank.
In Nigeria, the offerings for the privatization of three
federal government-owned hotels are being prepared by established local
merchant bankers. The International Finance Corporation (IFC) is presently
preparing with a Tunisian merchant bank an underwriting of a block of
shares of a majority state-owned textile company in Tunisia, to be offered
to the Tunisian public so as to achieve private majority ownership of the
company. The government-owned National Investment Bank of Jamaica retained
89/ The law further provides that, for this purpose, "the National Economic
and Social Development Bank (BNDES) shall select and list consulting
firms having
an acknowledged
reputation
and a tradition
of
participating in activities involving capital transactions and transfer
of voting control."
- 88 -
90/ and not as underwriters; as the sale was limited to Jamaicans, but the
local underwriting market could not support the offer at a realistic
commission, the Government took the risk of the sale on its own
account. J. Redwood and 0. Letwin, op. cit.
91/ E. Wilson, op. cit.
- 89 -
addressed
In some instances, all a government needs is occasional assistance in selected fields. For instance, if a government envisages a management contract for a particular SOE, it may select one or more advisers
to assist in reviewing proposals and negotiating contracts.
Some transactions have been prepared with minimal external assistance, such as the
proposed privatization of two textile mills in Togo, which essentially
involved the sale of assets to a foreign group.
Governments have also elected to use external advisers to formulate their overall privatization program. The government of Turkey engaged
the merchant banking unit of a large commercial bank to develop a privatization master plan that established a broad framework for privatizing
approximately forty enterprises. At the same time, the government engaged
another investment bank to prepare a privatization plan for the national
airlines, to include a detailed review of the feasibility of several alternative methods of privatization. The Philippine National Oil Company hired
a management consulting firm to advise it on the disposal of some subsidiaries. In the case of Guinea, the advising firm consulted with the government on both the overall program for industrial SOEs (including the definition of which enterprises to privatize) and, as mentioned above, on the
detailed implementation measures for each enterprise.
Whether the advisory and implementation assistance can or should
be delivered by one or more advisers depends largely on the size of the
program.
Advisors can be selected through a variety of procedures.
A
bidding process has been followed in many instances.
In some countries,
priority was to be given to local firms, firms with local establishments,
or joint ventures between local and foreign firms.
In private sales, a general rule of thumb is that the government
ought to ensure the presence of capabilities at least equivalent to those
of the private party with which it is negotiating. In most instances, the
required capabilities include auditors, financial advisers, corporate legal
counsel and industry specialists.
Several large merchant banks have
recently prepared briefing materials with respect to their capabilities in
privatization, building on recently acquired experience in the field. Such
materials constitute useful accounts of the capabilities which may be
required.
As to remuneration, it can be handled on a commission basis for
completed deals or on a fee basis.
The latter option is used more frequently with transactions other than public offerings. However, a "success
fee" arrangement can also be applied in private sales.
Large public
offerings in the United Kingdom involved both commissions (for underwriting
and placement) and advisers' fees.
Generally speaking, the fees then
90
Mandatory Procedures/Guidelines
91
details
on
23/ Asian
Development
Bank.
Privatization:
Policies,
Methods
and
Procedures. Papers presented at, and a summary of, the proceedings at
a Conference
held or, 31 January
- 1 February 1985 in Manila,
Philippines (Manila: Asian Development Bank, 1985).
- 92 -
of
any privatization
technique
will
be
heavily
- 93 -
2.
94 -
- 95 -
Figure 2
Initial SOE
Readied SOE
JTN
TMB
(Jabatan
Telecom
Negara)
Readying Steps:
-Government Agency-
o
o
o
o
o
o
o
(Telecoms
Malaysia
Berhad)
- 96
FIGURE 3
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r.to PLC
CONSIDER
REGULATiON
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lUILD
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PASSLEGISLATION
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SECWR
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'P
- 97 public offering.9 7 No format exists for private sales since they may range
from a full reorganization of a company prior to sale as a going concern to
a liquidation followed by a simple sale of assets.
This section comments on common steps in the readying process:
o
Enterprise Diagnosis
Physical Rehabilitation
Enterprise Diagnosis
97/ Mr. G. Grimstone of J. Henry Schroder Wagg & Co. Ltd. described (as
part of a presentation at the London Conference on Privatization on
July 6, 1987, sponsored by the Adam Smith Institute) the basic steps
for many privatizations as (i) legal/constitutional, i.e., change from
statutory body into a company, (ii) commercialization, i.e., financial,
management and other changes to make it a commercial type enterprise,
and (iii) selling.
Coopers and Lybrand, in a pamphlet distributed at
the same conference, refer to the establishment of the SOE as a selfsufficient entity as "corporisation" indicating that the assets must be
recorded and valued; pensions and other employee issues
resolved;
contractual obligations identified and an appropriate capital structure
agreed.
98
99
100
opportunity to match the highest outside bid, provided their own offer was
not less than 90% of the bid to be equalled.
Other commitments of the SOE may also need to be satisfied, such
as contracts with management and employees (pensions, allowances, etc.) and
commitments to suppliers, contractors and customers.
The identification of all these requirements is an essential
preparatory step to the sale of an enterprise or its prior restructuring
(and in some cases before entering into leases and management contracts as
well).
The impact of these requirements may be close involvement by all
relevant parties (creditors, employees/unions and others) in the privatization process, and/or additional costs to settle them (see page 138 on the
costs of privatization). Satisfaction of all legal requirements is essential to avoiding continuing claims after a privatization.
101
privatization.
Note that the transformation may raise many issues: when
Malaysia Telekom was converted from a government department into an enterprise governed by ordinary company law, for example, issues arose relating
to the changed personnel regime, transfer of pension fund inputs, etc. Sri
Lanka has drafted special legislation to govern such conversions.
Prior to the privatization of Telex-Chile, telex and post operations were organized as a public service regulated by a law that gave the
concession to the government.
Under a new law, two enterprises were
formed, owned by the Ministry of Transport and Telecommunications.
When
the Chilean Government decided to privatize Telex-Chile, the enterprise was
transformed into an open corporation and its ownership was transferred to
CORFO (see page 84).
The transformation of the legal form of this
enterprise entailed changes in its management structure and new accounting
practices.
The reorganization of an SOE into component parts may be a
preliminary step to privatization.
In Chile, the state-owned generating
and distribution electricity utility was broken up, starting in 1985, into
several smaller corporations. It was recently decided to privatize one of
the corporations, PULLINQUE S.A. (and the process took no more than six
months, the preparatory conversion work having been completed previously).
The British National Oil Corporation was split into two components and the
operational activities were privatized as Britoil.1 0 0
Financial Restructuring
100/ The procedures through which this split occurred are described in a
paper by Britoil's legal advisers, A.W. Baker and G.H. Daniel, "BNOC
and Privatization: The Past and the Future", Journal of energv and
National Resources Law, Volume I, No.3, 1983, pp. 149 - 159.
- 102
operated.
Most measures have had to do with the write-down of assets,
alleviation of liabilities, recapitalization and spinning off of assets.
These measures are described below.
(Complete fragmentation, e.g., into
component parts, is discussed elsewhere since it is a distinct privatization transaction in itself; related restructuring measures, however, include many of those described below.)
It is very difficult to know the
extent of justified restructuring, particularly for SOEs which are no
longer self sufficient or profitable. Restructuring of a SOE prior to sale
does not necessarily make it a going concern but may only establish the
conditions under which an eventual going concern could be established, and
it is particularly difficult to assess the extent to which that premium can
be recouped in the sale price.
Asset write-downs. Assets of SOEs may appear on the books at
inflated values.
If that is the case, the market value of the company or
assets represents a substantial discount.
It will be perceived as too
large by the opponents of a transaction where in effect it may not be. If
write-downs are necessary, there is some advantage in completing this process early so that any political fall-out from the write-down is separated
from the sale.10 1
Actions with respect to SOEs' debts (including governmentguaranteed). If an SOE has excessive debt liabilities, the question arises
as to whether it should be sold as is, in which case it may command only a
minimal price (if it is salable at all), or whether the government should
absorb all or part of the liabilities so as to provide the enterprise with
positive or adequate net worth prior to sale. In other cases, there is no
choice at all as the magnitude of the debts bears no relationship to the
market and earning value of the assets.
There is no one preferred course of action with respect to enterprise liabilities; each situation has to be handled on its merits. In the
re-privatization of Hotel Agrupados, one of the loss-making enterprises of
the Spanish Rumasa group, the acquiring consortium of Spanish and foreign
investors assumed total liabilities in addition to a high share price and
provision of fresh equity to the company. In general, the total debt proposed to be absorbed by a purchaser is a major criterion in evaluating
offers.
On the other hand, prior to the sale of Canadair Ltd., the
Canadian Government removed substantial liabilities from the company.
Similarly, the government of Mali has chosen to settle substantial liabilities of SOEs to be privatized. In Costa Rica, CODESA, a government holding
company, will assume outstanding debts of eighteen SOEs to be sold to a
private sector trust. The United Kingdom government, as the original borrower, wrote off substantial debts of several SOEs, in each case replacing
it by equity to improve their balance sheets.
Other debts were renegotiated. Japan will shoulder a substantial portion of the debt of Japanese
National Railways as part of its transformation into several new companies
101/ W. Edmund Clark, "The Why, Who and How of Privatizing Canadian Crown
Corporations" (Draft).
- 103 -
102/ The liability of a government for non guaranteed debts of its SOEs
will depend on a number of factors, including the legal form of the
SOE (i.e. , is it a puiblic law body or a limited liability stock
corporation?).
This important question cannot be analyzed in this
report, but the reader is referred to J. -M. Pi Suner, "La mise en
faillite des entreprises publiques," Annales de l'Universite des
Sciences Sociales de Toulouse. Tome XXIII, 1975 pp 203-222, and
Mark M. Christopher, "Piercing the Corporate Veil Between Foreign
Governments and State Enterprises," Virginia Journal of International
Law, Vol. 25, No. 2, 1985, pp 451-482.
- 104
- 105 -
- 106 -
FIGURE 4
(2)
(3)
Bonus issue 1:1 of 125,000,000 shares M$ 1 each to existing shareholders capitalized from retained earnings (no new proceeds).
(4)
(2), (3) and (4) were completed on December 4, 1986, and increased the
capital to M$ 250,000,000
(5)
Resulting Situation
of (1) to (5):
for
Source:
Volume Two, Part I and Prospectus dated December 29, 1986, for the
Offer for Sale of shares in Malaysian International Shipping
Corporation Bhd.
- 107 -
Physical Rehabilitation
108 -
The often read and overly simple conclusion that SOE management is
generally hostile to privatization does not bear out in practice. However,
problems with management cooperation may arise.
Preparing a large SOE for privatization can in most cases never be
done without the full commitment by the enterprise's board of directors and
top management. A supervisory ministry hiring investment bankers to implement the privatization without the consent of the board and management may
be a possible mode of implementation if the enterprise is relatively small.
However, in very large multibusiness, multiplant operations, it is a must
that the preparation starts with assuring the full commitment of the enterprise's board of directors and top management. They would normally be given
the task to prepare and implement the privatization plan or to provide
extensive assistance and support.
If members of the board of directors are not committed to the
privatization effort, they should leave their seats open for new directors
who are prepared to carry this responsibility. As the Public Sector Divestment Committee of Singapore reported:1 0 5
"A number of GLCs [government-linked companies] including the
larger ones have only civil servants and statutory board officials on their boards.
The Committee recommends that action
should be taken as soon as possible to change the composition of
the boards of introducing new directors from the private sector.
This can be an avenue for spotting executives who can be
entrusted with the leadership of GLCs in future or can help in
the search for new successor-owners for the GLCs.'
Among the agreements reviewed providing for the private transfer of
controlling shareholdings in SOEs, several contain effectiveness conditions
to procure
the government vendor or the relevant holding
requiring
resignation letters from members of the board of directors. Similarly, a
careful evaluation has to be made of the managing directors' commitment and
The Turkish government
ability to carry through the privatization plan.
replaced a number of board members and managing directors of enterprises as
they started to prepare these for privatization.
In the United Kingdom,
government has often brought in new senior management sympathetic to the
of the Public
105/ Report
February 21, 1987.
Sector
Divestment
Committee,
Singapore,
109
1
policy of denationalization.
()6 In most cases of British SOEs, businessmen
had previously been appointed to the boards of directors. Japanese National
Railways' top management, viewed by the government as not sympathetic to
change, was replaced prior to privatization. In twelve of the twenty five
SOEs to be privatized initially, the French government caused top management
changes.
However, in several, of IRI's privatizations in Italy, even when
carried out by private sale, guarantees on managerial tenure were obtained
by management in the readying process.
V'ALUATIONAND PRICING
106/ C. Pickering,
"The Mechanics
of Disposal,"
in D. Heald,
Privatizing Public Enterprises: Options and Dilemmas, op. cit.
ed.,
110
does create a criticizable windfall for investors, too high a price might
entail the failure of the privatization effort. In the case of the Sogenal
bank in France, a premium of 80 percent was recorded on the first day of
trading.
The experience of several British public offerings have shown
even more extreme changes between offer and trading prices.
Invariably,
substantial
oversubscription
of shares in many public offerings for
privatization (C6te d'Ivoire, France, Jamaica, Malaysia, U.K.) possibly
raises questions about their pricing, but at the same time the pricing may
have been a determinant of their success.
Numerous criticisms of price
settings under public offerings must now be appreciated in the light of the
evolution of stock prices in the last quarter of 1987. In private sales as
well, pricing is a difficult issue.
Cases are known where, despite the
introduction of auction-based mechanisms, prices obtained by the national
treasury may not have been adequate. This is particularly sensitive when
assets change hands again quickly, giving initial purchasers large capital
gains.
In any event, taxpayers in any country will critically monitor
state divestiture.
The following is a summary rather than a detailed
description of valuation techniques and pricing mechanisms.
The issue is very visible in public offerings.
If the shares
start trading at a premium (say 15-20 percent) shortly after the offering,
the expected short-term returns are very enticing to investors.
If the
shares fall below the offering price as soon as (or shortly after) they
start trading, investors will criticize the government and lose interest in
further issues and in the privatization per se. However, share offerings
on the market usually carry a discount. Average discounts may be in the
12%-20% range or even more in some countries. The question is not what the
specific discount of an actual offering is but the extent to which there is
or there should be a discernible discount for shares in SOEs10 8 (and
governments should endeavor to explain this to the public so as to avoid
some of the criticisms leveled at the offering price setting).
As
described in the Background Briefing materials on "Privatization in the
United Kingdom," distributed by H.M. Treasury:
"Pricing a share issue is always a difficult matter of
judgment, whether it is a state-owned or a privately-owned company that is being sold, especially when the company's shares
have not been traded before or where there are no directly comparable companies. Moreover, it is impossible for any vendor to
anticipate accurately the movements of the stock market between
price fixing and the receipt of applications. The United Kingdom
Government always seek the best professional advice available,
108/ See R. Buckland and E.W. David, "Privatisation Techniques and the
PSBR", Fiscal Studies 5:3, August 1984; Roger Buckland, "The costs and
Returns of the privatisation of nationalized industries", Public
Administration, vol. 65, /autumn 1987, pp. 246-248; and Colin Mayer,
and Shirley Meadoweroft,
"Selling public assets: Techniques and
financial implications", pp. 325-328, Privatisation and Regulation:
The UK experience, edited by John Kay, Colin Mayer and David Thompson,
Oxford: Clarendon Press, 1986.
ill
109/ Some entities may sell for less than their net worth, in recognition
that they may still incur operating losses for some years during a
turnaround period.
112 -
110/ Bernard
Petit and Ghislain
Garczynski,
"Panorama des m6thodes
actuelles
d'evaluation
lors des introductions
en Bourse, Les
Privatisations,
Droit et Pratique
du Commerce International,"
International Trade Law and Practice, 1987, Vol 13, p. 464.
- 113 -
- 114 -
--
i.e., it will be
--
Policies and
- 115 -
enterprise
116/ See T.M. Ohashi and T.P. Roth, Privatization: Theory and Practice:
Distributing Shares in Private and Public Enterprises, (Vancouver: The
Fraser Institute, 1980); Part One: Privatization in Practice: The
Story of the British Coluwbia Resources Investment Corporation, pp. 1
- 105. See also the prospectus for the public offering.
- 116 British Rail's hotel operations, its advisers considered that the profits
record was not good enough to support a flotation and to give a value which
They then advised that a private
would fairly reflect the asset value.
sale by tender would yield a better price.11
Transfer of control to one party or groups normally implies that
a premium would be paid for gaining control. The selection of a public
offering of shares may involve a discount to ensure the full sale.
Mechanisms to ensure and maintain widespread shareholding are, in the
opinion of the securities regulatory agency in one country in Latin America
now preparing new guidelines, essential to avoid that shares bought at a
discount are then subsequently.concentrated in the hands of one party or
group.
Finally, pricing for shares of one of the same SOE may vary
according to the method used. In the sale of Banque du Batiment et des
Travaux Publics in France, the negotiated private sale of blocks of shares
to shareholders gaining at least a 5% participation was set at 110% of the
public offering price.
4.
- 117 -
(a)
- 118 -
Increased Efficiency.
Because, as noted, the presence of a
minority shareholder may increase efficiency by instilling a
greater financial/management autonomy and discipline and counterbalancing excessive government interference, a government may
divest itself of only a minority position.
Italy's IRI group's
partial privatizations have reportedly had the aim of restricting
government interferences in certain enterprises.1 1 7 A government
may also bring in a private partner to improve the enterprises's
technical competence, market access, management expertise, etc.
Sometimes the government will enter into a management contract
with the minority private party, or conversely, the outside
management contractor of an SOE may invest fresh equity as part
of the overall arrangement, as did Heineken in Zambia Breweries.
A private joint venture, the Sino-French Energy Development Co.,
has acquired from the government of Macao a 38 percent stake in
the Electricity Company of Macao with the intent of increasing
its efficiency and thereby achieving an attractive return.
The
investor also undertook a contribute to new investment in the
company.
(c)
Gradual Privatization.
Partial privatization may simply be the
result of gradual privatization.
While the initial offering of
shares of Malaysian International Shipping Corporation Bhd.
(MISC) reduced the aggregate shareholdings
of governmental
parties
from about 60.80% to about 48.60%,
the offering
prospectus announces their intention to divest additional shares
at a later stage.
Various other circumstances will lead a
government to retain a partial majority or minority position
based, not on a particular strategic role, but rather on capital
market condition e.g., the absorptive capacity of investors.
Partial privatization may also be the result of market response.
In Jamaica, the public offering of Caribbean Cement Company was
not fully subscribed, and the government was left holding about
119
- 120
of private
or superior
block
by an equivalent
counterbalanced
If the government intends to distance itself from a
shareholdings.
company's management and operations, it should make that clear to investors
the terms on which the government will continue as a
and clarify
shareholder. Some British privatizations included specific provisions for
government's "distancing" or non-interference,1 2 0
but the precise legal
status of such undertakings in prospectuses is not fully clear.
These issues need to be borne in mind by states wanting to
encourage joint ventures. They will not be attractive to private investors
if state control will take away autonomy from the enterprises as private
investment could be frustrated through state intervention. Questions such
of boards of directors, rights of appointment of
as the composition
management, rights of minority shareholders, etc., will all need to be
addressed.
In several African countries of French legal tradition (Mali,
Senegal, Togo and Tunisia), legislation provides for various control and
other rights of the state versus the private shareholder in a joint venture
(Soci6te d'Economie Mixte, SEM) that go well beyond normal shareholder
rights (even for SEMs in which the government has a minority holding). In
the case of Mali, the government has now determined that SOE-related
legislation
should be concerned
primarily
with wholly state-owned
enterprise, with SEMs governed solely by ordinary company laws. Since much
of the Malian program will, at least in a first state, involve partial
rather than full
with majority
private
shareholding
privatization
privatization, any provision of excessive rights to the state shareholder
is considered a potential deterrent to private sector interest. Tunisia's
1987 law on enterprise restructuring provides for special exemptions from
laws on state control (particularly with respect to the "tutelle" and the
states' procurement rules) for SOEs being privatized (provided the private
participation reaches a minimum level of 67 percent of the company's
capital).
- 121 -
Background
Briefing,
H.M.
- 122 -
122/ E.g., in the case of the NCB privatization in Jamaica, the offer went
straight from application forms to the issuance of registered stock
certificates.
The avoidance of allotment letters and partially paid
shares made the administrative task much easier than has been the case
with large public offerings in the United Kingdom. See J. Redwood and
0. Letwin, op. cit.
123/
Ibid.
124/ This section will not review the restrictions on private ownership per
se as constituting obstacles to privatization due to a variety of
policies, such as those restricting private sector access to the
mining, manufacturing and public utilities.
- 123 -
Other
- 124 -
- 125 -
- 126 -
- 127
- 128 -
an interest in the aggregate of more than 30% of the issued ordinary share
capital. With respect to public offerings, such restrictions then further
appear in offering prospectuses, such as in the case of the privatization
of MISC in Malaysia and NCB in Jamaica. They would normally also have been
introduced, as part of the readying process, in the charters of companies
to be privatized.
As to private sales, general or ad hoc policies are easily
implemented, as the purchasers are selected individually. Prequalification
criteria may be the best vehicle. When the warship-building operations of
British Shipbuilders were privatized (largely through management/employee
buy-outs), foreigners were excluded from acquiring interests in view of the
strategic nature of the activity.
Practical approaches can be developed
such as under the Operating Guidelines of the Asset Privatization Trust in
the Philippines which provide that:
"Where the realizable price is equal, preference should be given
to: (a) buyers who intend to rehabilitate an asset for productive
utilization within the country, (b) buyers who are nationals or, in
the case of corporations, the majority shareholdings of which are
owned by nationals."
In the case of Compagnie Generale de Constructions Telephoniques
(CGCT) in France (a sale of assets), only telephone operators could be
interested, thus limiting the number of interested national investors.
Therefore, several candidate buyers were 20 percent foreign joint ventures.
The selection was made principally on the basis of long-term industrial
interests of the country.
Other Procedures
Buy-back options, such as those retained by the Government of The
Netherlands
when privatizing
KLM, 1 3 5 constitute
another method of
restricting
certain
patterns
of possibly
undesirable
ownership.
Arrangements for the privatization of another airline will include power of
approval by the government of any resale of stock in the airline.
Special procedures were introduced by France in connection with
the maintenance of a stable group of shareholders of SOEs to whom shares
were sold privately ("noyau dur") prior to the public offering of further
blocks of shares.
135/ The reasons and arrangements for ensuring the state's ability to
regain majority ownership of the company are explained in KLM Royal
Dutch Airlines' Prospectus of March 26, 1986.
129 -
136/
and Minister
responsible
for
130 -
138/ Code du Travail, Art L. 122-12, provides for the continuation of labor
contracts upon modification of the legal form of an enterprise,
including succession, sale, merger, etc.
139/ S. Hegstad and I. Newport, op. cit.
- 131 -
- 133 -
bigger holdings than has been known in the United Kingdom." and "The
response was overwhelming with virtually all employees taking up holdings
in the reserved offer as wel:L as buying substantial numbers of shares on
the open market."1 4 1
In Chile, a common procedure for workers' participation has been
to use their retirement funds (which under labor laws can be advanced only
up to 50 percent) in the form of cash or collateral for loans. In the case
of Compafiia de Acero Pacifico (steel mill), workers equity reached 31
percent of the capital, for a purchase value of Chilean Pesos 2,894,000
financed 100 percent by CORFO (the national holding company) loans.
In
this case, workers have had the option to reverse their purchases from
CORFO through a buy-back
guarantee
for up to three years.
Such
arrangements illustrate the extreme prudence which some governments have
exercised when encouraging the acquisition of stock in SOEs by employees.
Whereas the employees of several French privatized SOEs have made
substantial gains, problems have arisen in connection with the losses
(following the stock market downturn of October 1987) sustained by a number
of employees
of Compagnie Financiere de Suez for which enterprise
management has had to devise specific solutions such as special payment and
credit facilities.
While offers of free shares may appear to conflict with the
objectives of attaining the highest price, they do broaden the base of
political support for privatization.
Public announcements and litterature in respect of government
restructuring and privatization in British Columbia (Canada) have stressed
that affected employees will be given fair treatment, and have emphasized
and described
in detail speacial incentives for employee acquisitions
(including a 5 percent preference in bidding, and training and advice to
interested employees)14 2
and announced special retirement schemes.
Reference should also be made to the U.S. experiments with
Employee Stock Ownership Plans (ESOPs) and ongoing efforts at determining
their replicability in other countries.1 4 3
- 134 -
FIGURE 5
National CommercialBank of Jamaica - Employee Share Scheme
15. EMPLOYEE SHARE SCHEME
Approximately13% of the shares offered for sale (3,916,440)are
reserved under an Employee Share Scheme (hereinaftercalled "Scheme") for
full-time employees of NCB Group and its subsidiaries. Under the Scheme
each qualifying employee (called "Eligible Employee") regardless of
seniority of years of service, will be entitled on application to acquire
from the Trustees of the Scheme up to 2070 shares (called "Scheme Shares")
on the followingpreferentialbasis:
SHARES
MINIMUM PURCHASES&
MULTIPLE OF PURCHASE
20 Free Shares
350 Matching Shares
PRICE
20
Free
850 DiscountedShares 50
Offer Price
50
2070
The purchase of Scheme Shares in each category is conditional
upon the employee taking up his full complement of reserved shares in the
preceding category or categories -- for example an employee must take up
all his Free and Matching Shares before applying for DiscountedShares.
Payment
NCB has agreed to make a loan of up to approximatelyJ$10 million
to the Trustees of the Scheme to enable them to take up the entire block of
Scheme Shares mentioned above. Eligible Employees will pay the Trustees
for Shares acquired under the Scheme either in cash or under an Easy
Payment Plan or both. The Easy Payment Plan will enable an eligible
employee to pay the amount due to the Trustee for his shares by way of
salary deductionsover a 24 month period.
Extract from Prospectus, N.C.B. Group Ltd., 1986, Offer for Sale by
National InvestmentBank of Jamaica, Ltd.
- 135 -
136
and
Minister
responsible
for
- 137 -
1i:/
See Graham Todd, Creating New Jobs in Europe - How Local Initiatives
Work, The Economist Intelligence Unit, Report No. 165, April 1984,
including action by BSC Industry to help create jobs in areas affected
by restructuring or closure of steel enterprises in the U.K.
- 138 -
6.
COSTS OF PRIVATIZATION
- 139 -
Transaction Costs
The cost of a privatization transaction involves one or more of
possible
expenditures,F52
such as administrative
costs, financial
restructuring, physical rehabilitation and settlement of employment claims.
The administrative costs include essentially advisory services (see page
87), but may include underwriting and brokerage commissions in public
offerings and even brokerage commissions
in private sales.
In the
Philippines, commissions will be paid to brokers who bring in winning
bidders (and even other bidders under certain conditions). The financial
restructuring costs may include the settlement or assumption of loan and
other liabilities, or the conversion of government-held loans into equity
and the recapitalization of SOEs prior to sale (see pages 101 to 105). In
some instances, SOEs have significant tax arrears that the government may
forego as part of the privatization transaction. Physical rehabilitation
might be a cost, but generally the government would leave this to the
purchaser (see page 107). Interim physical maintenance, on the other hand,
is often a cost to the government. The settlement of employment claims may
involve severance pay, pension plan funding and possible retraining (see
page 135). The need to grant a discount in public offerings (see page 110)
must be regarded as a transaction-cost in terms of foregone proceeds. The
granting of payment terms at other than market interest rates also is a
cost of concluding a transaction (see page 144).
Residual Costs
While this report does not go into the broader economic gains in
efficiency that result from privatization transactions, it is important to
note briefly the wide variation in the financial aspects of privatization
in terms of the direct monetary outlays and receipts. Based on the country
review, results range from enormous capital gains to the state, to sales of
assets at a small fraction of the original cost with enormous residual
liabilities on the state budget after privatization.
Some illustrations
follow.
In France, Saint-Gobain's
shares were sold at a large
premium relative to the cost of nationalization.
The
transaction
costs amounted to only a fraction of the
realized proceeds. Overall, the net proceeds were high, and
there were no residual liabilities. It is noteworthy that
in France, proceeds from privatization are not applied to
financing the general budget.
There were paid into a
special account earmarked principally to reduce state debts
152/ Excluding
the cost of planning
and formulation of an overall
privatization program. For more detailed coverage on estimating the
full cost of the disposal of SOEs, see A. Waters, "Privatization: A
Viable Policy Option?," in Privatization: Policies. Methods and
Procedures (Manila, Philippines: Asian Development Bank, 1985).
- 140 -
(including
debts
incurred
on account
of earlier
nationalizations) and subsidiarily to subscribe to capital
increases
for purposes
of restructuring
other SOEs
(including those to be privatized).
Specific allocations
are to be made to repurchase government debts in the bond
market, and various maturities are paid off instead of
refinanced.
In the United Kingdom, where the state transferred the
telecommunications assets to a new public limited company,
British Telecom, the transaction costs were only a fraction
of the realized
proceeds.
However,
some long term
liabilities were not assumed by the new company.
In the case of the leveraged management/employee buy-out of
the National Freight Company in the United Kingdom, the SOE
was acquired for 53.5 million, but the net proceeds to
government were only about C 5.0 million, largely because
the government agreed to finance a deficiency in the pension
fund.
With respect to Spain's Rumasa privatizations, liabilities
were assumed by the purchaser in a limited number of
instances.
In the case of SEAT, the Spanish automobile
manufacturer
acquired by Volkswagen,
the arrangements
included a special fund at INI, SEAT's vendor, to cover
contingent liabilities.
-
- 141 -
access to
purposes,
for share
potential
- 142 investors, and the liquidity of the investing market.15 5 A public offering
is difficult in the absence of an organized capital market or when there is
a lack of local financial intermediation. Nevertheless, measures have been
used that compensate for the weakness of capital markets.
In the case of
the NCB privatization in Jamaica, the government launched an elaborate
information
campaign
about the public
share offer, including
the
distribution of 200,000 copies (for a country of 2 billion inhabitants) of
a question and answer sheet that described in basic terms the nature of
shareholding and the stock market. A distribution mechanism was developed
ad hoc which may be, relatively speaking, the most concentrated network
ever assembled for a share issue.1 5 6
In the end, the offering was
oversubscribed 2.7 times: "The offer has shown that liquidity is there
under people's mattresses."1 57
A further public offering of an SOE in
Jamaica, namely, the Caribbean Cement Company, also drew a large response,
even though it was not fully subscribed (for reasons indicated on page
114).
The sale of minority holdings in TELETAS in Turkey which drew a
response by the public much larger than expected was also accompanied by
creative and massive distribution and publicity efforts to compensate for
the weakness of the capital market.
That lesson was repeated in Kenya,
when Barclay's Bank (not an SOE and reportedly a sound and profitable
private firm) issued new stock to the public.
The issue was seven times
oversubscribed,
subscribers
included many first time rural Kenyan
purchasers.
Ultimately, the shares had to be distributed on a lottery
basis.
Whether public offerings are possible in other countries lacking
organized financial markets (e.g., most of Sub-Saharan African except
Kenya, Zimbabwe, Nigeria and C6te d'Ivoire) remains to be determined.
Experience
does show, however,
that creative approaches
are being
undertaken
successfully. 1 5 8
The recent capital increase of Societ6
Togolaise de Siderurgie (STS) (which is leasing a steel mill from the
Government of Togo) to finance a new line of machinery was achieved through
a public stock offering.
This new issue of approximately US$1.3 million
equivalent was largely subscribed by inter alia, 52 Togolese shareholders
jj5/ Although
it is desirable to describe specific alternatives
at
different levels of development of capital markets, doing so is beyond
the scope of this report.
156/ J. Redwood and 0. Letwin, op. cit.
157/ Ibid.
158/ In one West African country, a group of businessmen very recently
formed a six-member committee within the Chamber of Commerce to raise
equity to create a new private bank, with representation
from
different
ethnic groups. Each member undertook
to distribute
subscription
forms to potential investors. By the close of the
subscription
period,
nearly
seventy-five
local investors
had
subscribed to the issue for a total $1.6 million equivalent (including
foreign exchange subscriptions representing capital repatriation).
- 143 -
- 144 exist outside the banking system.1 61 They may be invested in other liquid
forms, such as cash, gold, etc. One additionalconstraint on privatization
in developing countries may be that the lack of a secondary stock market
renders investment in shares very illiquid.
Acceptanceof Payment Terms
When disposing of their shares in SOEs or of assets, several
governments have accepted payment terms, both in public offerings and
private sales. Other governmentsare reluctant to do so.
The governments of Bangladesh, Canada (and the provinces of
Quebec and Ontario), Chile, the United Kingdom, and Togo have all effected
sales of state holdings by agreeing to payments over time. In acquiring
all the shares of de Havilland Aircraft of Canada Ltd., the Boeing
Commercial Airplane Company paid Can. $95 million in cash and is to pay a
further Can. $65 million in successive installments. Seven year payment
terms were agreed by the Central African Republic for the sale of the
assets of Societ6 IndustrielleCentrafricainede Produits Alimentaires et
Derives (SICPAD). Installmentarrangementsare described in detail in the
offering prospectus of several United Kingdom SOEs, such as British Telecom
and British Gas.
Payments for British Gas are to be made in three
installments:71 cents at time of allotment (December 1986), 64 cents in
June 1987, and 57 cents in April 1988. In the case of private sales, they
will be evidenced by the sales agreement or by notes. One hundred percent
financing is never accepted, and security is mostly required in private
sales. Senegal's Law on Privatization specifically requires payment in
full upon sale unless a special exception is granted by Decree. Security
should be taken (it can take the form of bank guarantees,pledges of shares
Bangladesh has experienced the danger of unsecured
or mortgages).
financing and the resulting lack of recourse in dealing with defaults. The
machinery adopted for installmentsales of shares in the U.K. provides that
shares so sold will be registered in the name of and retained by a
custodianbank until fully paid for.
- 145 -
146 -
- 147 -
buy-out.
Investors will mostly rely on the banking sector for such
financing and governments may consider encouragement measures such as
rediscountingloans for this purpose. Lines of credit have been proposed
in some countries for the financing of new (primary)equity issues of SOEs
(and not for the sale of government shares since here the governmentmay
provide financing by accepting payment terms). Other governmentsthat have
undertaken privatizationhave considered measures to enable or encourage
bankers to provide financial assistance to purchasers. Commercial bank
financings have been used in management/employee buy-outs and in the
acquisitionby workers of substantialparticipationsin the capital of SOEs
offered for sale to the general public. Corporationsformed by workers for
the purpose of acquiring shares in Chilectra Metropolitananegotiated with
a commercial bank better conditions than the ones offered by CORFO, the
Chilean national holding acting as vendor.
Debt Equity Swaps16 5
Debt equity swap techniques have been developed by a number of
countries. 66
Basic techniques and their applications,
benefits and possible drawbacks, in various countries are described in the
literature on the subject. Debt equity swap schemes are in operation in
Argentina, Brazil, Chile, Mexico, the Philippines and several other
countries.
Debt equity swaps are generally designed as debt relief
mechanisms. But even though this is not their main purpose, they may
facilitate privatization transactionsand, in that sense, are a relevant
method of financingprivate investmentin SOEs.
major
debtor
167
Detailed rules or provisions govern the transactions.
Those
of Chile, Mexico and the Philippines specify the eligible debt, the
conversion procedures and eligible investments (including equity
investments in national enterprises). Funds obtained through a swap may
under certain regulations cover only a portion of the cost of a given
investment. The remittance of the capital amount of the investmentmay not
be permitted for a specified number of years, and remittancesof earnings
may be limited.
165/ Debt Equity Swaps in this report do not include techniques for debt to
equity conversionswhich may constitute a means for a creditor in an
SOE to acquire equity in that SOE. One illustrationof this is the
acquisition of a majority stake in Interbank in the Philippines by
Shearson American Express.
166/ See Stephen Rubin, A Guide to Debt Equity Swaps, The Economist
Intelligence Unit, Special Report No. 1104, September 1987; and
Euromoney, January 1988, Supplement: Global Debt - The Equity
Solution.
167/ Lee Bucheit, "Converting Sovereign Debt into Equity Investments,"
InternationalFinancialLaw Review, September 1986, p. 30.
- 148 -
The rules also specify priority uses (e.g. , in Mexico, the highest
priorities and therefore the highest redemption prices go to buyers of
privatized state-owned enterprises).
Other countries (e.g., Argentina)
have restricted the applications to new investment, thus not permitting
debt equity swaps to finance acquisition of existing state participations
in SOEs.
Not much detailed information is available on debt equity swaps
resulting in the acquisition of equity in SOEs, and perhaps only a very few
instances have occurred.
Three privatizations in Chile (Chilquinta,
Soquimich and Chilgener) were carried out through debt equity swaps under
which American creditor banks of Chile acquired part of the participations
offered.
In Mexico, it is reported 168 that swaps have been applied to
divest two small state companies, Porcelanas Euromese (ceramic tile) and
Pescados de Chiagas (fish processing) to foreign investors; and that a plan
existed for a conglomerate to acquire Mexican government foreign debt at a
discount on the secondary market applying it to acquire a majority stake in
Compania Minera de Cananea, a large copper mining industry; a salient
feature of the latter transaction would be that the acquiring groups
obtained financing from a foreign banking consortium. 1 6 9 New capital
investment by a Japanese tractor company to increase its participation to
majority holding in a joint-venture with a Mexican SOE was also made
through a debt equity swap. Proposals have also been made by Citibank to
convert debt claims into equity of two SOEs of which it is a creditor. In
the Philippines, efforts are under way to divest a bank to local and
foreign investors, involving equity made available through the debt equity
swap scheme.
The increase in the return on marginal investments realized with
debt equity swaps may constitute an incentive for investors with regard to
privatization.
Recommendations have been formulatedl70
to encourage employee
buy outs of SOEs, along the lines of U.S. type Employee Stock Ownership
Plans (ESOPs), through the application of debt equity swaps.
What is
essentially being proposed is that equity in SOEs acquired by creditor
banks be sold back to an ESOP on a leveraged basis.
These conceptually
very productive proposals should indeed be carefully examined as part of
various possible financial instruments to finance leveraged employee buyouts of the type described on pages 29 to 34, or to finance acquisitions of
stock in SOEs by other acceptable purchasers.
168/ The information on Mexico and the Philippines is mainly drawn from S.
Rubin, op. cit., pp. 106 and 82, respectively, which provides further
details on the schemes provided for.
169/ The Economist, May 7, 1988
- 149 -
for
- 150
- 151 -
172/
- 152
ANNEX A.
SUMMARY
Methods
Characteristics
Public offering
of shares.
Procedures
Private sale
of shares.
Sale of
government
or enterprise
assets.
Fragmentation.
New private
investment
in SOE.
Management/
employee
buy-out.
Leases and
management
contracts.
- 153 -
Preferred
Applications
and Special
Featuires
Implementation
Issues
- Structure
or condition
of SOE may not permit
public offering;
feasibility
of restructuring
to be assessed.
- Mechanisms necessary
to achieve
and maintain
wide-spread
ownership
and possibly
limit
foreign
holdings.
- Pricing
mechanism to be defined.
- Distribution
mechanisms may need to be introduced to compensate
for weakness of equity
markets.
of flexibility
preferred
method for weak performing enterprises.
-In
absence of equity
market,
may be only alternative
for sale as going concern.
-Size
of enterprise
may not justify
public
offering.
-Preliminary
step to public
offering
when presence
of
leveraged
party necessary
to turn enterprise
around.
-New
owner known and can be evaluated.
Offers
flexibility
in negotiation,
such as obtaining
specific
commitments
from purchaser.
Purchaser
may bring benefits
(management skills,
technology,
market access,
etc.).
-Implies
SOS is sold with assets
and liabilities
(there
are exceptiors).
sale of shares
not feasible
or objective
is sale
individual
assets.
of SOEs not salable
as going
-Permits
privatization
concern.
-Often
results
in separation
of assets
and. liabilities.
of liquidation
- If assets
are sold as a result
or major restructuring,
related
issues
arise.
- Relating
debt liabilitles
often not assumed
by purchaser.
-Where
objective
to privatize
only certairn
components;
where SOE is a monopoly,
and break-up
will improve
competition;
or where market will not absorb whole SOE.
-Permits
privatization
of component parts when no taker
for the whole.
-Permits
application
of different
methods to different
parts.
- Depends on privatization
entities.
individual
where primary
objective
not divestiture
but
of new equity
by private
sectcr.
enter-Addresses
funding problems
of undercapitalized
prises.
Offers flexibility:
used as first
step to,
and in conjunction
with,
sale of governrment-held
equity.
-SOE
have competent,
professional
manmust typically
agement and skilled,
stable
workforce.
-Leveraged
buy-out a means of transfer
to management
wealth;
incentive
and employees
even with limited
to productivity.
-May
be solution
for SOE not salable
otherwise.
-May
be solution
to employment problems.
be preferred
where privatization
of ownership
of
government
or SOE assets
not appropriate.
May be intermediate
solutions
rendering
subsequent
sale possible.
to transfer
ownership
to
-State
unable or unwilling
sector
but wants private
sector management.
private
-May
also be planned
as an intermediate
step to full
-Because
-Where
of
-Applicable
provision
-May
privatlzation.
financial
restructuring;
on whether to rehabilitate
procedures.
method
applied
to
Implementatlon
issues
related
to public offerof
ing private
sale of shares
or transfer
assets
may arise.
required
as under-
Continued
financial
liabilities
of state
with respect
to ownership
of assets.
- Under management
contract,
owner may still
need to inject
funds to support
operations.
Malntenancelrenewal
obligations.
- 154 -
ANNEX B
THE AUTHORIZATION PROCESS
Page 80 of the report states that the nature of the authorization
process greatly influences the ease with which a privatization program is
decided on and/or implemented.
In some cases, authorization from the
legislative branch is required, in others only from the executive branch.
In other cases, the overall privatization program is authorized by law, with
individual privatizations decided by a designated entity that may have been
created for that purpose.
Many constitutions include, among the matters
the creation and
that can only be decided by an act of parliament,
dissolution of state-owned companies and the transfer of state bodies to
private ownership. Many SOEs are created by a specific law (in other cases
by decree or some executive order) and can only be dissolved by an equivalent instrument (although in some cases the charters of the SOEs contain
specific provisions in this respect). Some countries have laws that require
certain sectors to be state-controlled or require a state majority in these
sectors. For state-owned enterprises governed by private company law, all
steps relating to dissolution, liquidation, etc. (normally decided by a
shareholders' meeting) are spelled out by their charters and company laws.
Sometimes legislation or the charters of the SOEs organized as stock
corporations impose restrictions on the transferability of shares. In some
countries, both the central or federal government and state governments may
be divesting shares or ownership and the requirements of both will need to
be satisfied.
The ease with which certain divestiture/privatization programs or
specific transactions can be initiated and completed depends largely on the
type of authorizations involved. Analysis of this issue is only possible on
the basis of specific situations, and no general conclusions can be derived.
If legislative approval is required in a fully transparent democratic
system, the authorization process may be very time-consuming because of
potentially strong political opposition (e.g., if there are personnel layoffs involved).
In many tightly controlled one-party states that have a
parliamentary system, however, the chief of state and the cabinet can obtain
legislative approval with ease.
The authorization process also involves a
determination of which administrative branch or organization should handle
the divestment program.
Typically, legislative authorization (at least for a transfer of
ownership) is required in cases where:
o
it is a constitutional requirement.
For example, many of the
constitutions of francophone African countries, such as in the
case of Senegal, have adopted the French constitutional requirement that legislative consent is required to transfer enterprise
ownership from the state to the private sector.
The situation
with respect to individual assets is, however, often open to
interpretation; and
- 155 -
166/ This would be the case for TFI (television shannel), Renault and Cr6dit
Agricole. In France, minority interest divestments (e.g., the state's
35 percent holding in Total (petroleum)) did not require authorization
by law.
- 156 -
- 157 -
ANNEX C
MANDATORY PROCEDURES AND GUIDELINES FOR PRIVATIZATION
Page 90 of this Report comments on the efforts of several states
to develop clear minimum standards to ensure orderly disposition, maximize
the return to the state, preserve a fair process for the general public and
assure the qualifications of the purchaser to run the acquired enterprise
productively. The following illustrates some of the main provisions of the
mandatory rules in Bangladesh, Brazil, Chile (internal procedures of CORFO),
France, the Philippines, Senegal and Tunisia. It should be noted from the
outset that most countries which have developed general principles and
guidelines
have also recognized
the need for flexibility
at the
implementation stage to allowr for the specific circumstances surrounding
each SOE.16 8
Argentina
Law 22.177 of March 4, 1980, gives the Executive Power authority
to proceed with partial or total privatization of SOEs. It provides for the
overall methods and procedures while SOE specific decrees provide for the
detailed technique to be applied to that SOE (several such decrees have been
issued recently).
The Law also empowers the Executive to dissolve and liquidate SOEs
and to appoint liquidators. Provincial governments are also authorized to
privatize their holdins in S()Es. The Law provides for the basic methods
which can be applied in Argentina (largely the divestment methods described
in Part I of this report).
Implementation of privatization transactions is the responsibility
of the Ministry to which the individual SOE is attached.
The relevant
Minister has authority to set the basis and conditions for sales in
accordance with general conditions approved by the Executive.
The Law
provides for domestic or international bidding in the case of divestment.
It further recognizes the need to permit certain provisions of SOE charters
or articles of association to apply such as the exercise of preemptive
rights of existing shareholders (see page 99).
The Executive may adopt various specific methods and procedures
for accomplishing privatization.
When bidding is not responsive, direct
negotiations are authorized.
Debt claims of the state (or state bodies)
over SOEs may be rescheduled; the state may also subordinate itself to other
creditors.
168/ Report
of the Public
February 21, 1987.
Sector
Divestment
Committee,
Singapore,
- 158 -
for affected
the necessary
of
the
privatization
of
abandoned
public
71
decided
to
take over
- 159 -
160 -
Council submits the matter to the President of the Republic who may decide
whether to review the evaluation or to reopen the bidding.
Chile
As described on page 83 of the report, Chile's CORFO has been the
vendor for a large number of SOEs under formal administrative arrangements.
While Chile has not, unlike other countries referred to in this
Annex, specified mandatory procedures by law, CORFO's customary procedures
merit mention.
Over the years, and building on
its several phases of
privatization,1 7 2
CORFO has developed its procedures and criteria for
purchaser selection.
Though done on a case-by-case basis, consistency in
the application
of the procedures have resulted in implicit general
procedures.
Furthermore, minimum guidelines to which CORFO is subject in
the restructuring of public entities, requires it to subject all dossiers
for the transfer of property to the national credit office (Contraloria) for
approval, adding to the consistency of the dossiers.
The
following
elements
of the procedures
are,
inter
alia, of
interest:
Building on the results of earlier privatization, CORFO has
strengthened requirements in respect of solvency of buyers and of the
avoidance of property concentration.
To increase the likelihood of
maintenance of solvency, the buyers' financial condition is reviewed in
detail at the bidding stage, including the method for raising the funds to
finance the acquisition.
Although accounting practices in Chile don't
require consolidation of balance sheets of related corporations, CORFO does
it, analyzing the complete financial profile of the group.
Specifications for prequalifying prospective buyers include:
o
shareholders
identification,
board members of corporations,
detailed financial statements of all related corporations (should
be audited);
- 161 -
Those
are
Those
are
Philippines
In the Philippines, privatization is to be carried out through the
Committee on Privatization (COP) and the Asset Privatization Trust (APT)
created by Proclamation No, 50 of December 8, 1986.
The broad organizational set up is described on page 85.
The COP identifies, by itself or with the assistance of APT and/or
other disposition entities, the most appropriate entity to undertake the
Such entities may
ultimate disposition of any asset transferred to it.
- 162
services.
The Commission
is the only body allowed to retain advisory
It recommends any incentives (particularly tax incentives).
through
- 163 -
single buyer or group of buyers to permit private sales) and to achieve the
participationof local interestsand employees.
The creation of a special share (see Annex D) is mandatory in case
the SOE has outstandingdebts guaranteedby the state.
The further practical modalities for selling shares in SOEs are to
be specified as needed by Ministerialorder.
Tunisia
Tunisia's Law No. 87-47 of August 2, 1987,175 relating to public
enterprise restructuring, supplemented by various other texts, sets the
overall procedures for the restructuring/privatization
of SOEs in Tunisia.
It authorizes the state to proceed with the transfer of all or part of its
direct or indirect participationsin SOEs. The specific SOEs to be privatized must be designatedby decree.
Restructuring/privatization under the law includes the basic
standard methods: (i) sale of all or part of state-owned (directly or
indirectly) shares; (ii) exchanges (conversion)of securities; (iii) waiver
or sale of the state's preferentialsubscriptionrights to new share issues;
(iv) SOE mergers, absorptionsor splits; and (v) sale of individualassets.
The administrativeresponsibilitiesare as follows:
-
- 165 -
ANNEX D
RETENTION OF SPECIAL RIGHTS BY THE GOVERNMENT
Page 118 of the report comments on the elements determining the
maintenance of some degree of governmental control over privatized SOEs.
Certain governments have determined that, in order to maintain
control, they should not divest themselves of majority holdings in certain
enterprises.
This would often be the case for enterprises of strategic
importance or in which the government finds that it needs to control its
operations in the national interest.
Several alternative techniques exist whereby a government can
retain powers of approval over key actions by an enterprise after it has
become a minority shareholder or even after total privatization. It should
be stressed, however, that these techniques are not a substitute for
government control over the management and operations of the enterprise.
Where a government wants to retain the rights of an ordinary shareholder, it
should retain majority or equivalent control.
One technique is the special share (also called the "golden
share"). In preparing or amending the charter of an enterprise as part of
the readying process, a special share is created that can only be held by
the government and that entitles it to special rights as described in the
company charter. This technique was used in several of the United Kingdom
An extract from the British
privatizations through public offerings.
Telecom Prospectus describing the special share appears in Figure 6. The
French privatization law provides for the use of this technique (action
specifique) in cases where national interest so requires, and it was also
applied in in several public offerings of SOEs (Elf Aquitaine (petroleum),
The
Havas (media), Bull (electronics), and Matra (includes armaments)).
Malaysian government retained a special share in the privatization of
Malaysian Airlines System (MAS) and Malaysian International Shipping
This technique has not been used exclusively with
Corporation (MISC).
public offerings, and it was applied in the privatization of Sealink in the
United Kingdom, a private sale, on the basis of bidding, to a foreign
company (which intends to offer Sealink publicly within a few years).
The special share normally enables the government to ensure that
certain major decisions affeacting the operation of the enterprise are
It typically entitles the government to
consistent with its policies.
receive notice of, and attend. and speak at, shareholders' meetings but not
It entitles the government, inter alia, to
to vote at such meetings.
approve (or veto) specific variations of existing (strategic) provisions of
the company charter such as dissolution, limitation on shareholdings, the
nationality requirement of i:he chief executive officer, the issuance of
It
voting shares that are not idential to the existing ordinary shares.
effectively controls takeovers. It further entitles the holder government
- 166 FIGURE 6
Special Share
The Special Share may only be held by or transferredto the Secretary of State or another Minister of the Crown or any person acting on
behalf of the Crown. The registeredholder for the time being of the
Special Share (the "Special Shareholder")may require the Company to
redeem the Special Share at its nominal amount at any time.
The Special Shareholderis entitled to receive notice of an attend
and speak at all General Meetings and meetings of any class of shareholders but not to vote at such meetings. The Special Share confers
no right to participate in the capital or profits of the Company save
that on a winding-up the Special Shareholderis entitled to repayment
of 1 in priority to other shareholders. However, each of the following proposals is deemed to be a proposed variation of the rights
attaching to the Special Share and is only effectivewith the consent
in writing of the Special Shareholder.
(a) The amendment,or removal, or alterationof the effect of all or
any of certain specifiedArticles, being the Articles setting out certain definitions;the rights attaching to the Special Share; the limitation on shareholdings;the right of the Special Shareholderto
appoint any person or nominate any existing Director as a Government
Appointed Director and other provisionsrelating to Government
Appointed Directors including the provision that the removal of
Directors by resolutionof a General Meeting shall not apply to
GovernmentAppointed Directors;the right of a Director to vote in
respect of resolutionsof the Board concerningmatters in which the
Crown may be interested;and certain of the procedures for the proceedings of the Directors including the appointmentof a Chairman,
Deputy Chairman, and managing and executiveDirectors, their removal
from such positions and their qualifications,in particular the
requirement that any Executive Chairman or Chief Executive must be a
British citizen.
(b) The issue of any shares with voting rights not identical to those
of the ordinary shares subject to an exception for any shares which do
not constituteequity share capital and which when aggregatedwith all
other such shares carry the right to cast less than 15 per cent of the
maximum number of votes capable of being cast on a poll at any General
Meeting.
Extract from a section of the BRITISH TELECOM Prospectus dealing with
various provisions of the Articles of Assocation of the Company.
Source: BRITISH TELECOM:Offer for Sale of Ordinary Shares.
- 167 -
176/ On the latter, see further: L. Rapp, op. cit., pp. 40-42.
168 -
ANNEX E
RESULTS OF RECENT PRIVATIZATION ACTIVITY
on Volume
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11 31951
I II
TABLE
OFCINItETION
BYSTAGE
OPERATIONS
OFPRIVATIZATION
SURVEY
ANDCOUNTRY
REGIOML
Of
CONTRACTS
.All Transactionsother than smaageset contracts :. NANASEENT
Completed ORM TOTAL
Underway
-Planned
SUBTOTAL
COMPLETED
REGION/COUNTRY : PLANNED UNDERWAY
Africa:
Sub-Saharan
Benin
13
15:
Is
Caaaroon
3:
Rep. :
African
Cen.
1:
divoire
Cate
33
33:
36
guinea:
Equatorial
-6
7:
3:
21:
21
3U
4?
13
Saban
Saabia
Ghana
32
33:
Guinea
39
46:
Kenya
Liberia
10
It:
M4alai
5:
16
Mali
10
t1:
-4
- - - - - - - - - - --
- - - - - - - - - --
0
- --
1?
- - - -
Mauritania
5:
16
Niger
10
13
32:
33
Nigeria
97
29:
Ruanda
1'
0:
41
EPrincipe:
SaoaTome
- - - - - - - -
- - - - - - - - - - - - - - - -- - - - - - - - - -- - I--
- -----
33
39:
2:
2:
Swaziland
2:
Tanzaia
0I
6:
&
12
Senegal
SierraLomws
sealia
----
16:
- - - - - - - - - - ------
----
Ugana
-a
------------0
--------------
--
TABLEIII
REGIONAL
AND COUNTRY
SURVEYOF PRIVATIZATION
OPERATIONS
BY STAGEOF COMPLETION
REGION/COUNTRY
AllTransactions
otherthan
management
contracts MANAGEMENT
CONTRACTS
Vt
PLANNED UNDERWAY COMPLETED SUBTOTALPlannedUnderway
CompletedGRANDTOTAL
Zambia
234
-45
Asia:
Bangladesh
China
Indonesia
137
416
47
471
t0
Japan
Korea,Republic
16
16
20
10
32
33
Nepal
Pakistan
10
14
14
Philippines
-RI
-N1
Singapore
37
15
55
55
SriLanka
13
21
Taiwlan
Thailand
104
19
63
186
196
Australia
Fiji
NewZlealand
Papua
NeeGouinea
14
14
Solomon
Islands
14
14
14
23
11
39
40
TOTALforREGION:
Malaysia
TOTALforREGION:
Pacific
Countries:
American
Samoa
Western
Samoa
TOTALforREGION:
Europe,
Middle
East& NorthAirica:
I I
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