Provides guidance to governments on the privatization of individual companies. Also discussed: setting a fair market value and when to bring in foreign management. |
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| 1. Why case by case? |
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| Global experience and lessons | A very brief review of the lessons from case-by-case privatization which has been used throughout the world to increase efficiency, introduce competition and reduce the need for public finance. |
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| 2. First phase - getting ready |
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| Step one: Identifying privatization candidates | The criteria for identifying suitable privatization candidates based on a policy test (e.g. whether or not an enterprise is core to the government's activities) are provided, and a framework for deciding which companies will be submitted to a feasibility study. | | Step two: Feasibility study | Key questions to be examined during the feasibility study are outlined, including an inventory of the issues to be resolved such as company and sector restructuring or environmental aspects. Useful charts for deciding whether or not to privatize are drawn, pointing to the role of advisers at various stages. The outcome is to present a privatization proposal to the government, including an initial valuation, options for sale and timing. |
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| 3. Second phase - moving to sale |
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| Step three: Privatization plan | Once a company has been identified for privatization, the key steps for preparing a privatization plan are discussed, including: a communications plan, a clear policy statement on the main issues, a sales plan and draft legislation, and the timing and method of sale. | | Step four: Obtaining approval | If legislation is required to confirm sale approval, this should be passed prior to the company being brought to market. | | Step five: Sale | The sale can take various forms: public offering, trade sale, negotiated sale or mixed sale and issues will vary on this basis. |
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| 4. Sales methods and special concerns |
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| Public offerings | Public share offerings on stock markets can be used for large, profitable and well-known state enterprises. Shares can be offered either domestically or internationally. Mechanisms for attracting small investors are specifically discussed, along with the organization of the transaction, and the role of advisers. Pricing and distribution issues are identified as the most critical for success. | | Secondary offerings | When a company is already traded on the stock market, the sale of additional shares is known as a "secondary offering". The process shares some features with an initial offering but is less complex. | | Trade (third-party) sales | Sale to a third-party or strategic investor involves specific preparation and procedures. Mechanisms for sale can be either through open bidding or a negotiated sale (less transparent). | | Mixed sales - trade sales combined with share offerings | Mixed sales combine two or three sales methods. The most common form is when a company is sold to a strategic investor bringing know-how and is accompanied by a public offering to get the public to participate in the transaction. Negotiated sales are used to guarantee some shares to the company's employees. This combination is very useful for developing countries with a nascent system of corporate governance. For pricing reasons, the trade sale should come first, followed by the other components. | | Conditions attached to privatizations | Governments may require keeping a "golden share" which gives them the right to approve major corporate actions. These tend to be used for "essential services", such as infrastructure. | | Role of foreign investors | Foreign investors are deemed to be particularly important for bringing capital, management skills, new technologies, international links and access to foreign markets. Their role in restructuring is discussed, along with mechanisms for attracting their participation. | | Privatizing natural monopolies | Issues related to privatizing natural monopolies are briefly mentioned, including the need for incentive regulation. |
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| 5. Organizing government privatization |
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| Securing a central location and high-level support | The section discussed the contribution of central government to the success of the transaction, as the transaction is likely to encounter resistance and will require high-level decision-making. | | Setting clear objectives | Clear objectives should be set out in policy statements, laws or decrees and trade-offs between conflicting objectives resolved early on in the process. | | Developing institutional competence and experience | The easiest way to build up privatization experience in a country is to have a single government body lead the process for all sectors. The Ministry of Finance is often the most likely to play that role. | | Overcoming the commitment problem | Institutional design can play a role to minimize fragmentation over decision-making, e.g., limit the number of veto-holders |
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| 6. Valuation Methodology |
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| Valuation methodology | Value will depend on the valuation method and the divestiture method. A staged approach to estimating the value is preferable, with an increasing level of detail. Final valuation should be treated as highly confidential. | | Methods | There are various methods to estimate market value - six are discussed in the paper: - Adjusted net assets: estimate the market value of the balance sheet assets minus liabilities. Underestimates the revenue generating potential but it is easy to understand;
- Discounted cash-flow: derives the net present value of the company's equity from its future cash-flows; Comparable companies and transactions: for both methods, the principle is to compare with other companies or transactions in order to extract some easy-to-use "multiples";
- Book building: sets the value of a company for sale through the construction of a "book of orders". To be effective, this requires a minimum number of institutional investors so this method would seldom be of use in developing countries;
- Replacement value: estimates how much it would cost to replace a company's assets. However, this would often lead to an over-estimate and is seldom considered by investors. The choice between those methods depends on the divestiture method but it is likely that a combination of results will be used.
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| 7. Hiring financial and other advisors |
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| Selecting financial advisors | Financial advisers are useful for valuing the company and acting as sales agent to undertake the sale. These two functions may need to be separated in order to avoid potential conflicts of interest and to ensure that incentives are adequately structured. | | Selecting other advisors | Other advisers are needed, such as lawyers or technical auditors. | | Foreign advisors | Foreign advisers are essential to attract foreign investors, and should work alongside domestic advisers. | | Tenders for financial advisors | All advisers should be hired through a tender process. |
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