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Techniques of Privatization
of State-Owned Enterprises
Volume I
Methods and Implementation
CharlesVuylsteke
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Techniques of Privatization
of State-Owned Enterprises
TECHNIQUES
OF
PRIVATIZATION
OF
STATE-OWNED
ENTERPRISES
Volume I
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.
WORLD BANK TECHNICAL PAPER NUMBER 88
Techniquesof Privatization
of State-OwnedEnterprises
Volume I
Charles Vuylsteke
The World Bank

Washington, D.C.
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
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discussion and comment and to communicate the results of the Bank's work quickly to the
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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
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Because of the informality and to present the results of research with the least possible delay,
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The most recent World Bank publications are described in the catalog New Publications, a new
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Charles Vuylsteke is senior counsel in the Legal Department of the World Bank.
Library of Congress
Cataloging-in-Publication
Data
Techniquesof privatizationof state-ownedenterprises.

(World Bank technicalpaper ; no. 88-90)
Includes bibliographies.
Contents:v. 1. Methods and implementation/
Charles Vuylsteke -- v. 2. Selected country case
studies / Helen Nankani -- v. 3. Inventoryof country
experience and referencematerials / Rebecca
Candoy-Sekse,with the assistanceof Anne Ruiz Palmer.
1. Privatization. 2. Privatization--Casestudies.
I. Vuylsteke, Charles, 1947.
II. Nankani, Helen.
III. Candoy-Sekse,Rebecca, 1956IV. Ruiz Palmer, Anne, 1954.
V. Series: World
Bank technical paper ; no. 88-90.
HD3850.T436 1988
338.9
ISBN 0-8213-1111-5 (v. 1)
ISBN 0-8213-1112-3(v. 2)
ISBN 0-8213-1113-1(v. 3)
88-20699
A B S T R A C T
This report was initiated largely in response to interest by

member governments and staff of the World Bank for information on the
practical aspects of privatization of state-owned enterprises. It reviews
what is known about the recent experience of selected developing countries
and developed countries.
It describes and illustrates methods that have
been tried and options that are available to governments. The report deals
strictly with techniques (that is, how to privatize and not whether to
privatize).
The issues analyzed are the most recurrent in the process of
implementing privatization.
The report, which consists of three volumes, is largely the result
of a cooperative effort by various contributors within and outside the
World Bank.
Volume I, Methods and Implementation, relies extensively on
Volume II, Selected Country Case Studies, and Volume III, Inventory of
Country Experience and Reference Materials.
vii
TABLE OF CONTENTS
Page
No.
PREFACE ..........................................
xi
INTRODUCTION AND SUMMARY...........................................
PART I - METHODS OF PRIVATIZATION.....................................
BASIC METHODS OF PRIVATIZATION................................
Public Offering of Shares......................................

Private Sale of Shares..........................
Sale of Government or Enterprise Assets .......................
Reorganization into Component Parts...........................
New Private Investment in SOE.................................
Management/Employee Buy-out ...................................
Leases and Management Contracts...............................
11
16
20
23
26
29
34
2.
OVERVIEW OF THE EXPER:EENCEWITH PRIVATIZATION.................
41
3.
DETERMINANTS OF POSSIBLE TECHNIQUES...........................
57
Objectives of the Government..................................

Current Organizational Form of the SOE........................
Financial Condition and Record of
Performance of the SOE......................................
Sector of Activity of the SOE.................................
Strength of the Domestic Financial Markets....................
Socio-political Elements......................................
57
59
ANCILLARY ARRANGEMENTS ........................................
71
PART II - SELECTED IMPLEMENTATION ASPECTS .............................
74
1.
4.
1.
59
62
68
69
PLANNING AND MANAGEMENT .......................................
75
Initiating Measures ...........................................

Organization of Departmental Responsibilities;
Implementation Units ....... ................................
Use of External Professional Services.........................
Mandatory Procedures/Guidelines...............................
General Business Environment..................................
75
80
87
90
91
- viii
Page No.
2.
READYING SOEs FOR PRIVATIZATION .........................

Enterprise Diagnosis .....
Satisfaction of Legal Requirements .....
Conversion of Legal Form .....
Modification of Overall Legal Framework ..
Financial Restructuring .....
Physical Rehabilitation .....
Changes With Respect to Staffing .....
Ensuring Cooperation of Management .....
94
97
98
100
101
101
107
107
108
...
3.
VALUATION AND PRICING .....
109
4.
DETERMINING FUTURE OWNERSHIP .....
116
Partial vs. Full Privatization .....

Widespread Distribution of Ownership .....
Restrictions on Ownership Composition,
Controlling Interests or Foreign Ownership ....
5.
EMPLOYMENT ISSUES AND EMPLOYEE PARTICIPATION ..
.
...
129
Employment-Related Difficulties .....

Remedies to Negative Employment Effects,
and Employee Participation .....
6.
129
131
138
COST OF PRIVATIZATION .....

Transaction Costs .....
Residual Costs .....
7.
139
139
RESOURCE MOBILIZATION AND FINANCING PRIVATIZATION .....

Capacity to Mobilize Private Resources/Domestic
Financial Markets .....
Acceptance of Payment Terms .....
Direct Borrowing by Purchasers .....
Debt-equity Swap Programs .....
Institutional Investors and Holding Trusts ....
Other Measures .....
116
121
122
125
141
141
144
146
147
149
149
ANNEX C
ANNEX D
ANNEX E
ix
MANDATORY PROCEDURES AND GUIDELINES FOR PRIVATIZATION

Argentina, Bangladesh, Brazil, Chile,
France, Philippines, Senegal, Tunisia .....................
157
RETENTION OF SPECIAL RIGHTS BY THE GOVERNMENT

(Including Special ("Golden") Share)......................
165
RESULTS OF RECENT PRIVATIZATION ACTIVITY

(Statistical TabLes)......................................
168
LIST
OF TABLES
AND
FIGURES
Page
No.
Tables
Table 1
Table 2
TECHNIQUES USED IN CERTAIN COMPLETED

PRIVATIZATION TRANSACTIONS...............................
45
PRIVATIZATION OF PUBLIC UTILITIES AND SERVICES.............
64
ANNEX E
Table I
SURVEY OF ON-GOING AND COMPLETED PRIVATIZATION

TRANSACTIONS BY TECHNIQUES USED .......................... 169
Table II
SURVEY OF PRIVATIZATION TRANSACTIONS BY SECTOR............. 172
Table III
REGIONAL AND COUNTRY SURVEY OF PRIVATIZATION

OPERATIONS BY STAGE OF COMPLETION........................ 176
Figures
Figure 1
CHILE:
CORFO'S PRIVATIZATION STRUCTURE...................
84
Figure 2
ONGOING PRIVATIZATION OF MALAYSIA'S TELECOM ...............
95
Figure 3
PRIVATIZATION IN THE UNITED KINGDOM ........................
96
Figure 4
STEPS WITH RESPECT OF THE OFFERING OF CERTAIN

EXISTING SHARES IN MISC (MALAYSIA)....................... 106
Figure
JAMAICA
Figure 6
- NCB
- EMPLOYEE
SHARE SCHEME ......................
134
SPECIAL ("GOLDEN") SHARE................................... 166
xi
PREFACE
The report contained in this Volume I was initiated largely in

response to demand by Bank staff and client governments for information
on the practical aspects of privatization. It reviews what is known about
the techniques and implementation aspects of privatization by drawing upon
the recent experience of selected developing countries and developed countries.
It describes and illustrates methods which have been tried out
and the options available to governments which have decided to proceed
with privatization. The report deals strictly with techniques (i.e., how
privatization has been accom-plished and not whether to privatize).
The
implementation issues analyzed are the most recurrent in the process of
implementing privatization.
Privatization is not an end in itself. It would be superficial
to regard privatization as a panacea for the various difficulties faced
by the public sector in many economies, as if for instance a mere change
of ownership or the introduction of private management would per se pave
the road to financial and economic efficiency.
Extensive efforts are
underway in several countries to improve the modes of organization and
enhance the performance results of state-owned enterprises, and privatization constitutes only one of several methods for such restructurings.
The World Bank's involvement with privatization stems mostly from its
support to such broader efforts. The report does not deal with the Bank's
role in state-owned enterprise restructuring and privatization, nor with
its relating policies
on loan conditionality. But it is the substantial
concentration of efforts by the Bank on helping to improve public sector
efficiency that has led to this writing.
The report is illustrative rather than exhaustive in describing
the techniques developed by various countries. The extent to which they
constitute replicable options for other countries facing similar circumstances is a question to be approached with prudence, but also with a large
degree of creativity.
While Bank staff may provide further background
details to interested governments, frequent exchanges of information are
occurring also among official.sof governments of various countries. Materials presented in Volumes II and III, published simultaneously with this
report, may serve as a guide for further orienting such exchanges.
The one major difficulty encountered in writing this report has
been the need to place proc(esses in context.
The "whether" and "how" to
privatize, more often than riot, ought to be interconnected decisions and,
probably more so than they have been in a number of economies. However,
the already voluminous set of references to country examples illustrating
various techniques cannot deal to a very large extent with the vastly
different situations encountered in individual countries.
Neither does
this report deal with the economic argument for or against privatization.
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
INTRODUCTION AND SUMMARY
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.
1/ SOE, as used in this report, refers to enterprises and/or productive

assets owned fully or partially and directly or indirectly by the state.
2/ Privatization may be an element of broader economic policy comprising
deregulation and liberalization with the emphasis generally as much on
improving the efficiency of retained SOEs as on efforts to divest. Even
when governments intend to continue state ownership, various measures
can still be implemented to improve efficiency and reduce costs.
See
Mary Shirley, Managing State-Owned Enterprises (Washington, D.C.: World
Bank, 1985) and Mahmood Ayub and Sven Hegstad, Public Industrial
Enterprises. Determinants of Performance (Washington, D.C.: World Bank,
1986).
-2To develop recommendations on or to assess divestiture programs,

it is necessary to have an understanding of the steps that need to be
taken.
Similarly, a program's success or failure may well depend on the
suitability of the methods of privatization chosen. Governments that have
decided to initiate a broad privatization program or to privatize individual entities or activities often seek realistic assistance in how to
proceed, what issues they may have to deal with and what solutions have
been tried.3 These governments usually wish to analyze, consider and compare the policies and practices of other countries in addition to their
knowledge and assessment of prevailing local business conditions.
This report is primarily based on surveys and studies of techniques applied worldwide.
It also draws on the operational experience of
the World Bank and other multilateral and bilateral agencies supporting SOE
restructuring and privatization, discussions with governments and with
private parties that have acquired interests in SOEs, and with parties who
have advised on completed transactions (e.g., merchant banks and advisory
groups). To the extent that it can be done, generalizations are drawn from
a review of the relevant experience of selected developing countries and
developed countries, complemented by actual examples of how different
methods have been used and issues addressed. The focus is on how in practice a government can go about privatization rather than on whether to
-undertake the effort at all.
Of necessity, the report provides a sample of privatization
experiences rather than a set of blueprints that can be applied as is to
clearcut situations.
The use of appropriate techniques depends on a
thorough understanding of constraints, obstacles, industry and market
characteristics, etc.
Each privatization transaction is different and
needs to be designed to meet the specific characteristics and objectives of
a country, enterprise and time, taking into account local administrative,
political, economic, social and legal conditions of both the country and
the enterprise(s) and assets targeted.
It is clear from the review of
country experience that creativity is a prominent and necessary ingredient
of privatization.
This report is not an exhaustive review of privatization, a task
beyond the scope of this project and one that would be duplicative of other
work.
Rather, it limits itself to specific techniques.
In keeping with
this approach, the report does not address the economic policy decisionmaking process that leads to a privatization effort, although the related
debate may influence the choice of method. Nor does it cover why SOEs came
into being, the causes of their generally poor performance and the
theoretical debate as to what privatization can accomplish. Those issues
3/ Although the owner and seller is referred to as the government, it might

actually be another party, such as a state-owned holding company.
- 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
While some privatizations involve little more than the sale

of shares on the stock exchange, most transactions are more
complex.
Privatization is a field that does not permit
dogmatic treatment; every case must be examined on its own
merits. The mechanics for privatizing the national airline
in Malaysia will not, for example, be applicable to the
of a medium-size manufacturing enterprise
privatization
Rather, the choice of privatization techniques
in Togo.
is generally a function of the government's objectives, the
SOE condition and its sector of activity, and the country
characteristics. Obviously, the profitability of an SOE is
one of the determinants of how easy or how difficult its
The experiences of developed and developing
sale will be.
countries alike demonstrate that privatization potential is
not limited to strong performing SOEs. Where widespread
share ownership is desired, a public offering should be the
preferred method; but the near absence of financial markets
and the concentration of domestic private capital and entrepreneurial expertise may not permit a public offering. When
regulatory aspects will
public utilities,
privatizing
4/ Elliot Berg and Mary Shirley, Divestiture in Developing Countries, World

Bank Discussion Paper No. 11 (Washington, D.C.: World Bank, 1985); and
Richard Hemming and Ali Mansoor, Privatization and PublicEnterprises,
IMF Occasional Paper, No. 56 (Washington, D.C.: International Monetary
Fund, 1987).
./ See T. Sharpe, "Privatization, Regulation
Studies, 5: 1, February 1987, pp. 47-60.
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.
Practical approaches can be modeled that often accommodate

to some extent both stated objectives and various constraints.
Relevant approaches include the adaptation of
basic techniques to specific constraints as well as combinations of various methods, as discussed in Part I on pages 11
to 44.
The techniques most responsive to specific common
issues are described in more detail in Part II.
They
include: intensive information campaigns and elaborate distribution networks for public offerings of shares in the
case of weak financial markets; combinations of public
offerings and private sales where the presence of a party
or core group of shareholders that is strong financially
and technically is necessary to turn around or sustain
the SOE; and infusion of new private equity in SOEs needing rehabilitation coupled with the sale of government held
shares. Where transfer of ownership is not desired or feasible at an initial stage, leases and management contracts
have been used, often to be followed by transfer of ownership. Large-scale use has also been made in some countries
of state and private joint ventures as a first step to
privatization.
The ancillary arrangements accompanying a privatization

transaction, as described on pages 71 to 73, are an inherent part of the basic method being applied.
In some circumstances where the feasibility of a given type of transaction hinges on long-term commercial and fiscal advantages
beyond those that otherwise apply to competitive industries
under market conditions, government economic policy in
this
respect
ought
to be clarified
before
entering
the
transaction.
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.
In determining the conditions for sales, pricing raises the

difficult issue of trying to balance the need to maximize
the proceeds wjith other objectives (pages 109 to 116). For
instance, although a certain type of transaction, such as an
employee buy-out, might yield the government a lower price,
it might stil-L be preferable if it better addresses the
government's economic, political and social objectives.
Wide variations exist in government policies with respect

to the desirable level of private ownership.
Whether
partial rather than full privatization is sought, whether
the avoidance of concentrated ownership is a major concern
of the government, whether the aim is to achieve widespread
ownership per se, or whether restrictions are justifiably to
be placed on foreign ownership, there are a number of techniques which largely permit governments to implement such
policies (pages 116 to 128).
Private interest has not been limited to strongly performing SOEs.

Governments have, through the application of
appropriate techniques, privatized loss-making or weak-performing enterprises (page 59).

However, many enterprises
cannot be sold "as is" and are in need of some restructuring
before they can be offered to investors. As investors may
sometimes prefer to establish a totally new enterprise, the
restructuring may involve the liquidation of the existing
concern and the sale of its assets.
Such restructuring
poses difficult questions related to employment and the
treatment of the liabilities of an SOE (particularly when
the liabilities are excessive in relation to the asset
value). Management issues must often be addressed as well.
The extent of the necessary readying measures will depend
largely on the financial condition of the SOE and the
selected method of privatization (pages 94 to 108). Physical rehabilitation, however, is usually not recommended.
o
There are wide variations also in the financial costs of

various types of transactions or specific methods or procedures of privatization (pages 138 to 141).
Costs include
low pricing, e.g., to assure widespread share ownership, and
the assumption of substantial portions of the liabilities of
SOEs.
Privatization may not yield full budgetary relief,
and several cases are characterized by important residual
liabilities for the state.
PART I
METHODS OF PRIVATIZATION
SOEs must ultimately be disposed of one-by-one and each case must

be examined on its own merits. Among various approaches, a government may
opt not to sell the whole SCE as an entity, but to dispose of just one or
more activities or subsidiar:ies. It may also not actually sell its existing holdings in the SOE, but open the capital to private participation and
thereby dilute its own proportionate shareholding. While a number of SOEs
have been sold with little or no restructuring, others have had to undergo
extensive financial restructuring. But for many more, privatization of the
entity as a going concern is not possible, or not attractive to the private
sector 5
, and a fragmentation
into component parts or the sale of
individual assets is more appropriate.
In other instances, a management
contract or a lease rather than a sale is the most desirable method.
This Part I first examines the most common privatization transactions or methods. Most transactions observed fall under one of these basic
types.
Therefore they also constitute the main options or alternative
approaches
available
to governments.
Second, it looks at country
experiences, in terms of the more frequently used transactions. Third, it
lists the main factors that determine whether a particular method can be
used.
Last, it explains various ancillary measures that may need to be
taken along with the privatization transaction.
5/ Nevertheless, the product or service to be provided by the SOE and the

assets with which it is provided may be of interest to the private
sector.
- 8 -
1.
BASIC METHODS OF PRIVATIZATION
The most commonly used methods of privatization are:

o
Public offering of shares,
Private sale of shares,
New private investment in an SOE,
Sale of government or SOE assets,
Reorganization (or break-up) into component parts,
Management/employee buyout, and
Lease and management contract.
Several of these methods can bring about total divestiture or

Several
denationalization or can be implemented partially or gradually.
combinations of the above exist as well. Partial privatizations often take
the form of joint-ventures. Some methods, such as the French type concession system for utilities or public services, do not typically fit under
one of the above basic methods, but are described under sector specific
arrangements (see page 66).
The choice of a particular method will be dictated by the objectives being sought and other factors (see pages 57 to 70 on determinants of
possible techniques), and will generally be based on an evaluation of
alternative methods.
This section is intended to describe the principal
characteristics of each method.
Beyond the above methods of transfer to private control or ownership of SOEs or government productive assets, other actions6 are sometimes
also referred to as privatization, or linked to it, that are not covered
here but that ought to be mentioned:
-
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.,
6/ The reader is referred to D. Heald, Public Expenditure (Oxford: Basil

Blackwell, Ltd 1987), Chapter 13, for what is probably the best summary
of the separate concepts which have been grouped under the term
"privatization." Heald examines separately privatization of financing,
privatization
of production of a service (e.g., contracting out),
denationalization and load-shedding (i.e., privatization as meant in
this report), and liberalization.
- 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.
-
Increased use of private sector financing of new activities,

such as contractor equity financing (e.g., "Construct, own and
operate contracts")7 or switching of the source of financing
for the supply of a good or service from taxation to user
charges (e.g., the North-South Highway in Malaysia to be
financed by toll revenues).
Revenue participation certificates or revenue bonds issued by

the state or by state bodies (as were issued for the Bosphorus
Bridge and the Keban Dam in Turkey).
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
Contracting out, i.e., substitution of private contractors or

services for production by the state or municipalities (e.g.,
for refuse collection, building maintenance, etc.).8 and
franchising.
Contracting out normally follows applicable
governmental procurement techniques and procedures.
Full liquidation of an SOE with the assets ending up in the

hands of private purchasers (other than cases referred to on
pages 20 to 22) while the SOE's activity is wound up.
The following details the main characteristics of various methods

of privatization, and highlights the principal factors which determine the
application of each specific method and the main issues which arise under
each of them.
Some examples of their use in various countries are also provided
in the text, but the reader is mainly referred to Table 1 for a listing of
examples of each method.
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
Public Offering of Shares (Fall or Partial)
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.
9/ A clear distinction should be drawn between:

(i)
offerings of existing government-held stock (true of most

privatizations involving public offerings); and
(ii)
new (primary) public issues of shares.

The latter is
another form of privatization, amounting to letting the
private sector into the capital of the enterprise, generally
through a capital increase with a consequent dilution of the
government's
interest,
rather
than a sale of the
government's interest (and it is described under Section 5,
"New private investment in an SOE"). Alternatively, or
simultaneously, convertible debentures (no additional funds
upon conversion) or warrants (brings in new funds when
exercised) may be issued. (Warrants were used as incentives
by the IRI holding in Italy and by Jamaica when selling its
holdings in the Caribbean Cement Company (CCC)).
Both (i) ancd (ii) will often take place simultaneously,
particularly
in the case
of enterprises
needing
recapitalization. Examples are provided on pages 41 to 44.
- 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 -
Preferred Applications/Special Features

Public offerings require that: (i) the enterprise be a sizeable
going concern with a reasonable earning record or potential, or that it can
be readied to become so; (ii) a full body of financial, management and
other information is available or can be prepared for disclosure to the
investing market; (iii) there is discernible liquidity in the local market;
and (iv) either the equity markets are developed or there is some
structured mechanism (inclucling a regulatory body) that can be made to
function to reach, inform and attract (as well as protect) the general
investing public.
It meets a government's
objective to encourage
widespread share ownership.
Privatizations
through public offerings have taken place in
response to different objectives. The British Telecom and other offerings
in the U.K. were the result of a deliberate policy of transferring
ownership from the state to the public. The offerings of minority stocks
of Italy's IRI in several companies are simply based on the group's
financial strategy, but they also result in a transfer of ownership from
the state to the public.
The main advantages of public offerings are that they permit
widespread shareholding, allow the broader resources of the general investing public to be targeted, and are normally characterized by openness and
transparency. For the above reasons, they are often also politically more
palatable.
As an illustration of the elements determining the choice between
public offering or private sale, the Public Sector Divestment Committee in
Singapore1 3 recommends that: "(1) Unless there are special reasons such as
the management wanting to take the business over, obligations to the
original promoters, or the parcel of shares being too small, the mode
should be random allocation through listing or secondary offer to the
public"; and "(4) Where a secondary offer is inappropriate e.g. when
Government is looking for a party who can take over the role of dominant
shareholder, the mode should be selective tendering or direct negotiation."
Public offerings are obviously designed to sell large participations or
raise substantial new investment.
Implementation Issues
The following are the major implementation issues likely to arise
in the public offering of SOE shares in certain developed and developing
country environments.
Condition of the SOE.
If the SOE is not presently a strongly
performing public limited cornpanywith a reasonable track record, a public
13/ Report
of the Public
February 28, 1987.
Sector
Divestment
Committee,
Singapore,
14 -
offering is possible only to the extent that prior restructuring and a

turnaround in operations are a realistic option.
In a large number of cases, an enterprise needs to be carefully
restructured or readied to make the public offering feasible.
Experience
shows that this need not be an obstacle where the enterprise clearly has a
good earnings potential. The transformation of government entities such as
the United Kingdom, Japanese, Malaysian and Sri Lankan telecommunications
enterprises into public limited companies represented by shares is an
example of such a readying process (see page 95 and following). Rather,
the issue arises with respect to what specific steps can be taken to ready
for privatization
through public offerings enterprises that have no
reasonable earnings potential in their present condition.
Prior to the
public offering of holdings in British Airways, the government took various
steps to restructure the loss-making enterprise, which thereafter showed
profits.
The work force was reduced and new management methods were
introduced, and various financial restructuring steps were taken as well.
Alternatively, a government may wish to privatize an SOE in two
steps.
In the first stage, it would sell a minority but controlling
interest to an investor or core group of investors through a direct sale.
The investor(s) would bring in the leverage necessary to turn the company
around.
Once the company had become profitable, the remainder of the
government-held
shares would be offered to the general public.
The
presence of a leveraged party may be paramount, in the case of SOEs which
are inefficiently managed. The presence of such a core group, be it a
strong technical partner or a sound investment management group, would also
boost investor confidence.
Similarly, in several French privatizations
through public offering, a block of shares was sold to a preselected core
group of shareholders (36.69 percent of the shares were so sold in the case
of Compagnie Financiere de Suez).
If the objective is to achieve widespread
Targeting ownership.
share ownership or to target certain segments of the investing public,
specific mechanisms (incentives, restrictions, etc.) need to be introduced
to ensure those objectives are attained and maintained. Otherwise even a
public offering may lead to a given investor or group of investors taking
control of the SOE (even though, as indicated above, in several instances
a "stable core" of a strong technical partner or institutional investor(s)
may be desirable). Foreign ownership may need to be restricted. Employee
participation in ownership may be encouraged (see pages 132 to 134).
Valuation and pricing.
These issues need careful handling to
ensure that adequate value is received.
Their importance is enhanced by
the need to avoid claims that the state has given away the public patrimony
to purchasers who then enjoy a windfall profit.
Relevant techniques are
discussed on pages 109 to 116.
Absence of developed equity markets.
Without strong equity
markets, public offerings will not generate much response unless mechanisms
- 15 -
are devised that allow the general investing public to be reached.

This
was done in the Jamaican cases and the Turkish instance described on page
142.
It is essentially the absence of an effective primary market or
market substitute which might impede privatization. However, the absence
of a secondary market would render an investment in stock of the privatized
SOE illiquid and may in itself discourage investors. However, as described
in page 142, there have been instances that cannot technically be
characterized as public offerings in which shares in SOEs have been offered
to and taken up by important segments of the investing public in developing
countries without any structured equity market.
Nature of capital market regulation.
An important question is
whether, in an unsophisticated equity market, the government should take
special precautions to avoid excessive financial risks for purchasers.
This is a complex issue, and more so than can be acknowedged in this brief
section. While the main purpose of capital market regulation is to ensure
an adequate level of discLosure when offering securities, important
questions arise as to the government's responsibility for protecting the
interests of investors who may not have the benefit of advice from
experienced intermediaries in a number of less developed capital markets.
Disclosure requirements vary of course from one jurisdiction to the other.
Serious attention must be paid by governments offering SOEs to relatively
unsophisticated markets that unfamiliar investors not be led to judge the
investment opportunity
on the basis of too favorable or optimistic
reporting.
A recent prospectus
for an equity issue to finance the
expansion of a privatized industry in a West African country (with no
regulatory agency supervising share issues) would astonish securities and
exchange commission officials in countries with more regulated markets.
However, the investing public in such a country may not respond well to an
offering if the prospectus were to include the usual cautionary statements
as they would be unfamiliar to them. Purchasers of shares must however be
made aware of the inherent risks and not expect a government guarantee of
return or of recovery of principal.14 It is advisable that, in addition to
the government's assessment of the safety of the securities offered when
processing an SOE for public offering, a securities commission or similar
agency be able to pass indepeandentjudgement when clearing securities for
public offering.
The absence of rating agencies in many developing
countries adds to the need for governments to consider this issue carefully
in the case of public offerings.
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
Receptivity of capital market and crowding out effect.

Large
public offerings may prevent available resources and savings to be invested
in the creation or expansion of other productive enterprises. This point
cannot be analyzed within the scope of this report. Suffice it to say that
when the volume of available resources, or the capitalization of the stock
market, is not on the increase, large scale offerings may represent a
threat.
The French Minister of Economy, Finance and Privatization had
indicated that, on the other hand, the proceeds of privatization permitted
the state to reduce or amortize through specific allocations (see page 139)
its borrowings in the market, thereby reducing the crowding out effect.
Obviously the crowding out effect must be considered carefully when
preparing public offerings and a phased approach (see page 78) may be a
relevant tool to address this issue.
In some circumstances (e.g. the sudden downturn in stockmarkets
in the fall of 1987) precautionary measures may be necessary and some
privatizations through public offering may have to be postponed.
Thus,
France postponed the first trading of shares of the recently privatized
financial group Compagnie Financiere de Suez (new stockholders would have
been faced with a paper loss even before they would have paid for their
shares). France further postponed the sale of Matra (which was scheduled
to take place in November 1987), 15 percent of Air France as well as UAP
(Insurance), and Germany postponed the offering of its interests in
Volkswagen and VIAG (aluminum, chemicals). In the case of the 7 bn. sale
of the U.K. Government's
stake in British Petroleum, a floor price
mechanism was put in place (whereby the Bank of England would acquire the
shares underwritten by various banks as a safety net to protect the
underwriters against the sudden crash of the stock prices which occurred in
the fall of 1987), demonstrating that governments may need to intervene
when capital markets become unresponsive.
Private Sale of Shares (Full or Partial)
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.
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
It may also be the only feasible alternative in the absence of

developed equity markets, where no mechanisms can be developed for reaching
the general investing public, and where the size of the enterprise may not
justify a public offering.
One of the principal advantages of a private sale of shares is
that the prospective owner is known in advance and can be evaluated, and
may be selected based on ability to bring a number of benefits such as
management, technology, market access and the like. In many instances, the
future success of the operation may be as important to government as the
proceeds from the sale.
In some cases, a partial private sale may be a
necessary first step to full privatization, as it brings in a leveraged
party who is able to turn the company around so that it becomes attractive
to investors.
In addition, the private sale permits all the required
flexibility to conclude special arrangements with a suitable purchaser as
required by the SOE condition. E.g., even a SOE with a negative net present worth or uncertain market value may be attractive to a buyer with whom
a special synergy exists (market share, technology, etc.). In some cases,
it has even allowed for the payment of compensation to a buyer agreeing to
acquire such an enterprise (IRI in Italy has done so).
But the main
advantage will usually be that a buyer may give other than market value to
the SOE.
It is important to avoid, normally through provisions in a sale
agreement, that a buyer would acquire an SOE with a view to dismantle it
and sell the assets (unless th:isis regarded by the vendor as an acceptable
outcome).
The private sale is, of course, much simpler in terms of disclosure and other legal requirements, than is a public offering.
The SOE may be in need of financial restructuring, such as alleviation of liabilities.
Phys:ical rehabilitation of assets prior to sale
seems to be a rare occurrence. Mechanisms for handling employment issues,
particularly loss of jobs and government benefits, may need to be designed;
most will carry some cost. To ensure a government's objectives are met and
the public interest is served, mandatory procedures may need to be introduced to govern valuation, purchaser selection (prequalification, bidding
process), etc.
There usually is a need for government "distancing" in
cases of partial privatization, to allay investor fears of continued interference.
There is a need to differentiate between denationalization or
reprivatization exercises such as in Bangladesh, Chile (initial phases),
Philippines (part of the portfolio to be privatized consists of nonperforming assets acquired by state development banks), Spain (Rumasa) and
Uganda, and first time privatizations. A company which was originally set
- 20
up as a private enterprise may present quite different characteristics from

a typical SOE. Formerly private companies will normally already be in the
required corporate form and may be in lesser need of prior restructuring.
However, during government ownership, the work force may have grown too
These aspects
large, liabilities may have reached unsound levels, etc.
would then normally need to be addressed prior to privatization, much as if
this was a first time privatization.
A disadvantage of any private sale (of shares as well as of
assets) is that it may
give rise to criticism as to the selection of the
acquiring party, particularly if a large number of transactions are so
concluded giving rise to inadequate spread of wealth in the country.
Strict mandatory procedures will tend to compensate this effect.
Pricing will be one of the most difficult areas, as with several
other forms of privatization.
Sale of Government or Enterprise Assets
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
17/ As in the sale of Compagnie Generale de Constructions Tel6phoniques

concluded after competitive bidding on the basis of preset criteria and
on the basis of a fixed price; all criteria were set forth in a
detailed "Cahier des Charges." The offer for sale by public tender of
21 hotels by British Rail Investments Limited was organized along
strict criteria spelled out in the comprehensive sales memorandum dated
December 2, 1982.
- 21
carried out by auction. It can also be concluded after direct negotiation

with a pre-identified party. In the latter case, it will often be preceded
by a complex investor search.
The reader is referred to the previous
chapter on private sale of shares as many of the procedures will apply
mutatis mutandis.
The sale of assets can take many diverse forms.
This report
looks only at a few of the more typical transactions, as observed in recent
privatizations; the following scenarios have been observed.
pany.
(i)
If it is desirable to privatize just part of an SOE, the

enterprise may simply dispose of those assets with the core
SOE remaining intact. Thus, this method is a useful way to
downsize an SOE. (If distinct units are hived-off, then the
transaction will rather be a break-up into component parts
as described on page 23.)
(ii)
If the intention is to sell the entire SOE but it is not

saleable as a going concern (that is, through a sale of
shares), it may have to be dissolved and liquidated and its
assets sold (with or without accompanying liabilities) to a
private party or parties, who will then create their own
corporation toc take over all or part of the activities of
the defunct
SOE.
This process
is very
common
in
As a rule, the assets and liabilities are
privatization.
separated, with the investor not necessarily assuming the
latter. This was done by C6te d'Ivoire with the SIETO hotel
company -- individual hotels were then transferred to
municipalities and placed under management contract.
The
objective of several privatizations in Guinea was for the
private sector to create new companies with private majority
Bids had to be in the
to embody government-owned assets.
form of a feasibility study, showing the expected future
operations of the company to be established. The assets of
several
dissolved
SOEs
in Togo
were
sold
to new
corporations. In the case of IOTO (oil products) and SODETO
(detergents) the buyers are corporations with private
foreign and Togolese participations. The plants of Societ6
de Marbrerie
de Thala in Tunisia were sold (through
competitive
bidding)
to a large Tunisian contractor.
Liabilities were settled in chat the state dropped its
claims on the company and thv creditor banks shared the
proceeds
of the sale; the zompany was dissolved and
liquidated.
(iii)
The enterprise may be saleable as a going concern but for

other financial (e.g., tax) or legal reasons, a sale of
assets is in the best interests of all parties.
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
and transferred all its liabilities to a new company formed by Fiat-Lancia.

The reason in the case of Alfa Romeo was that both the enterprise was not
saleable as a going concern and that IRI wanted to keep Alfa Romeo as a
shell company in order to write off its losses against other group profits.
Several aspects of the sale of assets are handled in ways quite
similar to those for the sale of companies.
For instance, comprehensive
documentation is often required when open bidding is planned. Though not a
prospectus, the documentation may be compiled according to similar standards.1 8 The marketing and investor screening procedures described under
the previous section (Private Sale of Shares) may apply in the case of
asset sales as well.
While such disposals often cover physical assets, they may
involve a spin-off of certain activities or rights. They may also involve
giving up a market share to a private party for compensation.
By definition, a sale of assets involves a known party and in
that sense it may have the same advantages as a direct sale of shares. In
addition, it offers additional flexibility in that it may be more feasible
to sell individual assets than the whole SOE or it may permit the sale of
an SOE that might be extremely difficult to sell as a going concern. It
should be borne in mind, however, that often this approach may result in
residual liabilities for the government.
In many cases of SOEs that are not saleable as going concerns,
the sale of assets is the preferred method, if not the only alternative.
This method is possible because the enterprise's products and assets may be
of relevance to a buyer in the private sector. In such cases, the government may decide to dissolve or dismantle the SOE and liquidate it by selling its assets and writing off its uncovered liabilities. The entity can
then emerge as a private sector company. This method is also appropriate
in some cases of privatization of SOEs that are not set up under company
laws (unless a public offering is planned, in which case conversion to a
public limited company is necessary).
In the case of Compagnie Generale de Constructions Telephoniques
(CGCT) in France, the preferred method was the sale of assets (following
dissolution) for a variety of reasons, principally the need to fragment the
enterprise (see page 25).
ties.
The main implementation issue is how to handle existing liabiliUnlike the sale of shares in a going concern, the assets are often
18/ See footnote no. 17.
- 23 -
sold without the corresponding liabilities. When the transaction involves

simply the disposal of excess assets, no major problems arise. When the
transaction involves full dissolution and liquidation of the SOE, most, if
not all, of the issues associated with major restructurings will arise.
For instance, full dissolution or winding up, in some instances the only
alternative, is the most costly alternative, since it may involve settling
all liabilities and laying-off all personnel. As with most transactions,
however, there are many "hybrid" solutions. For instance, the enterprise
may be dissolved and the assets sold, but under a contractual arrangement
that obligates the buyer to rehire a substantial portion of the personnel
or to assume certain liabilities subject to conditions prearranged with
creditors.
Thus, the implementation issues very much depend on the actual
situation.
The situation may arise of assets bought for purposes other than
restarting
operations
(e.g., scrap value, shipping plant to another
country, idling the assets to improve competitive position). If such purposes are undesirable, governments may wish to obtain specific commitments
to preclude such a situation.
As with several other forms of privatization, pricing will be one
of the most difficult areas.
Reorganization into Component:Parts (or Fragmentation)
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:
-
Break up into several legal entities, as in the case of

ENDESA, the state-owned power generating and distributing
company in Chile.
19/ This technique can be regarded simply as a form of restructuring prior

to privatization. However, since it is found to be a distinct action
with many applications in developing countries, it is dealt with as a
separate form of privatiz;ation.
- 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.
-
The sale of productive facilities in single or groups of

units rather than as a whole, as in the case of British
Shipbuilders
(this method was decided with the aim of
encouraging competition after privatization).
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.
20/ Based on information provided by Morgan Grenfell & Co. Ltd.
25
Components of British Leyland (The Rover Group) were privatized

through different methods: a public offering for Jaguar, a management buyout for Leyland Bus and Unipart, a hive-off of Leyland Trucks into a joint
venture with DAF (Holland).
The automobile businesses Landrover and
Austin-Rover remain to be privatized.
The disposal of Leyland Trucks
relieved the Rover Group of an operation that was losing around 1.5
million a week, and of the 750 million debt that Leyland Trucks had
accumulated. 2 1
Another example, among many others, of a fragmentation
being retained as the most appropriate privatization method among other
options, is the piecemeal saleaof Madelipeche by the government of Quebec.22
A comparable example is the sale of CN Route (trucking and distribution services) by Canadian National Railways. Yet another example is
the 100 percent privatization. of the stevedoring and transit operations of
the Port of Conakry in Guinea which involved the sale of some assets and
facilities and the lease of others.
This method permits piecemeal privatization. It further permits
different methods of privatization to be applied to different component
parts, thereby possibly maximizing the overall process.
If an SOE incorporates too many activities that, in the aggregate, are not attractive to potential investors, whereas individual units
would be, fragmentation is a possible alternative.
Sometimes, a state
wishes to sell only certain components of the SOE, while retaining others,
as in the case of British Rail.
Some port authorities that embody many
different operations (general port services, stevedoring, transit, towing,
etc.) have found that certairL activities are better handled by the private
sector, which finds them attractive, whereas the global operation might not
be.
Fragmentation of port operations is observed in
and other countries.
In the case of Compagnie G6n6rale
Telephoniques (CGCT) in France, the government was intent
central activity, whereas it wanted to divest most of
(about 98 percent of the assets).
Another
poly and that the
prises to create
example ot this.
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/
See "Privatization of Quebec Government Crown Corporations, Progress

Report,"
distributed
by Associate
Minister
for Finance
and
Privatization, March 1987.
- 26 -
The Central Electricity Generating Board

electricity supply industry.
(CEGB)2 3 could be privatized in several different ways, including among
others: (i) as one unit (the preference of CEGB and its employees backed by
unions) (possibly accompanied by revisions to the 1983 Energy Act to
encourage competition in electricity generation); (ii) a sale of assets,
power station by power station (or sale of some of them); or (iii) reorganize the CEGB into a few competing generating companies (seen as in the
best interests of consumers).
Another debate in the U.K. concerns the
method for selling 12 electricity distribution boards. The reverse method
is being considered here as a possible option appears to be lumping them
together into a smaller number of companies.
Implementation issues
Once an SOE has been broken up into component parts, the further
privatization method applied (private sale, sale of assets, management/
employee buy-out, etc.) will determine the issues which may arise. However, the reorganization of an SOE into component parts may in itself
present various issues arising under major restructurings, such as satisfaction of creditors' rights, employment issues, etc., which are dealt with
in Part II.
New Private Investment in SOE
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_/
CEGB generates electricity in England and Wales and transmits it to 12

area boards which distribute and market electricity for consumers. In
Scotland and Northern Ireland the electricity industry is vertically
integrated.
- 27 -
permit necessary rehabilitation,

expansion of the operations.
restoration of working
capital, or an
Normally, a new equity issue does not result in sales proceeds

for the state.
Procedures
This type of privatization is accomplished through a capital
increase24 of the SOE,2 5 although it may be carried out through a merger
procedure as well.
In many such instances, the SOE will be transformed
into a mixed economy (state-private) company. The new share issue of the
SOE may be handled through a public offer of subscription or private subscription.
In either case, the normal procedures for corporate capital
increases and new share issues, subscription and payment apply.
In some
instances, various classes of shares are issued depending on the objectives
of the parties involved.
For example, private investment may be more
forthcoming if preferred shares are offered. It should be noted that a new
equity subscription by the private sector may be handled in conjunction
with the disposal of existing government shares.2 6 In a number of instances
new private investment was applied to the initial capitalization of a new
company embodying SOE or government assets.2 7
In the recent (December 1987) case of Soci6te des Industries
Textiles Reunies (SITER), directly and indirectly owned by the government
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
of Tunisia for 88 percent, a capital increase financed the modernization of

the textile finishing mill and diluted the government holdings to 49 percent.
SOGITEX, SITER's textile holding company, subscribed to it for
further divestment of the shares to the International Finance Corporation
(IFC), a French textile company,28 and private commercial banks.
Such a mode of privatization, unlike perhaps the sale of assets,
and to a lesser extent, the sale of shares, is rarely carried out on the
basis of competitive bidding. As in the above case of SITER, the selection
process essentially involves the search for a reliable industry partner
(except, of course, in the case of public offerings) prepared to make a
substantial investment in the SOE.
Preferred Application/Special Features
This method is the preferred one for dealing with funding problems of under-capitalized enterprises. An SOE may be in need of additional
capital, e.g., to increase its capacity or for rehabilitation. An example
of this is the capital increase of Rh6ne-Poulenc (chemicals) in France. A
new issue may be combined with an offering of existing government shares,
such as in the case of the Compagnie Generale d'Electricite in France where
the new share issue was to strengthen its balance sheet and help it absorb
its takeover of ITT's telecommunications assets. In addition, it should be
considered where the sudden sale of government holdings in several SOEs may
be politically difficult to authorize and carry through, in that the transformation of an enterprise into a joint stock corporation with very limited
private participation may be popular (e.g., investors provide equity
financing to a debt-ridden public enterprise). Governments are likely to
favor joint ventures with foreign companies so as to gain management and
other expertise in addition to capital. Once the transformation has taken
place, further privatization through a gradual transfer of government owned
shares can take place more easily.
In some circumstances, this privatization method may be applied
to strengthen SOEs which the government intends to keep in the state portfolio.
E.g., the IRI group in Italy concluded a merger between SGS, a
microelectronics company owned by the subholding STET, and the relevant
division of Thomson (France).29 IRI holds that this type of privatization
is an important tool to make certain industries more competitive.
There are cases where a secondary distribution should only take
place after the primary issue has been completed. One situation is where
the recapitalization is a precondition for the market even to consider
investment or for the secondary share distribution to command an acceptable
price.
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 -
In summary, this will be the preferred method if a government's

objective is both to reduce its proportionate shareholding or change the
state/private mix in the SOE and if the enterprise is in need of capital.
Implementation Issues3 0
The new private investment in the SOE is normally achieved
through a primary equity issue by an existing SOE. It can then be handled
on the basis of a public offering or a private sale, and respective issues
described in the discussion of these methods (pages 13 and 19 above) may
arise.
New private invest.ment may be for the capitalization of a new
company embodying assets transferred to it by the government, and implementation methods with respect to the sale of assets (page 22 above) may
arise.
Management/Employee Buy-out
Characteristics3l
30/ A concern sometimes raisesdwith respect to this method of privatization

is that it leads to an extension of the SOE's capital with no state
divestment. This aspect, however, is outside the scope of this report.
31/ Another method of employee acquisition of interests in SOEs, the
Employee Stock Ownership Plan (ESOP), through which employees can
acquire important blocks of shares of SOEs, is discussed below in
paragraph (b). The worker cooperative, however, is not discussed here.
Workers'
cooperatives
normally
would imply a higher degree of
membership participation in management than management/employee buyouts, where the employees simply are shareholders. Proposals have been
formulated for setting up "Democratic Worker Ownership Trusts (DWOTSs)"
largely along the model of the over eighty-five industrial cooperatives
in Mondragon, Spain. Zimbabwe is reportedly drafting legislation for
the purpose.
These methods are not discussed here since there is no
known use as yet of the method as a technique of privatization of SOEs,
except in Niger.
Since they might in the future constitute a valid
method of privatization, the reader is referred to analysis made on the
subject in various articles including K. Bradley and A. Gelb, Cooperation at Work:
The Mondragon Experience, Heinemann Educational Books,
London, 1983.
Spanish edition:
Cooperativas en Marcha: el Caso
Mondragon, Ariel, Barcelona, 1985, and articles by the Industrial
Cooperative Association, including D. Ellerman and P. Pitegoff, "The
Democratic
Corporation:
The New Worker Cooperative
Statute in
Massachusetts," Review of Law and Social Change, Vol. XI, No. 3,
1982-1983, pp. 441-472. The reader is further referred to publications
on employee acquisitions as a restructuring measure for enterprises in
Many such measures may, if
difficulty (see footnote no. 33 below).
certain conditions are met, constitute desirable alternative forms of
SOE reorganization.
- 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.
32/ Lance Blackstone and David Francks, Guide to Management Buy-outs,

1986-87 (London: The Economist Publications Ltd., 1986).
See also M.
Wright and B. Coyne, Management Buy-Outs (London: Croom Helm, 1986).
33/ Keith Bradley and Alan Gelb, "Employee Buyouts of Troubled Companies,"
Harvard Business Review, Sept.-Oct. 1985, pp. 121-130, and same
authors, Worker Capitalism: The New Industrial Relations, (Cambridge,
Mass.: The MIT Press, 1983).
- 31 -
In the case of Nuova Utensileria Italiana (NUI), IRI's (Italy)

relevant subholding sold the enterprise to a group constituted by the
majority
of the company's employees, not on a leveraged basis.
An
illustration of a leveraged management/employee buy-out is the sale in the
United Kingdom of National Freight Company Ltd., a large company (approx.
30,000 employees) which was performing too weakly to permit a public
offering.
Instead it was acquired by a management/work force consortium
created for the purpose.
The consortium acquired the company for 53.5
million using a 51.0 million medium-term loan secured by the assets of
the operating subsidiaries of the group.
The balance as well as the
transaction costs were financed by an equity share issue by the consotrium,
of which over 80 percent was subscribed to by employees and pensioners of
the company and their families. The average investment per worker is about
700 (1986 profits were several times the level before privatization;
share value increased subsl:antially).
Some government debt has been
written off.
Other cases in the United Kingdom include several shipyards
of the former British Shiplbuilders Corporation which were privatized,
including the Vosper Thorneycroft Shipyard through a management buy-out in
1985 and the Vickers
ancd Cammell
Laird war shipyards
through
a
management/employee buy-out that same year.
The average investment per
worker was about 300.
Interest-free loans for up to f 500 and further
preferential loans were made to employees.
In addition, the workers'
consortium could buy stock at a preferential price of 1.0, whereas
financial institutions, banks and pension funds had to pay five times that
rate.
Further in the United Kingdom, the Victualic Company (a leading
European manufacturer of pipes and fittings) was sold by its parent, the
state-owned British Steel Corporation, through a management/employee buyout in 1983; and Leyland Bus and Unipart were bought-out by management from
British Leyland (The Rover Group).
SOEs acquired through employee/worker and cooperative buy-outs in
the first phases of Chile's privatizations did not remain in the workforce's hands -- enterprises encountered substantial financial difficulties
or were sold to groups of investors.
In recent Chilean privatizations,
there are only two instances of 100% worker buy-outs: ECOM, a large computer firm, and EMEL, an electricity generating corporation (there are,
however, as reported in Volume Two, a number of additional privatizations
with substantial worker participation).
For the sole purpose of acquiring ECOM, workers formed a corporation, Sociedad Administrador.a de Empresas de Computacion S.A. (SAECOM).
Since the capital provided by workers and employees was not enough for the
purchase of ECOM the financial package was formed in the following way for
the total price paid, which was about US1.5 million dollars equivalent: (a)
retirement funds advanced: 10%; (b) loan from CORFO (the state holding
corporation acting as vendor) with a maturity of 10 years at 5% real
interest rate: 90%. The price for ECOM was set according to the value of
liquidation of the corporation since it was the only feasible alternative
- 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/
Minist&re de l'Economie, des Finances et de la Privatisation, Les Notes

Bleues, No. 342.
- 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.
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.
36/ See "Accelerating Private Ownership: The Role of ESOP's" in F. Ghadar,

M.L. Hesley and T.H. White, Privatization for Development, (Washington,
D.C.: International Law Institute, 1987.), pp. 643-705, including a
Report to the President and the Congress by the Presidential Task Force
on Project Economic Justice, October 1986, entitled U.S. Encouragement
of Employee Stock OwnerslhipPlans in Central America and the Caribbean.
- 34 -
Management/employee buy-outs require the presence of competent

and skilled management and a committed and stable work force.
A strong
cash flow potential is usually a precondition for obtaining credit for a
buy-out.
The application of the management/employee buy-outs of most
interest is the leveraged one, i.e., involving the use of credit.
The
underlying element in the leveraged management/employee buy-out is the
enterprise's cash flow and/or other security that can be provided.
However, the problem with many SOEs to be privatized often is precisely a weak
cash flow and uncertain asset values. Therefore, in developing countries,
new and creative financing techniques need to be developed by governments
and perhaps financiers to permit buy-outs.
The buy-out can be very lucrative for the purchasers.
It may
also be risky. Workers in the National Freight Consortium in the United
Kingdom have seen a tenfold gain in the value of their stock. For a number
of reasons, the enterprise has shown improved results.
However, not all
cases may show such results. Stock ownership involves an inherent risk of
loss and great care should be taken in evaluating its extent, particularly
if the buy-out idea emanates from the government rather than the management/employees themselves.
Any coverage of the risk by the government
represents a possible residual liability associated with the privatization
and also needs to be weighed carefully.
Under employee buy-outs, employees may more easily accept wage
reductions on account of needed restructuring. However, if employees were
subsequently to lose both their jobs and their stake in the enterprise, it
might be felt that the government unduly exposed employees under privatization schemes.
Leveraged employee buy-outs could be encouraged through various
forms of financing instruments, ranging from the acceptance of payment
terms by the government vendor, to direct bank financing provided to
repayment
employee
consortia
(possibly
with supporting
external
guarantees).
Leases and Management Contracts
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:
IL/ The private

lessee or contractor may sometimes take an equity
participation in the enterprise or be given the option of purchasing
shares at the end of the lease or contract.
Depending upon the
circumstances, equity participation or the option to take up shares may
be viewed as an added incentive to the private operator or as the first
step in the transfer of ownership to that operator. Transfer of full
ownership after a lease or management contract is comparatively rare,
whereas joint ventures are more common.
38/ If either a lease or management contract arrangement is continued for
long periods of time (there are examples of management contracts
extending for fifteen years), the state has presumably decided that the
arrangement is convenient and profitable and that "privatization"
should be limited to management and operations.
- 36 -
Lease
38
The private operator leases assets or facilities owned by the

state and uses them to conduct business on its own account. The lease sets
forth the terms and conditions under which the lessee may operate these
assets and facilities, the compensation that must be paid to the state, and
the respective responsibilities of the parties. The key feature of a lease
arrangement
is that the lessee assumes the full commercial risk for
operating the assets. Thus, if the state leases out coal mining facilities
in return for an agreed payment, the lessee has to make the payment
regardless of the profitability of the operation. In addition to the lease
payment, the lessee is normally obliged to maintain and repair the assets
in use or to share in that cost in accordance with an agreed schedule.
Unlike the management contractor, which assumes no financial
responsibility for the enterprise's operation, the lessee suffers direct
financial repercussions if it fails to use the leased assets or facilities
in an efficient manner and to ensure effective management.
Under a lease, the lessee hires its personnel.
The lessee may
hire existing personnel and integrate them into its own work force, but in
doing so would exercise complete freedom of choice.
Under a management
contract, the contractor may have wide powers over existing personnel, but
they remain employees of the enterprise and are often subject to government
pay scales and conditions.
The difference in the extent of control over
the work force (and the ensuing ability to upgrade its quality) can be
quite wide between these two forms of arrangements and can affect the
success of the operations under the lease or management contract.
Another distinguishing feature of a lease is that the lessee has
unfettered control over the operation of the assets or facilities (subject
to the maintenance and repair covenants), while the management contractor
has only that control and authority specifically
granted under the
contract.
In leasing assets, the state might relieve itself of immediate
financial burdens, but it has to build sufficient safeguards into the lease
to ensure that a viable asset base is returned at the end of the lease.
This problem does not exist with a management contract because the state is
financially responsible for the upkeep of the assets.
Leases may cover the essential assets of an SOE. They may also
include certain assets or rights spinned off from the SOE as part of a
restructuring plan (such as Air Mali's IATA air routes, which were assigned
to another airline against the payment of royalties).
38/ A completely different transaction is the lease whereby the private

party is the lessor and the government/SOE the lessee, for instance,
when a government agency rents a fleet of vehicles or equipment from a
private owner. Nearly 25 percent of the flight equipment used by all
airlines is reportedly leased in this manner.
This type of lease is
not covered here.
- 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.
two arrangements can be blurred

example, a state may require a
to ensure a deeper commitment or
the rental fee if profitability
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
is not considered here as it stems from financial,

This, however,
or tax reasons more than the intent to derive specific
accounting
operational benefits or to address the constraints described in this
section.
Several leases which have been reviewed, including the lease by
Togo of a steel mill to STS, a company controlled by foreign interests and
in which local interests more recently also took a participation, and of
dairy manufacturing facilities to a Danish group, and the lease of the
Atlantic Hotel by The Gambia to a U.K. hotel company, have a 10-year term.
The lessee may be given an option to buy, as in the abovementioned hotel
lease in The Gambia.
Management Contract
Several factors will influence the design and structuring of a
management contract arrangement.4 0 A clear agreement must exist on the
intended objectives of the management role and the degree of authority and
control to be vested in the prospective manager. Management contracts are
found in many different business sectors. But they have found their widest
application
in the tourism/hotel
industry, where they have become
standardized in the sense that an accepted format and reasonably uniform
provisions have evolved.
The choice of the management company4 1 is the most important
element determining the results of the arrangement. In some instances, the
management company is a joint venture company between a government or SOE
and a private company. A properly structured remuneration package must be
devised which will, in many cases, include three features: charges for the
provision of the management company's personnel in accordance with agreed
formulae, including a small profit element; agreed reimbursable costs; and
incentive payments linked to profits, production or other appropriate
There is no term which is standard in management contracts, but
formula.
if the management company makes no investment which it needs to recoup over
a longer duration, three to five years is normal depending on the scale and
complexity of the problems faced.
Leases and management
contracts are the principal method of
privatization of an activity in situations where privatization of the
ownership of the assets or SOE is not appropriate.
However, both offer
40/ Described in detail in Hegstad and Newport, op. cit.

41/ The International Finance Corporation, jointly with other institutional
investors and approximately 50 international companies, is establishing
the African
Management
Services
Company which will provide
a
coordinated package of management services offered, inter alia, to SOEs
in the process of rehabilitation and/or privatization in Sub-Saharan
Africa.
- 39 -
advantages which may in certain cases make their application preferable to

other methods of privatization.
The lease may also be used as an intermediate solution aimed at making a subsequent sale possible. Similarly, the
management contract may also be an intermediate solution in turning an
enterprise around for subsequent privatization of ownership.
Several
textile companies in Sri 'Lanka have been turned around into profitable
ventures through management contracts; some are now being processed for
public offering.
There are many situations in which the state may not be able or
willing to divest itself of the ownership of an SOE or certain productive
facilities but still wishes to see the activity taken over or managed by the
private sector. (For example, the state may wish to retain ownership of the
assets because of sovereignty considerations or simply because they are
unsalable in the immediate future.) In those instances, leases and management contracts may be particularly attractive.
Leases and management contracts are tailored to meet specific
circumstances.
The choice of a lease as opposed to a management contract
depends on the government's objectives and the state of the enterprise in
question. If the enterprise is run-down and unlikely to respond to external
management
expertise
(i.e., the fundamental business or markets have
failed), it may choose to lease certain assets or facilities that can
generate revenues.
The lease is also an important alternative if all
operations of the SOE had ceased. On the other hand, if the enterprise is
merely in need of a short-term injection of management or other skills to
restore it to profitability, a management contract might be appropriate.
Besides
being
a good intermediate
solution
(its primary
advantage), the lease can be the preferred method because of a variety of
other reasons such as tax advantages to the lessee, overcoming constraints
to land title, as well as overall flexibility. It permits the introduction
of timid investors to a venture to be privatized and it helps overcome
financing constraints (particularly if the lessee does not have the cash
resources or credit is not reXadilyavailable).
Under both leases and management contracts, debt liabilities of
the SOE or of the state with respect to the underlying assets will continue
to be borne by the state. A management contract represents a cost, and only
increased profitability will offset this cost. In the case of a lease, the
lease fee paid to the state may not cover the debt liabilities. Moreover,
under a management contract, the government may still need to inject funds
to sustain operations.
Maintenance/renewal obligations and other costs to
be borne by the state and the private party, respectively, must be clearly
defined.
Under the lease, there will be a need for the state to carefully
assess the financial strength of the lessee on whose regular lease payments
it will rely (and perhaps the state may wish to require payment guarantees).
- 40 -
contracts, the principal issue will be the

Under management
reliability, skills and seriousness of the management contractor.
actual
- 41 -
2.
OVERVIEW OF THE EXPERIENCE WITH PRIVATIZATION4 2
Privatization has taken drastically different forms in different

countries. Some governments have resorted to a large extent to the sale of
shares to the general public, while others have sold shares or assets of
SOEs mainly to single buyers, and a large number have resorted to both.
Public offerings are less frequent in Sub-Saharan Africa, mainly because of
a lack of developed equity markets. A number of governments also have used
"non-sale" privatization
or what might be called "privatization
of
management" such as management contracts and leases. Of eleven industrial
SOEs privatized to date in Togo, five were sold through the sale of assets
and two through new private investment resulting in majority private
interest, and the assets of another five were leased to private operators.
There are first-time privatizations of SOEs originally established by the
government, and there are ma-ny reprivatizations of companies acquired in
the past by the state through nationalization, in satisfaction of debt to
state banks, or otherwise. Some techniques have been introduced by or are
predominantly utilized by certain countries. The French privatizations for
instance, are characterized by (i) the combination of private sales of
shares (or preplacement to create a core of known shareholders) with public
offerings, (ii) the intervention of an independent privatization commission
to set the transfer value and provide advice on various aspects of the
privatization, (iii) the almost generalized practice of 100% divestment,
instead of a gradual process as in several other countries, and (iv) the
application of the proceeds from privatization (see page 139). Table 1 at
the end of this section highlights the extent to which various basic
privatization methods have been used in the sample of countries reviewed in
Volume Three.4 3
42/ Annex E provides

privatization.
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 -
The results from the perspective of the state have varied.

Several privatizations of weak SOEs, carried out through the sale of
assets, have left the state with substantial residual financial liabilities
(but often have eliminated operating subsidies). On the other hand, public
offerings of strong performing SOEs have yielded substantial resources to
the state.
While statistical data of the effect of specific types of
privatization on public finances would be useful, the level of information
available has not permitted to develop them at this stage.
The description of basic methods in section A above does not
cover all the options available to governments.4 4
Many variations and
combinations have been designed and attempted to fit particular needs. For
example, in a number of instances, secondary public or private offerings
(sale of government-held shares to the private sector, i.e. , divestiture)
have taken place in conjunction with a primary offering (new issue for
raising
additional
equity,
i.e., new private investment to dilute
In the case of Malaysian Airlines System Bhd.
government ownership).
(MAS), an offer for sale of existing shares and an offer for subscription
of new shares were handled concurrently.
This approach was also adopted
for the privatization of Compagnie Generale d'Electricit6 (CGE) in France
and Singapore International Airlines, both through public offerings. Most
privatizations in Guinea, through private sales, also involved substantial
new equity contribution by investors.
Similarly, the recent privatization
of SEAT in Spain was achieved through a large capital increase taken up by
Volkswagen.
Volkswagen would take over existing shares before December
1990. In the above cases, the enterprises needed recapitalization. In the
few years prior to the public offering of shares held by Canada, the Canada
Development Corporation had attracted substantial new private equity so
that ownership had increasingly shifted into the hands of private sector
investors. In another instance, Societ6 Industrielle des Textiles (SITEX)
in Tunisia benefitted from equity investments by the International Finance
Corporation (IFC) and by Dominion Textile of Canada, largely applied to
modernization of facilities.
In a second phase of this privatization
(which is ultimately to result in majority private ownership) the following
L4/
The French privatization law of August 1986 lists several possible

methods of ownership transfer from the state to the private sector,
namely: (a) sale of shares; (b) exchange of other securities such as
non-voting
preferred shares (titres participatifs
or certificats
d'investissement) for common shares (in the case of Societ6 G6nerale,
Paribas and Compagnie Financiere de Suez, the holders of non-voting
preferred shares had the option of exchanging them for ordinary
shares); (c) waiver or sale of any preferred right to subscribe to an
increase in capital; (d) increase in capital through the contribution
of shares or other assets; (e) merger or split; (f) issuance of various
other types of securities; and (g) dissolution or liquidation of the
enterprise.
The Tunisian law of August 1987 on SOE restructuring lists
several of the same privatization methods, adding that restructuring
operations may take the form of sales of any assets of the SOEs.
- 43 -
steps are intended by SITEX's state-owned parent company:

(i) a public
offering of SITEX' shares on the Tunis Stock Exchange; (ii) a private
placement with private institutional investors (Insurance, Banks) that have
shown an interest in acquiring SITEX' shares; and (iii) stock option plans
for the employees.
These privatization plans hinge, however, to some
extent on improved financial performance by SITEX which should result from
the project financed by IFC. The privatization of Compafiiade T6l6fonos de
Chile (CTC) provides yet another example of this. The growth needs of the
sector and goals on telephone density imposed the need of heavy investments
to be included in CTC's development plan.
The privatization of CTC not
only included the acquisition of shares from CORFO, the national holding
company, but also the subscription by the new buyer to a capital increase,
to be paid as needed.
In a number of cases, public offerings of existing shares have
occurred in conjunction with private sales, where the presence of a preidentified leveraged shareholder or "friendly core" of shareholders was
necessary for a company whose remaining shares were eventually to be
offered to the general public.
This approach was also used in France,
inter alia, for the privatization of Paribas and Matra, where a core group
of friendly shareholders was put together, composed of institutional
investors who are not at liberty to dispose of their shares for a specified
period.
In the case of Banque du Batiment in France, the government put
together a group of institutional investors from the construction industry
to buy 51 percent of the shares in advance of other investors.
Such a combination of private sale and public offering might also
be appropriate to create certain patterns of ownership.
In the case of
Malaysian International Shipping Corporation Bhd. (MISC), a large part of
an offering by existing shareholders (mostly Government and state governments) was reserved for and preplaced with "Bumiputra" institutions, a
portion was reserved for sale to employees and the bulk of the shares was
underwritten by merchant banks and offered publicly.
Sri Lanka and Malaysia developed some creative approaches, such
as combinations of leases/private sales/public offerings and the use of
management contracts as a first step to privatization of ownership.
For
purposes of privatizing the container terminal activities of Port Kelang in
Malaysia, which were separ.ated from the Kelang Port Authority (KPA), a
joint venture between KPA and the private sector was established to lease
the relevant assets and acquire the container handling business from KPA.
In Sri Lanka, improved performance was observed under management contracts
concluded by textile enterprises; they were planned as an intermediary step
to full privatization and some of these enterprises are now being processed
for public offerings.4 5
As far as the nature of ownership is concerned, it is clear that
public offerings have achieved widespread ownership. However, experience
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 -
shows that private sales and new private investment as a privatization

method permits ownership patterns for given SOEs not necessarily concenNor is privatization in weak
trated in the hands of one investor.
Togo and Guinea are
financial markets limited to foreign investors.
examples of this.
Experience indeed reveals that carefully modelled practical
approaches can come close to satisfying both stated objectives and various
types of constraints. Most governments which have carried out a substantial number of privatizations have applied a broad mix of techniques,
This
including the main techniques described in Part I of this report.
would be the case of countries as varied as France, Chile, and the U.K.
The latter has offered shares of many SOEs to the general public, but an
even larger number of British SOEs were sold through private sale of shares
and assets, reorganization into component parts, etc.
,ABLE
I
Technioues
UsedinCertain
Completed
Privatization
Transactions
COUNTRY
1. PUBLIC
OFFERING
OF SHARES
2. PRIVATE
SALEOF
SHARES
Sub-Saharan
Africa:
Cameroon
4. FRAGMENTATION5. NEWPRIVATE 6. MANAGEMENT/ 7(a).MANAGEMENT

(incombination INVESTMENT$$
EMPLOYEE
CONTRACT
with1, 2 or 3)
(Mostly
in
BUY-OUT
combination
with
1,2 or 3)
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
4. FRAGMENTATION3. NEW PRIVATE 6. MANAGEMENT/ 7(a).MANAGEMENT

)Incombination INVESTMENTUS
EMPLOYEE
CONTRACT
with1, 2 or 3)
(Mostly
in
ROY-OUT
combination
with
1, 2 or 31
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
RINI (rice milling)

Nitra (freight)
)SNCP
(hides& skin)
(Sonhotel
:INN(printing)
'Sonitan (tannery)
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
(HS (Airline) (General

Hospital
(Malaysia
Shipping(Aerospace
Industrial
(
(North
Kelang
Bypass (a
(
(Port
Kelang
(Sports
Toto(lottery)
(
115SOEs
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
4. FRAGMENTATION5. NEW PRIVATE 6. MANAGEMENT/

(Incombination INVESTMENTH$
EMPLOYEE
with1, 2 or 3)
(Mostly
in
BUY-OUT
combination
with
1, 2 or 3)
~~~~~~~~~~~~~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
5. NEW PRIVATE 6 MANAGEMENT/ 7(a). MANAGEMENT 7(b). LEASE

4. FRAGMENTATION
CONTRACT
EMPLOYEE
(In combination
INVESTMENFO$
BUY-OUT
(Mostly in
with1, 2 or 3)
combinationwith
1, 2 or 3)
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)
ISugar Co, Doukkala

ICosumar(sugar)
:SNCE(civil works)
Netherlands
'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
S.NEWPRIVATE 6. MANAGEMENT/ 7(a).MANAGEMENT

4.FRAGMENTATION
CONTRACT
(Incombination INVESTMENT$$ EMPLOYEE
in
BUY-OUT
with1,2 or 3)
(Mostly
obiainwith
1,2 or 3)
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.
The table is largely based on Volume III of this Report.
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.
DETERMINAiNTSOF POSSIBLE TECHNIQUES
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.
Obiectives of the Government
The objectives of a government underlying a privatization program

vary widely and may include the following (or combinations thereof):6
O
budgetary relief from the financial burden (subsidies, debt

service requirements)
of SOEs, as well as relief from the
administrative burden (management/control requirements);
increased efficiency
privatization);
of SOEs
(achievable even through partial
implementation of policies stated at the time of the creation or

the acquisition4 7 of SOEs; this is the stated policy of Argentina
and Malaysia; in some countries such as the Philippines and
Singapore, the government's rationale for withdrawing
from
certain SOEs is that the activity originally designed to play a
catalytic role in the development of the economy, no longer needs
to be undertaken by government which otherwise might increasingly
be competing with the private sector;
46/ For a broader analysis on the rationale for divestiture of state-owned

enterprises, see E. Berg and M. Shirley, op. cit.
47/ A number of reprivatizations
in Bangladesh,
Canada, Chile, the
Philippines and other countries involved failing private enterprises
which were acquired by the government with the intent of returning them
to the private sector at the earliest possible opportunity.
58 -
greater revenue from state assets (normally this objective leads

to methods that can maximize the sale price);
improved business conditions by

productive private enterprises;
increased competition (e.g., competition can be fostered by

selling production units or facilities singly or in small groups
instead of as a whole); and/or
development of wider business ownership (public offerings are the

preferred method, particularly where wide distribution of share
ownership is the intent, as in the more recent privatizations in
Chile, as well as in France and the United Kingdom).
fostering
the
development of
The economic strategy of several countries reviewed provides for

a combination of objectives.4
The preamble to Senegal's 1987 Law on Privatization states four objectives:
autonomy and accountability of enterprise management; mobilization of public and private savings into productive investments; elimination or substantial reduction of subsidies to
The relative
SOEs; and encouragement of widespread share ownership.
importance of a country's objectives will influence both the choice of SOEs
to be privatized and the methods to be applied. In practice, privatization
may meet several objectives simultaneously which will become intertwined in
one program.
The policy measures Fiji has adopted to rationalize interisland shipping services, for example, aim at establishing a policy and
regulatory framework to promote development of private sector shipping as
well as reducing the government's fiscal burden by divesting surplus
government vessels.
There are few individual privatizations which will
satisfy all governments' objectives, but it may be possible to achieve
many objectives through a whole program of privatization.
In Sri Lanka,
privatization is part of a general process of liberalization and deregulation.
It is not an objective Der se, but rather aims at stopping SOE
losses, establishing broad based ownership (a strong middle class being an
important element of political stability), and achieving worker participation.4 9 In Italy, IRI considered for sale enterprises (profitable or
otherwise) which were not consistent with the basic aims of IRI's portfolio
as well as money-losing enterprises that were a drain on IRI's resources.
48/ The stated objectives of Brazil's Federal Program of "Destatization"

are: transfer of economic activities to private initiative, contribute
to a reduction of the public deficit, convert external federal debt
into equity investment, develop the capital market, achieve widespread
capital ownership, increase competition through deregulation, render
public
services
through
concessions,
and generally
promote
privatization
of economic activities handled by SOEs, save for
constitutional monopolies.
it/ Address by R. de Mel, Minister of Finance of Sri Lanka, at the London
Conference on Privatization, July 7, 1987, sponsored by the Adam Smith
Institute.
559 -
Current Organizational Form of the SOE
The current organizational form of the SOE will heavily influence

the necessary mechanical steps for transfer of its ownership and, therefore, also to a large extent the ease with which the process can be implemented.
This report describes in some detail (pages 100 and 101) the
readying process which frequently needs to take place under various
conditions to change the organizational form.
A public limited company
whose shares are already being traded makes for a relatively simple
privatization process, consisting only of offering additional blocks of
shares currently held by tLhe state to the investing public through the
stock exchange.
This pattern held true for both Singapore International
Airlines and some of the IRI privatizations in Italy. In the same category
are companies that were once but are no longer traded, such as those
initially denationalized in France; if the SOE is performing well, hardly
any restructuring is necessary, although in some instances prior management
changes were deemed necessary.
At the other end of the spectrum would be an SOE set up as a
statutory corporation under an act of parliament or as a government department.
Neither could be privatized in its present form but needs to be
transformed into a stock corporation subject to ordinary company laws so
that shares can be offered to the private sector. Legislation is necessary
in such cases and personnel may need to be transferred from state to
private employment regimes. The ongoing preparatory steps for the privatization of Jabatan Telekom Negara (JTN) in Malaysia illustrate the various
issues that arise.5 0
Financial Condition and Record of Performance of the SOE
The profitability
of a company obviously
determinants of how easy or difficult its sale will be.
is
one
of
the
The experiences of developed and developing countries alike

demonstrate that privatization potential is not limited only to strong performing SOEs. Loss-making SOEs (and some that have negative net worth) are
being sold through a variety of techniques, with varying outcomes for their
governments.
The financial condition of an enterprise need not be the
determining factor as to whether or not an enterprise can be sold, but to
whom or according to what method, and at what price, it might be sold.5 1
Where a government, however, decides the SOE cannot be disposed of on
50/ They are described in detail in Volume Two: Malaysia.

51/ Whereas the SOE's economic viability is a determining factor. Several
West African countries have classified some of their SOEs into a
category of nonviable enterprises to be liquidated.
60
acceptable terms, it may resort to other permanent or temporary solutions,

such as management contracts or leases and in some cases liquidation.
Obviously, public offerings are only feasible if the government
is of the opinion that the companies can be offered as a secure long-term
investment.
In practice it has proven possible to turn loss-making SOEs
into profitable enterprises and to sell them through public offerings.
British Airways had to be substantially restructured to be transformed into
an enterprise representing an attractive investment for the general public.
It was readied for sale in part by the introduction of new operational
practices and a reduction of the work force. In Sri Lanka, several lossmaking textile companies were turned around through management contracts
and are now being readied for public offering. In the case of the National
Freight Company Ltd., the merchant bankers advising the government recommended postponing a public offering until steady profits could be shown5 2
(it was privatized shortly after through a management/employee buy-out).
In several of the above cases, the government had to alleviate the liabiliIn France, Compagnie Generale de Constructions
ties of the SOEs.
Tel6phoniques (CGCT), Credit Commercial de France (CCF) and Cr6dit du Nord
(a subsidiary of Paribas) were all loss-making and were privatized after
some restructuring (see page 105).
However, in the majority of cases, management/employee buy-outs
left aside, such sales have been private ones involving financially and
In
technically strong purchasers who could assure improved operations.
In
Canada and Italy, several privatized SOEs have been loss-makers.
France, Compagnie G6nerale de Constructions Telephoniques (CGCT), a heavily
deficit ridden SOE, was sold through a sale of assets. The strength of the
enterprise lied with its market position. In Spain, Rumasa group companies
In Togo,
sold back to the private sector had excessive liabilities.
several enterprises sold to private investors had enormous liabilities out
of proportion to the market value of the assets (and the assets of other
such SOEs were not sold but leased). In the case of the hotel operations
of British Rail, which were privatized with several other non-rail activities, their condition was characterized by: a lack of cash resources for
investment in refurbishment and modernization; restrictions on management
imposed by being part of a large centralized organization, subject to
public sector conditions of service; increased competition in the hotel
sector and a declining share of the business; and decreasing profitability.
Private sale (by auction) was chosen as a more appropriate method than a
public share offering for several reasons: the profits record was not good
enough to support a flotation; a value that fairly reflected asset value
was more likely to be achieved and a discount would have to be offered to
attract investors in a public offering.5 3 Investors will acquire lossmaking but potentially viable enterprises if they anticipate that certain
52/ Basil Yamey

and David
Stafford,
Report
on the Experience
of
Privatization
in Great Britain (Rome: Direzione Centrale Studi e
Strategie sulle Privatizzazioni, IRI, 1986).
L3/ Based on information provided by Morgan Grenfell & Co. Ltd.
- 61 -
restructuring measures will turn its earning potential around.

And,
indeed, the main criterion for a government as well might be the long-term
viability (and for Spain it was, when reprivatizing Rumasa group companies,
more important than a preference for Spanish buyers).
In some instances, governments intend to divest their shares when
suitable levels of efficiency and profitability have been attained by an
SOE.
But an initial step may be new private investment into the SOE, as
explained in the relevant sections on pages 26 to 29.
In the case of
Societ6 Miniere de Spath Fluor et de Barytine (Fluobar) in Tunisia, the
first phase of its privatization involved financial restructuring (write
down of share capital) and new equity contributions by institutional
investors (the International Finance Corporation and the Arab Mining Company).
SOEs in weak financial condition and with a poor record of performance could generally not be sold "as is". A number of restructuring
measures will be necessary, falling under the general categories of management changes, reorganization, and, more often than not, alleviation of liabilities.
All of those are described in some detail in a section of this
report dealing with the readying process (pages 94 to 109).
In many
instances, however, it will be too difficult to sell such SOEs as going
concerns, and often only the assets rather than shares can be sold,
generally after the dissolution and liquidation of the SOE. In such cases,
the government often has to absorb the liabilities (mainly debt but also
tax arrears). Assets may only be salable at a fraction of their acquisition cost (particularly when the acquisition cost was initially way above
the market value and, in addition, deterioration has occurred). There are
indeed many instances where governments will not expect to recoup their
original investment.
It is often argued that, while the cost of privatizing lossmaking SOEs is high, the cost of keeping them may be even higher.
This
raises various questions on the economic argument for privatization, which
this report is not addressing.
But the high cost involved in financial
restructuring raises two additional questions with respect to the decision
making process.
The first is whether the government should restructure the
finances of the enterprise prior to sale (thereby maximizing the level of
interest in, and proceeds from, the privatization) or rather leave it to
the purchasing party or parties to do. The level of the required investment and its recoverability will need to be assessed in detail.
Second,
prior restructuring may result in a substantial residual burden for the
government after privatization through sale (a government may have disposed
of its ownership, but stil:L be liable to cover service on debt it has
assumed).
This leads to two comments.
On the one hand, residual liabilities should not be seen as a transaction cost: the debt is owed anyway
by government (at least directly guaranteed debt) and is not a result of
privatization per se). An informal evaluation of the overall potential and
possible alternatives for privatizing certain unprofitable enterprises is a
key element for a government in determining whether an enterprise is a
- 62 -
proper candidate for privatization through sale. Sometimes other measures,

such as temporary retention, management contract or lease, winding up,
etc. , should be considered
instead.
The section of this report on
financial restructuring
(pages 102 to 105) comments further on the
treatment of SOE liabilities.
Clearly, as the experience of several
countries has demonstrated, the ultimate liquidation of non-viable SOEs may
be the only available alternative.
But it is again outside the scope of
this report to discuss this issue.
Sector of Activity of the SOE
The sector of operation of an SOE shapes key aspects of its

privatization. This would be true of several sectors.54 But this factor is
best illustrated by recent privatizations of public utilities or public
service SOEs.55 Several points ought to be highlighted with respect to
public utility companies.
First, while different privatization methods
have been used, specific variations are emerging as particularly responsive
to this sector that offer additional options for governments. Second, when
public utilities are privatized, the interests of consumers must be
adequately safeguarded.
For instance, in the case of the sale of a
utility, adequate licensing arrangements and regulatory mechanisms are
necessary.
In several countries 5 6 like the United Kingdom, Malaysia,
Singapore and Thailand, utilities, ports, airlines, etc., are the first to
be proposed for privatization. In France, a number of cities and municipalities had arrangements in place for private water distribution before
any other recent privatization moves.
The water and electricity authorities in the United Kingdom are currently also being targeted for privatization.
In Sub-Saharan Africa, there have recently been moves toward privatizating public services.
Methods have ranged from public offerings
(Chile's ENTEL and CHILEC, Malaysia's JTN, British Telecom, British Gas,
Singapore Airlines), to the sale of assets (Port of Conakry in Guinea) to
management
contracts and leases (Gambia's GPA Shipyard and Ferries,
Jamaican Broadcasting Company and other SOEs in C6te d'Ivoire, Malawi, Sri
Lanka, and Zambia).
A sample of privatizations for public utilities and
services is provided in Table 2.
54/ E.g., land ownership constraints

privatization of agri-businesses.
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 -
In the United Kingdom, the privatizationsof British Telecom and

British Gas Corporationwere effected by creating a public limited company
(plc) to take over the assets of the former public sector entity, followed
by a public offering of blocks of shares by the government. The public
utility character of these enterprises required basic accompanying measures, including: (i) some steps towards the termination of monopoly
rights; (ii) establishmentof a regulatory body; and (iii) granting of a
license to the new plc imposing certain obligations (including pricing
mechanisms) to ensure the qu.alityand continuity of the public service.
The United Kingdom now has two models for such comprehensivepackages,
namely, the TelecommunicationsAct 1984 and the Gas Act 1986. The proposed
privatizations of Water Authorities there are expected to follow these
models in part.57 Similar techniqueshave been applied or are planned in
58
Chile, Malaysia and Sri Lanka.
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
Private Sale (U)
Private Salett (C)

Sale of Assets (P)
Public Offering (P)

Public Offeringtt (C) (U)
Public Offering$$ (C)

Give-Aways(U)
Private Salet (C)

Private Salett (C)
Public Offering (C)
Employeebuy-out (C]
6ambia
Fragmentation (P)
Sale of Assets (C)

Public Offering (P) (U) Private Sale (U)
LeaseIC)
lManagesent
Contract (C)
Private Sale (C)
Public Offering (P)
Private Sale (U)
Private Salett (C}
Private Salett (C)
Private Sale (C)
Public Offering (C)
Fragmentation(C)
Public Offering (P)

Sale of Assets (C)
Public Offering (P)
Private Sale (C)
Public Offering$ (C)
Private Sale (C)
Management
Contract (C)
Private Sale$ (P1

Public Offering (P)
Lease$ (U)
Public Offering (C}
Private Sale (P)

Lease(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
Private Sale (P)
Managesent
Contract/
Lease (C)
Jordan
Korea
Liberia
Malawi
Malaysia
Infrastructure
(Ports, Roads)
Public Offering (P)
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
Private Sale (C) (U)

Private Sale (C)
Lease$(C)
Public Offering$ (C)
Public Offering (P)
Public Offering (P)

Public Offering (P)
Management
Contract (C)Public Offering (U)
Public Offering (C)

Private Sale (C)
Lease(C)
Public Offering (Cl
Fragmentation$ (C)
Public Offeringt (P1
Private Sale (C)
Private Sale (P)
Management
Contract (C)
Private Sale (Pj
Public Offering (C)
Lease(C)
Private Sale (U)
Sale of Assets (U)
Management
Contract
(C)
Private Sale (U)
Public Offerings (C)
Private Sale$ (CISS

Private Sale (C)
Management
Contract (C) Private Sale (P)
Lease (C)
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
Public Offeringt (P)

Private Sale (P)
Public Offering (PI
Fragmentation(P)
Public Offering (C)
Private Sale (C)
Contract (C)
Management
Private Salet (P)
Public Offering (P)
Private Sale (U)
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)
Public Offering$ (P)
Management
Contract (C)
Private Sale$ (P)
Public Offering (C)
Private Sale (U)
Trinidad I Tobago
Tunisia
Turkey
Private Sale (P)

Public Offering (C)
Fragmentation(Cl
Fragmentationt(U)
USA
Fragmentationt(C)
Private Sale (C)
EmployeeBuy-Outt (C)
Public Offering (C)
Private Salett (C)
Public Offering (C)
UK
Public Offering (C)
Zaire
Zaebia
Public Offering (P)

Public Offering (C)
Private Sale (P)
Fragaentation/
Public Offering (U)
Private Sale (C)
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 -
France has used the "concession" and the "affermage" (generally

translated as leasehold) contract methods with good results.
They are
being increasingly
applied,
aside from management
contracts.
The
"affermage" works as follows: the private operator rather than the owner is
legally responsible for the utility service, collects all water fees from
consumers and takes the operational risk.
It might be required to build
into the water rates an amount to be remitted to the owner to cover all
It usually also
aspects of the financing costs of the assets utilized.
must collect, on behalf of the government or municipality, and therefore
build into the water rate, various taxes such as sewerage levies and local
taxes.
The government/owner
retains specific
rights of control.
Increasingly, these methods are being applied in other countries. In Cote
d'Ivoire in 1973, countrywide operation and maintenance of the water supply
sector was entrusted by such a leasehold arrangement or "affermage" to the
Societe de Distribution d'Eau de la C6te d'Ivoire (SODECI), a corporation
owned by the Ivorian government (4 percent), SAUR (France) (46 percent),
other French shareholders (2 percent) and Ivorian private shareholders (48
percent).
SODECI's ownership was gradually shifted to Ivorian interests
with its shares being traded on the Abidjan Stock Exchange. Proposals are
being developed to privatize the sector further by having SODECI acquire
all fixed assets and take financial responsibility as well for the urban
water supply sub-sector under a concession contract under which SODECI
would be responsible for all investments in the sub-sector. Proposals from
private parties for similar arrangements (lease and equity) are being
solicited in Guinea to result in the creation of a mixed economy company
which will operate the water supply system in that country.
The initial
response has been positive.
The "concession"
type of arrangement
is applied in other
countries as well. But the French concession invariably provides for full
rights of ownership and use of the constructed facilities to revert to the
government or the municipality, while this may not be the case in other
countries such as, e.g., the U.S.A. where the private party has an
unqualified and continuous right of ownership and use (except in the case
of Build, Operate and Transfer Contracts see footnote No.7).
Contracts similar to the above-mentioned French model are also
extensively applied in Spain (over 80 percent of all water distribution is
handled
under such arrangements).
They are also in existence in
Casablanca.
Water distribution in Macao is handled under a concession
arrangement with an 85 percent private company, Sociedade de Abastecimento
de Aguas Macao (SAAM).5 9 A concession for electricity production and
distribution is in existence in Vanuatu.
The "affermage" often is concluded for a period of 10 to 15
years, whereas the "concession" is concluded for longer periods of 20 to 30
years.
This is because under the "concession" the private party has
financed the underlying assets and needs to recoup its investment. However, the arrangements used in France are examples of flexible approaches.
59/ Asian Water and Sewerage, December 1986, p. 5.
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/
Typical arrangements in France are detailed in Ivan Cheret, "Private

Sector Role in Provision of Water Supply and Sanitation: Alternative
Approaches,"
World Bank Seminar, January 1985.
For a further
description of alternative arrangements
in other countries, see
C. Vuylsteke,
"Provision of Urban services Arrangements with the
Private Sector," in Managenent Options for Urban Services, Report of a
Seminar held at Cesme, Turkey, on November 11-20, 1985 (Washington,
D.C.: The World Bank, 1986), pp. 301-347.
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 -
vatization might represent a substantial gain in efficiency (were it only

by the discipline instilled by having the private party represented on the
board of directors) while safeguarding government's concern for strategic
control.
In sum, in the case of utilities or strategic SOEs, a government
can, depending on its objectives and concerns, limit the level of private
participation in order to retain control; or retain specific limited powers
both over the future ownership, control or conduct of the privatized company,6 3 and over the delivery of the utility service through appropriate
licensing and regulations,
contractual monitoring systems, etc.
In
practically all cases of privatization of a utility or public service, the
basic steps include regulatory safeguards (including the establishment of a
regulatory body and the granting of an operating license) to ensure that
the service will continue to operate in the public interest.
The costs
(direct or indirect) of the proposed regulatory system and its efficiency
will need to be carefully assessed.
As a last observation on this item, it should be noted that the
interdependence of various sectors or at least the downstream effects of
the privatization of one sector over another need to be clearly analyzed.
The electricity generating industry in the U.K. reportedly6 4 is forced to
buy 95 percent of its coal nationally (at prices higher than the world spot
price for foreign coal). Obviously, the privatization of the electricity
generating industry will have maior downstream effects on the possible sale
of another SOE, British coal (also considered for privatization).
Strength of Domestic Financial Markets
The level of development of the capital markets in a country will

determine whether certain privatization methods can be applied.
The
specific method needs to be suitable to the structure and liquidity of the
capital markets and the sophistication of local investors. For example, if
there are no channels for share distribution and, if the investing public
is small in size, a traditional public offering of shares is often not
feasible. Private sales to local and foreign investors are then likely to
become the predominant method of sale. It appears, however, that based on
the experience of Jamaica, Kenya, and two West African states with no
equity markets at all, the prospects for raising local capital for privatization through public offerings or other mechanisms involving a broad section of the investing public are probably better than was previously
thought.
Therefore, the absence of a strong local capital market should
not be thought automatically to preclude public offerings or at least
private sales targetting a relatively wide group of investors.
A more
detailed account of this issue appears on pages 141 to 144. Based on the
63/ See Annex D on Special (or "golden") share.

64/ The Economist, November 21, 1987.
- 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
It should further be! recognized that the decision-making process

may not be as neutral or pragmatic as the above theory may seem to indicate.
The intensely political nature of the topic, the role of ideology
and the influence of power groups or elites may play a preponderant role.
Political factors naturally greatly impact on the decision to
privatize (see the recent interruption in the large scale French program).
Political considerations also always influence and in some cases determine
the mechanics to be applied. A foremost political and social issue is the
possible need for retrenchment of the work force of an enterprise. In such
cases, appropriate
preventive or remedial mechanisms may need to be
developed.
A government's concern over concentration of ownership often
leads to the adoption of mechanisms to ensure widespread share ownership.
In the case of SOEs in weak financial condition, private investors may want
the government to write off liabilities, and they may also not buy except
at a substantial discount as compared to the assets' book value. Both such
demands pose political difficulties.
The range of divestiture/privatization methods very often offers
alternatives for dealing with socio-political constraints.
While the
sudden dissolution of several SOEs, or the sale of government interests in
SOEs, may be politically difficult in given environments, transformation
into joint stock corporations with new private equity provision may be both
feasible and popular (e.g., equity financing provided by investors to debtridden public enterprises).
Once the initial change has taken place,
further privatization through a transfer of government-held shares at a
later date is then possible at a lower political cost. A common question
on (and often an argument against) privatization is its impact on pricing
Policy makers do argue that, generally
of the SOEs' product or service.
speaking, there should be no reason for prices to go up, unless the SOE was
operating in an uneconomic way (and in that case it could probably not be
continued in the private sector unless a subsidy would be provided).
The above elements are likely to create substantial and active
opposition by various interest groups in certain country environments.6 5
Well devised and large scale information campaigns explaining the advant-
65/ Interest groups comprise the general public (taxpayers, customers,

voters), the SOE (management, employees), prospective investors,
commentators and opponents (G. Grimstone, J. Henry Schroder Wagg & Co.
Ltd. at London Conference on Privatization, July 7, 1987, sponsored by
Adam Smith Institute).
- 70 -
ages of proposed privatizations are believed to be one important step to

address their concerns. Even when the environment does not call for such
nationwide campaigns, a careful presentation of the government's intent to
the general public may be key to the initiation of a program to the satisfaction of constituent portions of the country. One West African government has chosen not to use the term "privatization" but rather "opening up
of the capital" of SOEs to private interests (while in fact not limiting
itself to one particular method of privatization). In some countries the
term "restructuring" rather than "privatization" is used.
Ownership patterns are also central to privatization decisions.6 6
The actual concentration of domestic private capital and entrepreneurial
expertise may not correspond to the government's objective of controlling
certain economically strong groups.
These include ethnic (e.g., Chinese
Malays, Indian Fijians and Indian Africans), geographic (urban elites) and
concentrated power groups (economic dynasties and political cliques). For
example, the Malaysian
government has attempted, in its divestiture
program, to distribute corporate wealth among its nationals, particularly
indigenous Malays (Bumiputra), through the National Unit Trust Scheme. As
a result, it has allowed only the Bumiputra class to subscribe to blocks of
equity shares of divested SOEs.
However, such approaches may make the
other ethnic (and foreign) groups resentful. In Western Samoa, only about
15 families have access to sufficient capital and business know-how to bid
on large-scale privatization actions.6 7 Some countries, while interested in
privatization, are fearful that government monopolies may only be replaced
by private ones, in that there is an absence of a financially strong middle
class.
66/ See pages 116 to 128 on "Determining Future Ownership."

67/ Charles Feinstein, "Privatization Possibilities among Pacific Island
Countries," Research Report Series No. 2, Pacific Islands Development
Program, East West Center.
- 71 -
4.
ANICILLARYARRANGEMENTS
Many privatizations will require transaction - specific ancillary

arrangements
along with the basic methods described above.
Already
mentioned was that a regulatory framework may be required in the case of
public services or strategic enterprises.
Purchasers may seek various
commitments from the governmeant so that they can operate their business
satisfactorily. Governments may seek commitments from purchasers as to the
future financial and economic behavior of a firm.
In some countries, state ownership of certain sectors has sometimes been taken as an alternative to regulation, such as with utilities
and public services.
However, a number of governments have increasingly
come to the conclusion that the introduction of an adequate regulatory
framework is the more effective control vehicle, rather than ownership. A
regulatory framework generally includes the establishment of a regulatory
body and licensing by the state (see page 163). When Guinea privatized the
stevedoring and transit operations of the Port of Conakry, it instituted
several ancillary arrangements, such as legislated standards for this
profession (Code d'agreation) and specialized labor regulations for the
port. In other words, specific sectoral arrangements may be required.6 8
As to commitments sought by purchasers, typical ones include
freedom of transfer of capital and distributed income; assurances that the
investor can wind up the firrm; and freedom from price controls. When Togo
signed an agreement in view of the sale of textile mills to the Pen Africa
Textile Corporation,6 9 the Convention d'Etablissement signed as part of the
privatization arrangement provided, inter alia, for a stability of the
legal regime, free transfer of capital and earnings, customs, tax and
financial guarantees, and assurance that the government would not establish
or encourage the establishment of other textile enterprises with the same
line of products (the latter raising a number of question as to the
government's intention with respect to competition in the sector).
Governments should be clear as to the assurances they are prepared to offer (relative to pricing and other policies that may affect
returns).
They should also develop a system for valuing the advantages
sought, as those will affect the comparability of offers.
In some
instances, exorbitant advantages have been granted to purchasers, such as
an exclusive market or undue protection against imports.
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 -
An area in which much bargaining takes place between purchasers

and governments is the effective protection to be provided to SOEs to be
privatized.
Typically, governments either undertake to provide a protective tariff or maintain existing advantages as an inducement to purchasers.
This approach is likely to lead to strains on the economy because it
promotes highly protected industries.7 0
In many situations, few private investors or operators may be
interested in acquiring or leasing an SOE or state-owned productive assets,
particularly those that are not viable.
The government may face the very
difficult decision of whether or not to grant exorbitant advantages (e.g.,
protection from competition) that could result in viability from the
operators' point of view and make a transaction possible. Without addressing that decision-making per se, it should be said that, when planning a
given transaction, the ancillary advantages sought by purchasers need to be
carefully weighed before the underlying transaction is approved.
In one
known instance, idle industrial facilities are being leased on a basis
whereby the proceeds to the government will cover only a minute fraction of
the respective debt service obligations (although there is no indication
that a sale or other arrangement would have yielded a higher monetary
return). The lessee has revitalized part of the facilities, put them into
production and provided renewed though reduced employment.
Expansion of
the industry is now taking place, with private investment successfully
raised in expanded facilities. Beyond the lease proceeds, the government
may receive some tax benefits, while further unquantifiable benefits may
accrue to the country in terms of a favorable climate for industrial
development.
On the other hand, the viability of the new operation is
based largely on market exclusivity, linked with substantial protection
against competing imports.
Careful analysis of the foregone benefits to
the government (e.g., import duties) and costs to the consumer (who might
be otherwise able to buy competing imports for less) should be evaluated
carefully in such instances.
In other words, in reviewing ancillary
arrangements, extreme care should be taken to evaluate the long-term costs
and benefits to the country versus the immediate return of completing the
transaction.
Some new enterprises have emerged in West Africa with
substantial protection effectively granting monopolies of production.
In
some instances the dissolution and liquidation of an SOE may be of more
benefit to a country's economy even though a privatization might yield
better immediate financial proceeds. Review of such ancillary arrangements
are presently taking place in some West African states.
Some liabilities or contractual commitments of the SOE may need
assumption by the government (other than debt liabilities covered under the
"Readying Process" on pages 102 to 104). The case of the privatization of
the Ontario government-owned Urban Transportation Development Corporation
Ltd. illustrates this among other examples.
The government was led to
70/ Deepak Lal, Martin Cane, Paul Hare and Jeffrey Thompson, ApPraising
Foreign Investment in Developing Countries (London: Heinemann, 1975).
- 73 retain performance liability commitments for existing contracts,7 1 and

retained the buyer as manager on a fee basis to handle these contracts.
When the government sells an enterprise directly through a private sale of shares or assets, it may be able to obtain specific commitments from a single, or consortium of, purchasers that could not easily be
obtained if the shares were sold to the public.7 2 Part II of this report
highlights on page 135 some privatization transactions that have included
conditionality
to maintain
certain
levels
of employment. 7 3 The
abovementioned
Convention
d'Etablissement in Togo for the privatized
textile mills provides for a minimum level of employment at 6,000 workers
after two years of operation, as well as preference for Togolese raw
materials.
Other undertakings have covered future financial investments
such as in the SEAT privatization in Spain, and economic behavior and
market commitments of the enterprise such as in Canada's privatization of
de Havilland.
The amount of notes payable by the Boeing Commercial
Airplane Company on account of the purchase of the Canadian Government's
shares in the Havilland Aircraft of Canadair Ltd. is to be reduced by
Can. $1 for every Can. $5 of purchases by Boeing of Canadian goods and
services under new orders. Shares retained by the Canadian Government in a
holding company through which Bombardier Inc. acquired Canadair Ltd. are to
be cancelled as Canadair invests in research and development or wins new
export business.
Several privatization transactions concluded by the
government of the province of Quebec require certain levels of investment
over time by the purchaser. Privatization agreements in Guinea, preceding
the creation of a new company incorporating government assets, always
stipulate investment obligations during the next five years, a deadline for
the start of operations and a minimum production level.
71/ Christopher
J. Maule,
"Privatization
Transportation
Development
Corporation
November 1987.
- The
Ltd.,"
Case of
Business
the Urban
Ouarterly,
72/ Robert A. Donaldson and Donald C. Ross, "Privatization from a Canadian

Perspective," Paper presented at the International Bar Association
Conference in New York, September 1986.
73/ Only realistic commitments should be sought. In one known instance, a
government's attempt to privatize its national railway was frustrated
by the introduction of excessive constraints, such as the retention of
certain lines and of the existing workforce.
- 74 -
PART II
SELECTED IMPLEMENTATIONASPECTS
Part II addresses selected implementationissues and reviews some

tried solutions. Most issues must be viewed in the context of one of the
basic methods of privatizationdescribed above.
The principal issues which arise in implementingprivatization
can be grouped under the followingheadings:
o
Planning and Management
Readying SOEs
o Valuation and Pricing

o
DeterminingFuture Ownership
Employment Issues and Employee Participation
Cost of Privatization
Resource Mobilizationand Financing
These areas cover the most recurrent issues or constraints in

implementingprivatizationand need extremelycareful handling in the planning and implementationstages.74 It is important to anticipate which of
these issues are likely to arise in a proposed transactionand to evaluate
the possible responses. Solutions or techniques analyzed here represent
some of the main options for governmentsto apply.
74/ Those issues were selected principally in function of the types of

questions which have arisen under World Bank operationalwork.
- 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
"Initiating measures" are meant to cover initial implementation

measures, that is, after a government has redrawn the line of state ownership, or has determined the principles to govern the implementation of its
policies in respect of its SOE sector.
The initial announcement of privatization is generally handled in
two ways.
In most instances, the government announces its intention to
divest or privatize various sectors of the economy or substantial segments
of the public sector as an element of economic policy. In a smaller number
of cases, like in Spain, the government simply privatizes one or more
enterprises, ad hoc, so as to improve their efficiency or for other reasons
of economic rationality, without launching a broader privatization program
and without having spent much time and effort preparing the policy or
political terrain.
As an example of the first approach, Nigeria's Finance Minister
announced privatization in his 1986 budget speech, as did Canada's Minister
of Finance in 1985.
Partic:ularlywhen the general public is targeted to
acquire the state's interest, speedy action to foster and sustain the
interest engendered by the announcement is essential.
Even with private
sales, the announcement ofE a privatization program should be quickly
followed by implementation.
In Singapore, the Minister of Finance appointed a committee, the
Public Sector Divestment Committee, to identify SOEs for divestment and put
together a divestment programme (it submitted a com rehensive report in
February 1987). Some countries have prepared (Turkey) 5 or are planning to
prepare (Malaysia) detailed master plans for privatization.
To move
75/ See a detailed commentary in R. Leeds, "Turkey: Implementation of a

Privatization Strategy," Case Study for John F. Kennedy School of
Government, Harvard University, draft.
- 76 -
rapidly, a country indeed needs to be clear in advance about the initial

steps to be taken and have identified some initial viable candidates.
If
those conditions cannot be met, it is perhaps best to proceed case-by-case,
rather than launching a general program.
Even with a case-by-case
approach, however, the government should announce its intentions publicly.
Otherwise, critics may view the transaction as underhanded.
In most
countries, it is also necessary to continue publicizing the government's
progress in varying degrees of detail.
Initial
announcements
should
present
the privatizations
transparently
and invite constructive discussions with all parties.
Initial attempts at privatization in a West African country in the late
sixties were severely criticized for lack of open debate and led to labor
unrest and subsequent reversals of divestitures.
The government now
encourages extensive public debate with all relevant quarters.
Brazil's
new privatization
decree contains provisions for full disclosure of
privatizations 7 6 which are to be widely announced to ensure the public
knows all the conditions. In the UJnited Kingdom, enormous media relations
efforts have been deployed with respect to most instances of privatization.
Initial announcements in British Columbia (Canada) stressed that processes
(bidding system, valuation and all other appropriate details) would be very
public.
Employment
issues
and other major concerns
such as the
concentration
of capital in some countries must be addressed at the
earliest stages.
Major addresses on privatization, such as H. M. Hassan
II's address at the opening of Morocco's spring parliamentary session on
April 8, 1988, largely focus on these issues. The office responsible for
privatization in one Latin American country observed the negative efforts
of publishing
lists of enterprises
to be privatized
without full
information on rationales, methods and procedures, etc.
After a government has announced a privatization program or the
privatization of selected enterprises in general terms, it will want to
inform7 7 the market in somewhat more detail. One way is to issue a general
statement of policy and then solicit interest in several SOEs. Malaysia's
Guidelines on Privatization (1985) are designed "to inform the public as
well as those who are in the business world about the concept and other
issues related to privatization."
These guidelines
generally invite
private business interests to submit proposals for privatization to a
designated government office. In the Philippines, the Asset Privatization
Trust issues general catalogues of SOEs or assets to be privatized and
interested parties may request asset specific catalogues.
Several
26/
Brazil's decree of November 1985 further requires "the operations to be

analyzed and assisted by external auditors who will take steps to
ensure the transparency and openness of all phases of the transaction."
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 -
governments' announcements have given rise to a broad preliminary interest

from investors.
This method is a relevant approach for initiating a
program of privatization of SOEs by methods other than public offerings,
such as private sales of shares or assets, and even management contracts
and leases. However, the government should be satisfied that a reasonable
level of private interest exists in the SOEs it intends to privatize.
Both general and case-by-case
announcements
are normally
necessary when initiating a program of privatization of SOEs, whatever the
method, but more essentially when public offerings are envisaged.
As
illustrated by the cases of France and the United Kingdom,7 8 as well as by
the National Commercial Bank (NCB) privatization in Jamaica, widespread
publicity provided sufficiently in advance helps educate the public and
inform investors as to the public offerings.
The massive and detailed
information campaign conducted in connection with NCB led to a massive
response (described further on page 142).
Promotional campaigns with
respect to the government's overall efforts at privatization can be
extremely important as well, particularly if lack of response or even
opposition is due to a lack of understanding. Socio-political constraints
(see page 69) and interests of various groups must be addressed extremely
carefully from the outset.
Representatives of chambers of commerce and
banking circles in at least two countries have noted that the government,
when planning its privatization effort, did not consult sufficiently with
the private sector.
While several of the above patterns of initiating measures illustrate what many practicioners would recommend as sound practices, and provided certain principles of transparency are maintained, no dogmatic
approach should be taken in this respect.
It is found that extensive
announcements were made and initiating measures taken by several countries,
while not much implementation action has taken place.
Conversely C6te
d'Ivoire has privatized 28 SC)Eswithout a formal or comprehensive plan and
with modest publicity.7 9 Such an efficient ad hoc approach may however not
be feasible or advisable in all countries, partly because of its lack of
transparency.
78/ France's Saint-Gobain had retained an advertising agency (Publicis) to

present the company to the public at large. Advertising for several
enterprises was carried by television and the press.
British Gas
claimed its advertising campaign reached 98 percent of the adult
population in the United Kingdom.
Some countries, however, do not
permit advertising in cotmection with public sales of shares (the case
in Canada).
79/ Wilson, op. cit.
78 -
Whatever the approach to privatization, careful planning and

phasing of activities is important. The timing of offerings must take into
account market conditions.
When Chile began its privatizations, it conducted so many sales simultaneously that the financial markets were virtually flooded, while investors proved unable to sustain their acquisitions.
Public offerings should be staggered, with careful selection of initial
candidates to gain credibility. A state may do well to divest its shareholdings in even a single enterprise gradually.
The privatization of
Nippon Telegraph and Telephone (NTT) in Japan involved its conversion into
a joint stock company, whose shares are eventually to be quoted on the
stock exchange. While the government will remain the majority shareholder,
it is expected to sell half its stake over a period of five years. British
Telecom has completed the first stage of its privatization, with the
government still to divest its remaining 49.8 percent holding. The French
government has carried out about one-third (in terms of number of SOEs and
asset value) in the first year of its five year privatization program,
giving it the flexibility of holding some sales in view of the present
stock market downturn. In the case of private sales, dialogue with representative sections of the private sector is extremely useful in identifying
potential interest.
The selection of the first enterprise or enterprises for privatization through sale is, as noted, very important "as its success or
failure will influence the future of the whole privatization plan", as
Argentina's office in charge of privatization commented when offering
Austral, the Argentine state airline, for sale. Similarly, when France's
new conservative government debated during the summer of 1986 what to
privatize first, Saint-Gobain was an obvious choice.
Solid and wellmanaged, it seemed the most likely to appeal to a French stock market that
had become more cautious. 8 0 Several investment bankers believe that a
successful sale within a short time span after the start of a privatization
Niger decided to privatize the distribution
program is very important.
operations of its National Petroleum Company first, as it entailed a relatively easy transfer of smaller units (gas stations) to local operators,
giving some visibility to early success.
The first phase of a privatization program might well begin with
profitable firms so as to enhance market confidence and to
relatively
80/ The Economist, November 1, 1986.
- 79 -
demonstrate the government'scommitment.

81 The first French privatization,
Elf Aquitaine, was a partial privatization,only (51 percent) to test the
market, whereas subsequent cases followed the 100 percent privatization
policy. In countries with active capital markets, it may also be possible
to sell very quickly the shares of companies partially owned by the
government and already listed on the stock exchange. Subsequently, the
program should seek to maintiaininvestor interest through a variety of
offerings, mixing types of ifirm,partial and full privatizations,and
public offerings and private sales, in keeping with market conditions. The
pattern and pace should be reviewed continuously.
The selection of first candidatesfor privatizationmay be determined by various socio-politicalfactors. In Egypt, the first SOEs to be
privatized may be hotels, as these do perhaps not as greatly concern the
population at large.
According to First Boston Corporation/CreditSuisse First Boston
based on their experience of the Rumasa group privatizations in Spain, a
detailed action plan, which should quickly follow the announcement of
8 2 objectives, timing, financing, foreign or
privatization, should include:
domestic sale, treatment of minority shareholders, valuation of the
companies prior to sale, preaparationof data for potential investors,
studies of adjustments and prior changes that can increase the
possibilities (and/or price) of a sale, analysis of the tax, legal and
labor situation,and identificationof potential investors. As a basis for
the detailed plan, it is advisable to carry out some form of cost/benefit
81/ But various other considerations may come into play.

In the
Philippines, the carefully drafted operating guidelines for the Asset
PrivatizationTrust which were recently approved by the Committee on
Privatizationprovide how the Trust should determine its priorities for
disposal:
"Within the overall context of rendering productive once
more idle or underutilized assets, the Trust, as a general rule,
shall give priority to situations that would yield the maximum
cash recovery in the shortest possible time; however, priority
attention may also be considered under certain existing circumstances, such as where (1) the cost of conservation and/or maintenance of an asset is great, (2) the rate of deterioration of
plant and equipment is rapid, (3) rehabilitation by new owners
could immediately generate employment or have strong linkage with
other industries, or (4) locational considerations apply, as in
certain projects which may be the sole employment sources in
their respective locales."
82/ First Boston Corporation, Book on Privatization.
80 -
analysis of alternative methods that meet the government's objectives.83

Authorization of privatization in a given country may be determined by existing legal requirements, such as those in the constitution.
Usually there is some room for discretion, however. France passed special
legislation authorizing a privatization program for a group of sixty-five
SOEs (a separate law authorized the privatization of TF1, a television
channel).
A similar law was enacted in Senegal authorizing the total
privatization
of 13 "Soci6tes
d'Economie
Mixte"
and the partial
privatization of another 13 such enterprises.
The United Kingdom needed
separate pieces of legislation for practically every privatization.
This
led to delays of over one year for individual entities, whereas in France
the processing time per entity is about three months from the decision to
proceed to the actual offering. Turkey's law gives the executive branch
the power to decide on privatizations.
The care with which the
authorization process is prepared can greatly influence the ease with which
a privatization program is launched and implemented. Annex B presents the
experience of selected countries in this respect.
Organization of Departmental Responsibilities: Implementation Units
A government needs analysis and informed advice on many issues,
coordinated formulation of recommendations,prompt and expedient decisionmaking, as well as an effective implementation capability. The possibility
for abuse must be minimized.
The emphasis is generally placed on
No one
centralization, simplicity, flexibility, speed and transparency.
organizational model for managing a privatization is appropriate in all
circumstances.
Managing a privatization program requires a variety of skills.
Some may be available within government departments, others must be hired
from outside. 8 4 This section analyzes how departmental responsibilities
The following is a
have been organized and coordinated in practice.
sampling of some of the organizational set ups which have been adopted.
Specialized Government Ministry.
A number of governments have
used a specialized ministry to carry out and coordinate the privatization
program, such as in Canada (Office of Privatization and Regulatory Affairs
as well as some provincial ministries:
e.g., Quebec has an Associate
Minister for Finance and Privatization). France had a "Ministre d6legu6 A
law of August
1987 -la privatisation"
until the privatization
responsibility was then transferred to the Ministry of Finance, Economy and
Privatization (which has now been renamed since France's privatization
program has been interrupted under the new administration). Where there is
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/
The next section 1 deals with the use of professional services.
a Ministry
of
responsibility.
State
81 -
Enterprises,
as
in
Togo,
it
may
be
assigned
Permanent Privatization Committee. To ensure decision-making by

consensus, some countries have set up a permanent governmental committee or
commission to oversee privatization, or some specific aspects such as the
valuation.
In some cases it may be assisted by a specialized task force.
Typically, the committee includes representatives of the ministries and
public entities most concerned with the privatization exercise, but may
also comprise personalities i-rom outside government. Brazil, Canada, the
Philippines and Senegal established such committees and gave them principal
authority to carry out their privatization programs.
Brazil's decree of
1985 governing privatization establishes an Interministerial Privatization
Council to administer the process. Its chairman is the Minister of State
and Chief of the Planning Secretariat at the Presidency and it further
consists
of the Minister
of Finance,
the special
Minister
for
Debureaucratization, the Minister of Industry and Trade as well as the
sectoral minister overseeing any particular SOE to be privatized.
The
Council has a secretariat for technical and administrative support.
The
lead in the actual process is taken by the Minister of State responsible
for the individual SOE.
In August 1986, the Canadian Prime Minister
established the Cabinet Committee on Privatization, Regulatory Affairs and
Operations (CCPRAO), chaired by the Minister of State (Privatization) and
Minister responsible for Regulatory Affairs.
The Office of Privatization
and Regulatory Affairs (OPRA.), reporting to the Minister, was set up in
December 1986 to provide the required support and cohesion.8 5
In Senegal, the Special Commission for Supervision of Divestment
(Commission Speciale de Suivi.du D6sengagement de l'Etat) has sole authority to recommend privatization measures to the government and to retain
advisory services for that purpose.
The Gambia set up a permanent task
force comprised of representatives of the Ministry of Finance and Trade,
the Ministry of Economic Planning and Industrial Development, and the
National Investment Board (NIB), as well as the responsible sectoral
ministries.
The NIB is the lead agency, with responsibility for the
detailed implementation.
I]n Malaysia, an institutional machinery for
privatization was set up, consisting of an Inter-Departmental Committee
under the chairmanship of the Director General of the Economic Planning
Unit (EPU).
It has overall responsibility for "planning, monitoring,
coordinating and evaluating" implementation of the privatization program.
The Committee included members for such key agencies as the Treasury,
Attorney General's office, the Implementation Coordination Unit and the
EPU. In Sri Lanka, a Presidential Privatization Commission has been placed
under the authority of the President and has among its members three of the
chairmen of the best performing private firms in Sri Lanka. In the Philippines, the Committee on Privatization (COP), a Cabinet-level committee
85/ Varying arrangements exist in Canada for handling privatization at the

provincial level.
- 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
86/ Craig Pickering, "The Mechanics of Disposal," in D.R. Steel and

D.A. Heald (Eds.), Privatizing Public Enterprises: Options and Dilemmas
(London: Royal Institute of Public Administration, 1984), pp. 45-58.
- 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.
87/ Law 3291 of May 28, 1986.
- 84
Figure 1
CHILE:
CORFO'S PRIVATIZATION STRUCTURE
CORFO'S COUNCIL*
Composition
President:
Minister of the Economy
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:
Planning Minister (ODEPLAN)

General Manager of CORFO
Enterprises Manager of CORFO
Normalization Manager of CORFO
Executive Secretary:
Function:
Normalization Deputy Manager of CORFO
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.
* Has also the function of Board of Directors of CORFO.
- 85 -
Most privatization programs fall into one or another of the

organizational alternatives discussed above, or some combination of them.
Some countries aim to have one organizational entity make the political
decisions (i.e., establish overall policy and approve individual transactions), while a different, separate entity actually conducts the
operational tasks associated with privatization, such as negotiations. The
Committee on Privatization in the Philippines is responsible for deciding
which SOEs will be sold and must approve all sales, while the Asset
Privatization Trust, a government agency acting as Trustee of the National
Government, is responsible for actually selling the assets and taking all
the related actions (although government entities other than the Asset
Privatization Trust may dispose of enterprises under them (e.g., the
Philippine National Oil Company is authorized to privatize its subsidiaries) subject to approval by the Committee on Privatization). A Corporate
Affairs Group comprising a Privatization
Office was created at the
Department of Finance, largely to provide assistance to the Secretary of
Finance as Chairman of the Committee on Privatization.
In Costa Rica, a
trust with similar functions was set up to assist in the divestiture of
companies held by Corporacion Costaricense de Desarollo (CODESA).
Other countries find that maximum authority must be placed with a
given body or ministry to handle all aspects of privatization, subject to
the scrutiny of an independent:commission with respect to certain aspects
(such as, e.g., valuation).
An example of the latter is France, whose
organizational scheme has proven to be able to proceed speedily with the
implementation of authorized transactions.
The administrative
structure needs to be responsive to the
interests of government, interested business circles and investors, and
other relevant parties. It must be able to deal not only with the transfer
of ownership aspects, but also with likely implication for competition and
efficiency.
It is not possilble at this stage to draw lessons from the
experience of different countries with organizational structures for privatization.
While various management models stand out, categorization is
difficult because governments often try to be flexible and to allow for ad
hoc solutions. At the same time, because privatization involves by necessity several government deparitments, to ensure adequate coordination, one
party (ministry, committee, etc.) needs to be designated as the lead unit
through a formal administrative instrument. Boards of directors and management often play a key role in the process jointly with the governmentowner. There are various examples of this. Of course, management thereby
becomes an interested party in the outcome of the process, particularly if
they are given responsibilities in the selection of the acquiring party
(which in turn will decide whether it needs to replace existing board and
management).
- 86
Most of the organizational structures described above are only at

early stages of implementation of their programs. A scheme such as the one
in the Philippines has not yet demonstrated its efficiency as the privatization program has barely been initiated. The countries where the implementation of privatization has been more speedy are seemingly those that
have avoided the complexities of involving too many government departments
other than through the membership of government ministers in a policymaking body (such as CORFO's Council in Chile). The privatization structures adopted in Chile and France have permitted efficient implementation
of privatization decisions. Clearly, each country needs to devise its own
approach based on factors such as the scope of the program, and the political and administrative characteristics of the country. If the scope of
the privatization program is one of fundamental economic policy reform in
the country, then the responsibility to carry it out will need to be placed
at the highest levels of government. Or, the organizational set up is to
have quick access to the highest levels of government.
It is sometimes argued that elaborate schemes for handling privatization may be counterproductive (and that privatization merely requires
political will and a "get on with the action" attitude). It would be simplistic, however, not to recognize that in both developed and developing
country environments, a minimum degree of checks and balances, coordination
and transparency is necessary to try and protect the public interest when
disposing of state assets.
As described above, some schemes may attain
these objectives without rendering the process too cumbersome.
There is no conducive evidence that, for instance, centralized
decision-making power in one ministry yields better results than the
committee approach.
The centralized approach yields quick results, which
is clearly an advantage.
However, the potential for abuse is great, and
the level of criticism subsequently levied may be politically costly, thus
rendering future privatization more cumbersome. The trade-off between the
two approaches is then often one of expediency versus potential for abuse
and political back-lash. The abovementioned French approach addressed, to
some extent, both concerns.
Decision-making being centralized at the
Ministry of Economy, Finance and Privatization, a key concern became to
make the process as unquestionable as possible. Hence, the creation of the
independent Privatization Commission, primarily charged with setting the
valuation of the enterprises.8 8
88/ Edouard Balladur, Je crois

Flammarion, 1987) p. 87.
en
l'Homme
plus
au'en
l'Etat
(Paris:
- 87 -
Use of External Professional Services
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 -
the services of an established British merchant bank, solely as adviser9 0

to help with the public offering of its holdings in the National Commercial
Bank.
Much of the bank's experience accrued in U.K. privatizations
(employee share schemes, limitations on individual shareholdings, etc.)
proved extremely relevant in the Jamaican context.
Other methods of privatization also need professional services.
The required expertise often leads the government to seek the assistance of
investment banks. The presence of a reputable merchant bank may reduce the
possibility of underhandedness.
In the case of private sales involving
large corporate divestitures and where marketing skills are essential,
governments have resorted to investment banks, a step taken by the Spanish
Their tasks
government in the sale of the Rumasa group enterprises.
included: overall advice to the vendor, as well as advice on the establishment of an action plan for the sale of several specific companies, on their
valuation, on financial readying measures, on the preparation of sales
brochures, a search for and identification of potential buyers, an analysis
and evaluation of offers, and consulting in the final negotiations.
They
The key
acted as both financial adviser and financial representative.
experience needed for private sales includes prior involvement with equity
markets, a network of contacts through which to solicit investor interest,
and involvement with divestiture techniques and corporate restructuring.
Accountants and law firms generally must also be retained, as well as
specific industry specialists. The industrial investment firm retained by
the government of Guinea as financial adviser for the recent privatization
of fourteen industrial SOEs was mandated to diagnose all industrial SOEs,
locate potential buyers and initiate contacts, and assist the government in
the negotiations.
A law firm was retained under a separate arrangement.
In C6te d'Ivoire, most private sales were, however, handled entirely
without external advisors.9 1
Generally speaking, in the case of developing countries, the
advisers should have experience adapting divestiture and financial techniques to local conditions.
Often, some association between local and
foreign advisers is the most appropriate arrangement with respect to both
technical advice and development of the required network of contacts to
solicit investor interest.
Recent experience with direct sales in West
Africa points to the need to not only address local as well as overseas
interests, but also the regional investment community.
When selecting
large international firms, while they usually offer a vast reservoir of the
skills that are usually key to the success of a transaction, special
attention must be paid that they be equally well-equipped to follow through
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 -
where the local or regional

investors' market is to be
(particularly in the absence of structured financial markets).
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
amount to a percentage of the proceeds. In both the divestment of shares

in Malaysian Arlines System Bhd. (MAS) and Malaysian International Shipping
Corporation Bhd. (MISC), the underwriting commission was 1/2% of the offer
price per share. In the case of MAS, a subscription offer, it was payable
by the company. In the case of MISC, an offer for sale of existing shares,
it was payable by the offerors.
In the case of British Telecom, various
commissions 9 2 (not including the sales commissions for stockbrokers)
amounted to about 6 million (the net proceeds were about 3,600 million).
The size of advisers' fees has raised political concerns in the
United Kingdom with the opposition finding them too high. These, however,
have been at levels similar to merchant banks' fees for corporate divestitures and equity issues in the private sector. The commissions for underwriters are still larger than the fees for advisers, but they are regarded
as justified because the risk of undersubscription is taken off the government's hands.
The recent privatization program in Guinea involved fixed
fees (not including the legal fees) for the outside assistance for the
privatization of its industrial enterprises that amounted to about $0.5
million at the point at which fourteen industrial SOEs had been privatized
for an aggregate price of about the equivalent of $12.5 million.
It has not been possible to establish a trend in the relationship
of fees to transaction proceeds in private sales (at least where the fees
were not payable on a commission (or success fee) basis). Where a transaction results in the retention of residual debt liabilities by the government, the price is not a proper reference for the fees. The determination
of what constitutes reasonable fees ought probably to be made in each case
by reference to the overall benefits expected from a given privatization.
Mandatory Procedures/Guidelines
The procedures for privatization (particularly private sales)

should safeguard the public's interest. Individual deals should be subject
to clear minimum standards that ensure orderly disposition, maximum return
to the state, a fair process for the general public and assurance that the
purchaser is qualified to run the enterprise productively.
A number of governments such as Bangladesh, Brazil, Chile,
France, the Philippines, Senegal and Tunisia have, when planning privatization, developed mandatory procedures for their programs.
These involve
mechanisms for setting floor prices, procedures for selecting purchasers
(e.g., through bidding or direct negotiation, minimum qualifications,
whether to limit purchases by non-nationals, etc.). They may also involve
obligatory payment guarantees or various forms of security where the government provides the financing or accepts payment terms. These procedures
22/ Details on the amounts and method of computation are provided in B.

Yamey and D. Stafford, Report on the Experience of Privatization in
Great Britain, op. cit.
91
have been introduced not only by countries with large-scale privatization

programs.
As in many countries the initiation of any privatization
requires legislative authorization, a law on privatization has been enacted
spelling out the basic conditions applying to the process.
In some cases
where governments did not apply minimum criteria, they suffered adverse
consequences.
Chile's experience in its first phase of privatizations
revealed that it needed to. formulate better prequalification criteria.
Bangladesh, which accepted payment terms when reprivatizing a substantial
number of firms, has suffered from defaults for which it did not have
remedies, such as mortgages or other financial security.9 3 A privatization
program in a West African country was seemingly criticized by some as
tainted with favoritism and somewhat oblivious to procedures which had
indeed been established.
Among the advantages of specific legislation or mandatory rules
on the subject is the possibility of introducing strict requirements for
the objective valuation of assets and for setting the sales price. In the
absence of such rules for private sales, the door is open to a wide range
of irregularities that might result in the state not getting a fair price.
At the same time, there is no hard evidence that a comprehensive body of
rules is essential for success. At a minimum, however, states embarking on
divestiture/privatization will find it advisable to adopt some implementation criteria, such as standards for valuation and bidding, uniform terms
of finance, etc., particularly if the authorization procedure provides wide
This is of
discretionary powers to the executive branch of government.
particular relevance to countries planning to privatize a large number of
entities.
Furthermore, the private sector is attracted by a practical and
orderly framework that facilitates analysis by prospective investors on the
basis of generally accepted business standards and that assures the fairness and subsequent stability of the proposed transaction.
Annex C provides further
introduced by several countries.
details
on
the mandatory procedures
General Business Environment
The broad economic and legal environment for doing business in a

given country is critical to the success, and sometimes the feasibility, of
privatization (just as it is a determinant of the level and success of
private investment in general). Although not a focus of this report, the
importance of the general business environment needs to be highlighted
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 -
since the feasibility

dependent on it.
of
any privatization
technique
will
be
heavily
Key factors in the business environment (such as the fiscal,

monetary, trade, administrative
and regulatory policies) need to be
assessed when evaluating the feasibility of a privatization program in
general and of specific methods.
It is therefore an inherent part of the
planning process.
The development of the domestic capital market and the
availability of vehicles to mobilize private resources are other important
factors. The general regime for private investment raises many questions.
For instance, are privatization transactions eligible for special incentives under the investment codes?
The answer is generally no, since the
codes apply to new investments only, not to buying into ongoing ventures.
However, C6te d'Ivoire's investment code provides for incentives in cases
of enterprise restructuring.
When assessing privatization alternatives or steps for specific
enterprises, there is a need to review some basic country, legal and policy
requirements and restrictions.
For instance, are there limitations on
foreign investment in terms of ownership, sector participation and capital
remittances?
In the case of management
contracting, what do the
procurement laws of the country require, and what performance obligations
are required of managers?
The tax regime may or may not be conducive to
certain types of transactions (e.g., does it favor direct ownership of
assets over stock ownership?). Do the company laws of the country protect
minority shareholdings (othervise the raising of equity in, or the sale of
existing shares to, the general public is not feasible).
Where overall
economic policies are a disincentive
to private sector development,
corrective measures may be necessary.
Some financial and legal features of a country may be obstacles
to private interest in general, or to foreign private investment in particular.
These include labor laws and hiring regulations; the income tax
regime and import and export duties; foreign exchange controls (right
totransfer capital, dividends and other funds); political risk (risk of
expropriation or other measures affecting ability of the investor to
control and operate his assets); immigration restrictions (limitations on
foreign management); and even accounting standards and the availability and
adequacy of information. Some countries (in West Africa, for instance) are
characterized by extremely cumbersome procedures for setting up and administering corporate structures.
According to a recent study,9 4 the most
crucial limiting factor in Africa is not the lack of entrepreneurship, but
weaknesses in the policy environment which inhibit effective investment.
Approaches taken recently by several countries, including Brazil
and Morocco, place privatization in a broader context of "modernization" of
94/ K. Marsden and T. B6lot, Private Enterprise in Africa (Creating a

Better Environment), World Bank Discussion Papers, Washington, D.C.,
1987.
- 93 -
the economy. The Moroccan Administrationis currently expected to present

to its legislature draft laws introducingvarious accompanyingmeasures to
privatization such as a reform of the stock exchange and relating
intermediation,tax incentives to stock ownership and to the trading of
shares on the stock exchange (designed also to address capital
concentration concerns by encouraging widespread shareholding),certain
reforms to the company laws, and antitrustprovisions.
The general point to be made is that the overall gains from
privatization can be greater in a policy environment that encourages the
efficient operation of private enterprises and that avoids giving special
privileges to private parties acquiring or leasing SOEs or their assets.
Thus, privatization may need to be accompanied by well-planned policy
reforms that promote strong interest by the private sector and permit
competition and efficiencypricing (that is, that avoid exclusivemarketing
arrangements or monopolies, that reduce special privileges such as
protection against competing imports,etc.).
2.
94 -
READYING SOES FOR PRIVATIZATION
SOEs whose shares are already listed on a stock exchange and

being traded can sometimes be divested further by a simple government
decision to sell. An existing shareholder in a joint stock company, fully
familiar with the company's operations, may want to increase its stake by
acquiring government shares. In these instances, no readying may be necessary. In the first case, the focus is on setting an appropriate offering
price for the shares. In the latter case, a negotiation takes place that
concentrates largely on the valuation of the enterprise to determine a
mutually acceptable price for the shares.
Most readying activities will be taken in view of carrying
through privatization as soon as they are completed. But, as was recommended by the Public Sector Divestment Committee in Singapore, it may be
advisable to bring SOEs to a state of readiness so as to be in a position
to seize privatization opportunities as they arise.
Few SOEs however are in a condition that permits sale or other
transfers to the private sector without readying measures.
Based on a detailed preparatory analysis which will precede just
about any divestiture, it will frequently be determined that the SOE is not
salable on an "as is" basis, and a wide array of preparatory restructuring
measures may be called for.9 6 Figure 2 illustrates the type of readying
actions being taken with respect to Malaysia's Jabatan Telecom Negara,
involving a conversion from government department to public limited company
in view of a public offering; those steps are similar to those applied in
several British privatizations and to those applied in the ongoing privatization of the Sri-Lankan telecommunications, presently a government
department.
Figure 3, providing a list of steps taken in several British
privatizations, further illustrates this. They represent a rather typical
set of readying actions for government public services to be sold by way of
96/ In a number of countries, the readying for privatization has included

complete transformation and reorganization of weak performing SOEs into
profitable autonomous and self-sufficient SOEs to the point of becoming
an attractive investment for the private sector.
Even though this
demonstrates that SOE efficiency may be achieved through appropriate
restructuring without divestment, it is often argued as well that
private sector ownership is more conducive to the maintenance or
furtherance of efficiency. This opens a debate on privatization as a
condition of efficiency which is not within the purposes of this
report.
- 95 -
Figure 2
ONGOING PRIVATIZATION OF MALAYSIA'S ENTERPRISE
Initial SOE
Readied SOE
JTN
TMB
(Jabatan
Telecom
Negara)
Readying Steps:
-Government Agency-
o
o
o
o
o
o
o
(Telecoms
Malaysia
Berhad)
-Wholly Owned Government Company-
Incorporation/creation of a public limited company

Transfer of assets and liabilities
Transfer of personnel
Valuation of company's worth
Change in financial accounting systems
Establishment of regulatory framework
(issues of subsidies and telephone charges)
Listing at the Kuala Lumpur stock exchange
- 96
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Extract from Privatizationin the U.K., Background

Briefing,H.M. Treasury,London, 1986.
SECWR
comn
'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
Satisfaction of Legal Requirements
Conversion of Legal Form
Modification of Overall Legal Framework
Financial Restructuring (including measures with respect to

excess liabilities)
Physical Rehabilitation
Changes with Respect to Staffing
Ensuring Cooperation of Management
Enterprise Diagnosis
A first step in any privatization is normally a thorough examinaFollowing this examination,

tion of the SOE's finances and operations.
preliminary values should be established for assets or shares and an initial determination on the relevant privatization method or methods should
be made.
The enterprise
diagnosis will first consist of a corporate
finance analysis, covering the SOE's debt situation (and in particular the
state's exposure with respect thereto), capital structure and past financial performance. Auditors may need to be retained to review the adequacy
of financial statements and, in many instances, prepare financial state-
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
ments in accordance with sound accounting practices.

Indeed, some SOEs,
especially in developing countries, are without adequate records, have
over-valued assets and have lacked financial discipline. Additional work
on accounts will be determined in part by the country's legal requirements
(and their actual application). However, in many cases, existing company
information does not meet the accounting requirements of potential purchasers or standards of the markets in which the sale is to be offered, and
still further work may be necessary.
The diagnosis will further examine the SOE's past operations and
market situation, possible special privileges granted to it as an SOE and
their impact on performance, and the relevance of existing plants or other
assets to potential investors, as well as the physical condition of these
assets.
Naturally, the volume of diagnostic work and the amount of effort
in presenting it in comprehensive form to prospective buyers will depend on
the anticipated method of privatization. In many instances of private sale
of shares or assets, prospective purchasers may also want to undertake
their own detailed diagnosis.
Satisfaction of Legal Reguirements
It is necessary to ascertain existing creditors', shareholders',

employees', and other third parties' rights. Loan (as well as guarantee)
agreements (with development agencies as well as commercial banks) routinely include provisions prohibiting the sale or other disposal of the
government's interests or loss of control under a minimum percentage without the creditor's consent. The Canadian government, for instance, could
not reduce its ownership of the conglomerate Canada Development Corporation
(CDC), below 10 percent of the voting shares without triggering certain
remedies of CDC's creditors.
CDC ultimately prepaid the loans to free
itself from such restrictions; new loans were negotiated soon after.9 8 The
reason these clauses are used is that the state is often considered a
Unless the SOE (or government
performance guarantor of the enterprise.
guarantor) is prepared to prepay the outstanding loans, it is obliged to
involve the creditors whenever such clauses are present, a situation that
frequently pertains to the privatization of SOEs. Similarly, when assets
are burdened with mortgages or liens, no transfer of individual assets may
be possible without the consent of the creditor.
Another issue is government guarantees, which are commonly proWhat happens when the company is privatized?
vided for SOE borrowing.
Will the guarantee be maintained? Most likely, the answer has to be yes,
unless creditors are offered an acceptable substitute private guarantee
98/ Donaldson and Ross, op. cit.
99
(see further page 102).99 Senegal requires the introduction of an "action

speciale" (golden share) if the SOE is covered by government loan guarantees or if government loans have been onlent to it to assure repayment by
the privatized enterprise (see Annex D).
The rights of existing shareholders also have to be taken into
account. The charters of SOEs set up as mixed joint stock companies routinely contain restrictions on the transferability of all or certain
classes of shares, provide for -preemptive rights of existing shareholders,
These provisions have reportedly been a hindrance to some
and the like.
privatizations in Kenya, and in the Philippines the proposed purchase of
Associated Bank from the government-owned Development Bank of the Philippines could not proceed because of such restrictions. Under the Brazilian
rules governing the privatizaticinprocess, the presence of a requirement of
existing shareholders' consent is one instance where direct negotiation
rather than bidding is an accepted procedure for selecting the purchaser.
The exercise of preemptive or preferential rights of existing
shareholders is often difficult to reconcile with the justified requirement
that shares sales should be maximized through a bidding or other competitive process. Either the shares are first offered, on the basis of a predetermined price, to the existing shareholders - and then exceptions to
bidding requirements must be accepted. Or existing shareholders are offered
the first refusal at, or close to, a price resulting from the bidding - in
which case potential bidders might become substantially less interested in
participating in the bidding. Experiences vary. In the recent privatization
of one industrial enterprise in Brazil, it was decided that preferential
rights of minority shareholders could be exercised in accordance with the
company's articles of association, on the same conditions as the winning
bidder would have acquired the stock being offered. While it has not been
possible to review the details of these transactions within the scope of
this report, it is worth noting that the 1987 presidential decree authorizing the privatization of one chemical industrial company in Argentina,
Atanor CompafniaNacional para la Industria Quimica, S.A., provides that the
existing shareholders may exercise their purchase option as provided by the
articles of association during a period of thirty days following the date
on which the responsible min:istry notifies them of the purchase price
(determined on the basis of a specified method); shares not so bought are
to be offered on the basis of bidding. In another instance, namely
Carboquimica Argentina S.A. the relevant 1987 presidential decree does
build the preferential rights: into the bidding process; the existing
private shareholders, having participated in the bidding, are given the
99/ A related question is whether the SOE's ability to borrow will be

affected by the lack of fut:uregovernment backing after privatization.
In the case of Japan-NTT, credit lines have remained open with no
change in the costs, but that is not always the outcome (Euromoney,
11/86). In Thailand, management fears that the cost of borrowing will
increase after the proposed privatization of Electricity Generating
Authority of Thailand (EGAT) and Thai Airways.
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.
Conversion of Legal Form
A very large number of, if not most, SOEs cannot be privatized in

their existing legal form which then needs to be converted. The exceptions
are enterprises that are already joint government/private where the government is selling all or part of its residual shareholding. A case in point
is the mixed company in which the existing private party wants to increase
its stake or in which other parties, satisfied with the company in its present form, want to buy in by acquiring government-held shares.
Such was
the case in Mali, where local private interests acquired government shares
in Industries Textiles du Mali (ITEMA), which was already set up as a mixed
limited company. The same situation pertains with a public limited company
whose shares are already traded and in which the government decides to sell
a further interest (e.g., Singapore International Airlines).
Most other
forms of privatization referred to in Part I require legal restructuring or
complete transformations.
Legal restructuring may range from simple amendments to the articles of association to the dissolution of an enterprise and transfer of its
assets and liabilities to a new corporate entity. When shares are to be
offered to a private purchaser or to the general public,
a number of specific legal steps may be required to convert the enterprise into a joint
stock corporation or a public
limited company. Where the entity is a nonstock enterprise (e.g., a statutory body established by an act of parliament), the government needs to convert it into a stock corporation under
ordinary company law. British Telecom was, immediately before privatization, transformed from a public
corporation into a public limited company.
As a public corporation, BT had a quasi-governmental power to grant
licenses under the monopoly it enjoyed; these powers were removed by legislation before privatization.
Dissolution of a statutory body and the
transfer of its assets usually require special legislation.
Activities
embodied in a government department or agency similarly require this transformation.
Some countries have begun to transform government departments
into commercial organizations as a preliminary step for possible future
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
Modification of Overall Legal Framework
In many situations, conversion of the legal structure of the

activity is accompanied by ancillary legal changes, such as revisions of
special privileges (e.g., termination of monopolies), establishment of a
licensing system, introduction of a revised regulatory system for utilities, and so forth. A more cletailed discussion is found in Part I under
"Ancillary Arrangements" (page 71).
Financial Restructuring
Balance sheet restructurings and ancillary financial measures

have been necessary for many SOEs privatized as going concerns (particulary
where public offerings and sales of shares are involved). Other sometimes
more far-reaching measures of a financial nature have been necessary with
enterprises that cannot be privatized as going concerns (particularly in
the case of dissolutions followed by the sale of assets and fragmentation
into component parts).
The amount of change necessary will vary from
enterprise to enterprise depending largely on the manner in which it was
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 -
to be privatized. Austral, Argentina's domestic airline, would reportedly

have been sold without its debt.
In the case of Empresa Nacional de Electricidad S.A. (ENDESA),
the Chilean government took over substantial debt; however, in the case of
Empresa Nacional de Computacion e Informatica (ECOM), which has been losing
important sums in recent years, it was decided to privatize the corporation
"as is" and indeed, the sales price agreed upon this leveraged worker buyout was correspondingly low.
Debt restructuring mtay involve various type of arrangements such
as: complete reorganization, with debt selectively assumed by new operating
entities; rescheduling; repayment (possibly accompanied by a selective sale
of some assets to finance it); direct buy-back of a discount; conversion
into equity; and arrangements for a third (governmental) party to service
the debt on behalf of the SOE, possibly as an interim arrangement.
Assumptions of debt liabilities and reschedulings would require the consent
of the creditors and will therefore involve negotiations with them.
Whether the liabilities are settled or assumed, such actions are
often regarded as a cost of privatization.
One reported reason for the
Kenyan government's hesitancy in pushing forward with a privatization
program is the size of the outstanding liabilities that would have to be
settled. However the burden on the government ought not, in most cases, to
be regarded strictly as a privatization related cost.
Either the SOE is
self-sustaining and chances are it can be privatized with its liabilities.
But if it is not, and the chances of restoring its self-sufficiency are
remote, possible uncovered debts may be the responsibility of government.1 0 2
should be
internal
restructuring
To all extent possible,
explored.
The sale of real estate assets of STECM, a mecanical
construction company of the SOTIMACO group in Tunisia, permitted excessive
liabilities to be settled and shares in the company can now be sold.
In some instances, governments have decided they should be compensated in some way for assuming SOE debts prior to privatization. When
selling Canadair Ltd. to Bombardier Inc., the Canadian government retained
ownership
of the Challenger
business
aircraft
technology
as Can.
$1.2 billion of debt on its account had been incurred by the Government,
and licenced its use to Canadair. In the privatization of British Telecom,
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
some government-contracted loans were not transferred as debt to British

Telecom to maintain an acceptable debt/equity ratio.
Instead, the
government retained preferred redeemable shares in the new company.
Governments should carefully explore the conditions under which they would
be prepared to maintain liabilities (or exposure through guarantees) on
account of privatized SOEs.
In many instances, a government has on-lent borrowed funds (for
instance from international lending agencies) to the SOE or has, as guarantor, serviced the debt of an ailing SOE and become a subrogated creditor.
When the government is the creditor, there are various options for handling
that SOE debt.
One avenue is simply to cancel it. However, governments
may, circumstances permitting, pursue other avenues that permit them to
recover their investment at some stage. One possibility is for the government to convert the debt into equity.
In so doing, it may be satisfied
with a conversion into non-voting, non-participating preferred stock with a
small, fixed dividend. A formula could be found for redemption, over time,
of the stock. An example of a conversion by the government as creditor of
debt into equity is found in the case of Industries Togolaises des
Plastiques.
Relief by the government of an enterprises' liabilities must be
seen as a readying measure to facilitate or permit a sale. In Italy, IRI
attempted to make the sale of money-losing enterprises attractive by debt
assumption or the provision of additional equity. Action with respect to
liabilities is normally undertaken only after the government has satisfied
itself of the absolute necessity of the action.
Otherwise, privatization
might become a process whereby creditors would be reimbursed for loans
beyond their realizable value. One way to establish an upper limit for the
debt to be assumed by the government is to estimate the liquidation value
of the targeted SOE should it not be privatized.1 0 3
Other actions with respect to SOE debt might be taken, such as
illustrated by the readying of the Caribbean Cement Company (CCC) in
Jamaica. To make the company more attractive to prospective investors in
this public offering, the government agreed to assume the foreign exchange
risk on approximately US$62.3 million of CCC indebtedness owed to foreign
creditors. This was coupled with a capital injection to strengthen the debt
to equity ratio and a moratorium on a substantial amount of import duties.1 0 4
Finally, governments tend to forego privatization transactions
that require new guarantees. The government of Mali rejected a proposal to
create a new, partly private corporation to take over the assets and business of the liquidated national transport enterprise, CITRANS, because it
103/ L. Rapp has so argued. Lucien Rapp, Technigues de Privatisation des

Entreprises Publiques (Paris: Librairies Techniques, 1986).
104/ Roger Leeds, Privatization in Jamaica: The Caribbean Cement Company,
Center for Business and Government - John F. Kennedy School of
Government (Cambridge, Harvard University, March 1988).
- 105 -
would have been required to provide its guarantee to a financial package

for the new corporation.
Recapitalization.
Once again, there are no set blueprints for
addressing the problems of undercapitalized SOEs to be privatized. In some
instances, it is preferable to sell the enterprise as is. The government of
Spain used as one of the main criteria for evaluating offers for unrestructured firms the readiness of the purchaser to inject fresh funds upon privatization.
This same determinant applied in the privatization of two
textile mills by Togo and in IRI's choice of Fiat's bid over Ford's for the
acquisition
of Alfa Romeo. Indeed, one of the relevant methods of
privatization could be a new (primary) share issue to raise new equity (see
pages 26 to 29) prior to or simultaneously with the sale of an enterprise.
Most
privatizations
of industrial
SOEs in Guinea
involved
the
transformation of debilitated SOEs into a new corporation whose equity was
to consist, on the one hand, of a government contribution in kind of the
assets of the former SOE and, on the other hand, of an infusion of fresh
equity by private investors (often resulting in 49 percent government and
51 percent private ownership).
The government-held shares are then
divested at a later stage (although in some instances divestiture takes
place in parallel with the first transaction).
Cases where a government has decided to inject new equity itself
to make a sale possible seem more rare. However, the recapitalization of
Malaysian International Shipping Corporation Bhd. (MISC) is an example of
existing shareholders (mostly governmental parties) providing new equity to
finance MISC's fleet expansion and replacement and to provide additional
working capital.
It was largely recouped from the sale of governmental
shares.
Figure 4 provides, as an illustration, a summary of financial
restructuring steps in the case of MISC.
The privatization of Credit
Commercial de France required prior financial restructuring to bring loan
loss reserves to an adequate level. In the case of Credit du Nord (subsidiary of Paribas), the state, as minority shareholder, has, together with
Paribas, subscribed to a capital increase to cover losses and forthcoming
personnel lay-off costs.
Similar arrangments were planned in respect of
British Petroleum (BP).
Other.
Various
other balance
sheet modifications
may be
appropriate.
For instance, an SOE may be reshaped by removing certain
assets. As discussed on page 24, the spin-off of assets or activities may,
however, constitute a privatization transaction in itself.
- 106 -
FIGURE 4
Steps with respect to the offering of

certain existing shares in MISC.
(1)
Pre-offering situation: Issued ordinary share capital of

M$ 100,000,000 (as of June 30, 1986).
(2)
Special issue of 25,000,000 shares of M$ 1 each to the Minister of

Finance
(Incorporated)
representing
the Central
Government,
capitalized from MISCs retained earnings and credited as fully paid
(no new proceeds).
(3)
Bonus issue 1:1 of 125,000,000 shares M$ 1 each to existing shareholders capitalized from retained earnings (no new proceeds).
(4)
Creation of a Special Share for the Central Government to hold.
(2), (3) and (4) were completed on December 4, 1986, and increased the
capital to M$ 250,000,000
(5)
Rights issue 1:1 of 250,000,000 new ordinary shares of M$ 1 each to

existing shareholders against payment of M$ 250,000,000.
Total
proceeds of M$ 247,000,000 (after deduction of share issue expense of
M$ 3,000,000) to be utilized to finance MISC's fleet expansion and
replacement and to provide additional working capital.
Resulting Situation
of (1) to (5):
Cancellation of certain liabilities of MISC
.Infusion of fresh funds into MISC

expansion and replacement of fleet
for
Five-fold increase in the number of issued

ordinary shares, in the hands of the same
shareholders
(with an increase in the
government's shareholding)
(6)
Concurrently with (5), offering of 84,985,000 shares owned by 11 major

shareholders to the Malaysian public at M$ 2.40 each, reducing the
Government holdings (both Central and State Governments) from 60.80%
to 48.60%.
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
To the extent that physical assets are in need of rehabilitation,

the question again is whether to do so prior to privatization or to leave
the task to the purchaser.
Detailed forecasts should be prepared in this
respect.
It is conceivable that physical rehabilitation may increase the
sales potential of the enterprise and permit the cost to be recovered, but
no example is known.
The proposed operating guidelines for the Asset
Privatization Trust in the Philippines provide that, as a general rule, the
rehabilitation of assets prior to disposition should be avoided so as not to
incur additional government exposure. The decision to sell the enterprise
in its present condition is difficult, as its potential value may not be
realized and the government may be criticized for disposing of national
assets at low prices. On the other hand, it could be criticized for engaging in expenditures that may never be recovered. In any event, additional
government investment prior to sale may not be realistic, given the financial constraints of a large number of governments interested in privatizing
their SOEs.
Nor may they be desirable, as potential investors may have
different views on how to rehabilitate the company.
Physical rehabilitation and modernization through privatization
occurs regularly. It frequently is financed through new private investment
in SOEs. Examples are provided on pages 27 and 42.
Changes with ResRect to Staffin2
The legal situation with respect to personnel of state-owned

enterprises (in terms of labor law and social security) needs careful
review.
Liquidation means laying-off personnel; privatization sometimes
means a drastic reduction in the work force as a precondition of sale (e.g.,
SEAT in Spain), even in the case of management contracts (industry experience indicates that employment reductions are often necessary).
The cost
and timing may depend in part on whether personnel are under civil service
or private labor laws (e.g., with respect to severance pay, etc.).
Even when no lay-offs are involved, some personnel questions may
arise as part of the readying process, as in the case of a change of legal
form from a public corporation to a joint stock company.
In such a case,
complex questions may arise with respect to the transfer of personnel from
civil service or quasi-civi:L service to private employment. In the case of
Jabatan Telecom Negara in Malaysia, when the public corporation was transformed into a joint stock company, the disposition of the existing pension
system was a major hurdle.
Turkish legislation on privatization provides
for the maintenance of entitlements in the State Retirement Fund. Because
of potential labor rigidities, a prospective purchaser may insist on staff
reductions prior to the acquisition.
108 -
In view of the importance of personnel questions, the matter is

more fully dealt with on pages 129 to 138 as part of wider employment issues
arising under privatization.
Ensuring Cooperation of Management
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.
It is indeed extremely important, when an SOE is to be privatized

as a going concern, that there be management commitment and responsibility
for the privatization transaction.
Management may be in favor or against privatization for many
different reasons.
In the Cote d'Ivoire when PALMINDUSTRIE was incorporated under the company laws t:oallow for partial privatization, the transformation was well received by management as it permitted the enterprise to
escape civil service salary alignment. The management of the Caribbean
Cement Company in Jamaica, recently privatized through public offering, was
strongly supporting Prime Minister Seaga's privatization program. This was
largely due to the hampering government's interference in the company's
operational and financial decisions.1 0 7
Management related actions yield much less clear conclusions than
other readying measures. They vary greatly. In few instances of direct or
private sale of shares will purchasers want to acquire the SOE "as is" and
the key question which arises is whether the government should take responsibility for management changes or should leave it to the purchaser. Prior
changes in management are more likely when the enterprise is being substantially restructured in view of a public share offering than is the case
with private sales, where the new owner will want to restructure management
to fit its needs.
3.
V'ALUATIONAND PRICING
Whether for the purpose of selling shares or assets, valuation

and the resulting pricing are sensitive and difficult matters even where
developed equity markets exist as shown, inter alia, by the recent experience of France and the United Kingdom. The French government's sale, among
others, of shares in the state-controlled Elf-Aquitaine has drawn criticism
from the opposition socialist:party because the opening price, set at 305
francs per share, rose to 339 francs shortly thereafter.
The "Conseil
d'Etat" has ruled, however, that the price as fixed was in keeping with the
financial interests of the state. On the other hand, while too low a price
106/ C. Pickering,
"The Mechanics
of Disposal,"
in D. Heald,
Privatizing Public Enterprises: Options and Dilemmas, op. cit.
ed.,
107! Roger Leeds, Privatizat:ion in Jamaica: The Caribbean Cement Company,

op. cit.
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
both on pricing and on other aspects of sale. It has also shown

that it is ready to experiment and innovate in the interests of
achieving successful privatizations at a fair price for the taxpayer and the investors. However, the effect of privatization on
the government's finances is incidental to the programme's main
purposes, which are to increase efficiency and to widen share
ownership to the benefit of the whole economy."
The Public Sector Divestment Committee in Singapore has recommended that the sale of shares not be rushed at the expense of satisfactory
prices.
Different economies will have different objectives, and for many
developing countries, particularly those seeking relief from budgetary
pressures, the financial effects will be paramount.
If less visible than in public offerings, the issue is at least
as difficult, and sometimes more so, in the case of a private sale of an
SOE (sale of shares or assets).
Only very rough guidelines can be set for SOE valuation. A value
can be determined by reference to recent earnings or future earnings potential, dividend paying capacity, adjusted value of its assets, or various
combinations of the above. Where liquidation of the enterprise is a possible alternative, the liquidation value may also be used. The practices of
using book values, assessing n,et asset values, calculating the government's
total investment, or discounting average maintainable (historical) profits
are usually not adequate. Other more flexible methodologies --particularly
discounted cash flow techniques -- could be envisaged, since these are
based on forecasts of future performance and expectations of future earnings and better capture the variety of different factors that valuation
should take into account. 1 09 In some cases, this approach may require
exceptions to current mandato.ry provisions or rules governing the issuance
or offering of securities.
In assuming the potential of enterprises, all
elements should be considered fully, e.g., companies and assets may occupy
attractive market niches, which are presently underutilized or neglected,
such as was the case of some British Rail subsidiaries. There are so many
different circumstances, that any delineation of the required measures for
valuation cannot be set. For some SOEs, the asset recording and valuation
process involved in their transformation into a commercial type corporation
will constitute the first step to establishing an enterprise value.
In a public offering, the net worth of a company will be taken as
a reference value but may not be determinant since the public as an investor is principally interested in the earning value of the shares and
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 -
possible capital gains.

When a private sale is envisaged, on the other
hand, the net worth may become a preponderant element.1 1 0
Some countries' mandatory rules on privatization (see page 90)
lay down detailed requirements on valuation.
In France, the value of the
enterprise or assets to be privatized must be determined by the Privatization Commission, which is composed of independent members; the valuation
has to be published, and is to be carried out in accordance with objective
methods consistently applied with respect to the sale of company assets.
The process should take into account, with proper weighting in each case,
the market value of securities, the value of the assets, the record of
earnings, the existence of subsidiaries and the prospects for performance.
The final offering price, determined by the Minister of Economy, Finance
and Privatization, may not be below the Commission's valuation.
Similar
requirements with interesting variations are contained in Senegal's Law on
Privatization and Tunisia's law on SOE restructuring. In the Philippines,
proposed guidelines would require that standard formulae be used to establish a range of values, including appraised value, replication cost,
capitalized earnings and other accepted methods.
Serious efforts must be
made to establish the realistic economic value of assets, especially those
that appear to be overpriced acquisitions or overdesigned plant investments.
On this basis, the Philippines' Asset Privatization Trust would be
required to work out mechanisms for determining a fair floor bid price or a
fair target bid price (in the Philippines, the rule will be to sell via
bidding procedures).
In general, countries need to develop a practical approach for
valuing enterprises or assets, with sufficient flexibility to permit the
establishment of a price that corresponds realistically to the level of
interest in the private sector. In most instances, the approach will use
several criteria with proper weighting. The mandatory procedures in France
and the Philippines illustrate this point.
With respect to pricing mechanisms, they depend on the type of
transaction envisaged.
Two methods have been used for public offerings.
One is to offer the shares at a fixed price, to be set before the offering.
The number of shares sold to each applying party is scaled down in proportion to total applications. The second is an offer by tender in which the
striking price represents the balance between tenders made at different
prices and the number of shares available, with all those who have tendered
above the striking price receiving shares at the striking price.
The merits of each approach depend on several factors. A fixed
price offering can result in an oversubscription that leads to accusations
that the government sold at too low a price. However, based on the United
Kingdom experience, where both methods have been used, the tender method
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 -
has the inherent risk of constituting an unattractive method to investors.

Particularly smaller investors are not encouraged by the greater complexity
and uncertainty of the tender method. The tender method is probably less
attractive if widespread share ownership is sought. Further, it does not
as easily permit the introduction of special incentives such as discounts
to encourage purchases by employees.
On the other hand, it may yield a
higher price, a significant advantage in the case of a small offer for
which a very large interest is expected.
The tender method may also be
appropriate when the market-clearing price is particularly difficult to
ascertain because of the uniqueness of the enterprise.1 1 1 In the case of
the privatization of Nippon Telegraph and Telephone, the price for an
initial block of shares was set through an auction, with further blocks of
shares offered at a set price. An initial block of 51 percent of the share
capital of Associated British Ports Holdings plc was sold at a fixed price,
while a further block of 48.5,percent was subsequently sold by tender at a
higher price. The difference in timing and the then strongly rising trends
in the capital markets render these results of such experiences somewhat
inconclusive.
Both the British privatization program and IRI's (Italy)
program of public offerings indicate that the fixed price offering is the
more commonly used method. I't is said that allowing investors some opportunity to make capital gains initially encourages investments in further
issues.112
As to private sales of shares or assets, one approach is competitive bidding or an auction, which leads to a price determination in line
Governments may, however,
with the enterprise's or assets' market value.
wish to set a floor price in advance of calling for bids. Several privatizations recently completed in West Africa, e.g., Guinea and Togo, involved
the establishment of new companies to which the government would sell or
otherwise transfer assets. The transfer price was essentially determined
by the company's profit potential.
In the Philippines, the determination
of what is an acceptable price for any particular asset will primarily be
111/ A general discussion on the respective merits of the two methods is

contained in David Heald, "Privatization:
Policies, Methods and
Procedures," op. cit. An assessment of the experience of the United
Kingdom with both methods can be found in B. Yamey and D. Stafford,
Report on the Experience of Privatization in Great Britain, op. cit.
112/ It should be noted that the criticism leveled at price setting is
usually a result of upsurging stock markets. Following "black Monday"
on October 19, 1987, in.- France, and the continuing decline in stock
prices, an investor who would have, on the day of offering acquired
shares within the minimum individual allotments (10 shares in SaintGobain, 4 in Paribas, 6 in Sogenal, etc.) would have spent FF 17,000,
whereas the value or his portfolio on November 4, 1987 would have been
a mere FF 17,004.50 (Le Monde, November 6, 1987).
- 114 -
based on what the earning capability of the asset is

along the P/E (price to earning) concept.11 3
--
i.e., it will be
Several factors may affect pricing. 1 1 4 In preparing for a

particular privatization, as thorough a review as possible is necessary to
identify the existence and impact of these factors.
One is potential
market response, a key determinant, in particular the level of investor
interest11? and availability of financial resources. The profit record is
another key determinant of the value of a company. Pricing has reportedly
been a very difficult issue in the privatization of the Caribbean Cement
Company in Jamaica, an SOE with a weak record of performance. It depended
largely on intricate market judgements. A price was finally set leading to
substantial
market response
to a public offering, even if it was
undersubscribed.
The extent to which investors perceive they can improve
on performance of the SOE is in many cases a major factor as well. Various
objectives of the government may affect the price, e.g., limitations on
foreign holdings or on given groups of purchasers.
If widespread share
ownership or employee ownership is targeted, discounts and other incentives
may lower the price.
There are cases where a government opted for an
employee buy-out to meet its objectives, even though a sale by competitive
bidding might have yielded a better price.
Social as well as political
objectives may be preponderant and there are instances of shares in SOEs
given to employees or to the public. The 1979 share give away of British
Columbia Resources Investment Corporation (BCRIC) in Canada solved quite a
number of problems, including the "we are asked to buy what we already own"
argument,
the possible
failure of the privatization
process,
the
interdependence of privatizing and raising capital, and the "sell out
113/ Doing business with the Asset Privatization Trust

Procedures in effect as of April 13, 1987.
--
Policies and
114/ See Giorgio Stefani, "Privatizing Public Enterprises in Italy:

The
Case of State Holdings," Annals of Public and Co-operative Economy,
Vol. 57, No. 3, 1986, on the Italian experience: "all factors causing
inefficiency or waste (such as excess personnel or obsolete plant)
will produce a corresponding reduction in asset value on purchase
unless public administrators are able to offer ancillary incentives
such as installment payments, low-interest loans (for the payment of
the purchase price) or a full order showing advantageous prices."
115/ A premium might be paid by a party with a specific interest (e.g., a
strategic market niche).
An analysis of the role of valuation and
price is made in a paper prepared for the World Bank by L.P. Jones, P.
Tandon and I. Vogelsang of Boston University, "The Ecomomics of
Divestiture: Ex Ante valuation and Ex Post Valuation Development
Research Department Discussion Paper,"April 1987.
- 115 -
to the rich" perception.11 6 Each Canadian citizen or applicant living in

British Columbia for one year could receive five free shares in BCRIC,
probably worth about $50 in tot:al at the time. At the same time, British
Columbians would be able to buy up to 5,000 shares. The perception by the
purchaser
of the impact of certain regulatory
mechanisms
(e.g.,
demonopolization of utilities) is another important factor. A number of
ongoing and completed privatization cases are public utilities.
In these
industries, many governments seek to achieve both wider competition and
transfer of ownership to the private sector, and this double objective is
usually best attained through tight regulations.
But these in turn
influence the price which the affected SOE can command.
As a further
indication of factors which influence pricing, in some instances which have
been observed in West Africa the value of the transactions is probably as
much in the market niche or possible exclusivity arrangements as in the
actual physical assets of the enterprise.
The general business environment will be an important price
determinant. If a crude price-earnings multiple is adopted as a method, a
low multiple of earnings may be the way in practice how an investor will
value a business if he perceives a high level of risk and requires his
money back in say two or three years.
In the final analysis, realistic market values are what will
normally set the price. In many cases, assets acquired at significant cost
may have little market value.
One problem is that, unless the original
acquisition was made by an administration no longer in place, it may be
politically difficult to admit loss on investments. At the same time, the
theory that the fair price is market-determined should not be applied
indiscriminately.
An improperly structured privatization might yield a
weak market response.
An SOE with potential but with an unattractive
record of performance may not yield its true value under a premature public
offering.
Invitations to bid on a private sale may not have adequately
targeted the market. Valuation or price setting ought to be carried out in
the full context of the detailed definition of optimum techniques in each
specific case. The pricing of a given SOE may also need to be carried out
in the full context of a broader privatization program and the government's
objectives. One of the lessons derived from the United Kingdom privatizations is that it is more important to have an aura of success than getting
the last penny for a given SOE -- this may indeed maximize the proceeds of
an overall program in the long term. The experience of several governments
yield the conclusion that, in view of the high cost of a failed offering,
it may be better to err on the side of too low a price than too high.
enterprise
The selection of the actual privatization technique for a given

may largely determine its value and price.
In privatizing
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.
DETERMINING FUTURE OWNERSHIP
This section analyzes techniques for determining the desirable

level of private ownership (partial vs. total privatization).
It also
examines issues related to the nature of private ownership (such as how to
achieve widespread distribution of ownership and how to restrict ownership
or controlling interests, important questions in many countries).
Partial vs. Total Privatization
Privatization through a transfer of ownership can take place to
varying degrees, generally depending on the government's objectives or
market conditions.
Governments usually retain partial ownership for
purposes of control, for instance, over "strategic" sectors, or when the
government's objective is to increase efficiency only, or when gradual
privatization is called for.
The specific reason for retaining partial
ownership largely dictates the best method for doing so.
117/ Based on information provided by Morgan Grenfell & Co. Ltd.
- 117 -
(a)
Ownership and control. The extent of ownership in a company is

normally the main determinant of operational control.
Whether
majority ownership is required or whether a lower level of
ownership may provide sufficient control depends on both the
provisions of the charter of the enterprise and the composition
of the remaining slhareholdings. The charter or articles of
association of a company may require a simple majority or a twothirds or some other majority for various decisions.
In some
cases, one-third or less of the shares of an enterprise may
provide a shareholder with a veto power.1 1 5
Moreover, where a
shareholder's small (say 20 percent) shareholding is balanced
against wide dispersion of the balance of the shares, chances are
that this minority shareholder is the most leveraged party. The
company's charter may also create different classes of shares.
When the government aims at maintaining partial ownership for
control of overall operations of the company, it will aim for
that level of ownership that affords the required voting power.11 6
Under the Brazilian decree on the process of privatization,
voting control may not be transferred in respect of certain
categories
of enterprises
(including activities
linked to
national security, state monopolies and basis economic or social
infrastructure or producing inputs of strategic importance).
Hence, a recent issue of convertible debentures by Vale do Rio
Doce and a new equity issue by Electrobras were conducted in such
a way that the government's position was reduced to the minimum
necessary to maintain absolute voting control.
In Spain, the
government publicly offered shares in four SOEs but retained 51
percent.
When it was decided in Chile to privatize the state
sugar mill IANSA, a target of 49 percent divestment was on
grounds, inter alia, of existing price supports for sugar.
If,
however, the government only wants a veto power over certain
events to protect the national interest (foreigners gaining
control, a particular investor/shareholder gaining a dominant
position, etc), a minority position or even a symbolic ownership
115/ Until the recent offering

of shares of Societ6 Nationale Elf
Aquitaine, the French government's participation (being held through
another SOE) was over two-thirds, giving its absolute control.
The
government has now reduced its participation to a simple majority
which gives the private sector a blocking minority.
The government
did, however, introduce a special share to prevent any one party
acquiring over 10 percent:without its specific approval.
116/ Even though partial privatization may obviously lead to instances
where the lines of control are not clear. E.g., in Italy it is unclear
whether IRI or the private sector now has control over such companies
as Madiobanca (owned 60% by the market, and by a control syndicate -20% IRI banks and 20% private sector holders) and TELIT.
- 118 -
of one share if special rights are attached to it (often called

the "golden share" as applied, inter alia, in France, Malaysia,
Senegal and the U.K., see Annex D) may be sufficient. To protect
the national interest in key sectors, the government would
usually establish a set of licenses and regulations for the
respective industries.
The type of control to be retained not only determines the level
of acceptable private ownership, but, naturally, also some of the
methods to be adopted.
Gambia's proposed strategy is that, in
the case of enterprises with state guarantees of outstanding
loans, the state should maintain at least a presence on the board
of directors to safeguard its investment.
(b)
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
117/ Financial Times Survey on Privatization, FT, September 16, 1987, p. 1.
119
28 percent of the shares offered (in Jamaica, public offerings

were not underwritten -- the government as vendor assumed all
risks of the sale). This was largely attributed to the poorer
record of the SOE, large financial costs in respect of recent
investments burdening it, and somewhat uncertain prospects. It
was believed that this situation was still more favorable than an
offering of only say 50 percent of the shares (in that case, the
offering would have been oversubscribed, possibly leading to
accusations
of a give-away).
In the case of British
Telecommunications, the government initially sold only a 50.2
percent interest, with the intention of selling additional shares
later.1 18
The government of Japan decided to sell half its 15.6
million shares in Nippon Telegraph and Telephone in slices of
1.95 million shares over the next four years (for strategic
reasons, the government will retain at least one-third of the
equity). When a state holding company such as IRI in Italy sells
shares through the stock exchange while still retaining a
majority or minority position, the intent may be simply to raise
capital within the group.
Partial divestiture may also be the
best alternative where total divestiture might unnecessarily
polarize public opinion. For public offerings, market conditions
are the main determinant of the size of a divestiture.
A
downturn in the stock market in October-November 1987 led the
French government (intent on carrying out 100% offerings) to
postpone the next slice of their program whereas other states may
find it easier to pursue their programs through the selling of
portions only of the enterprises capital through either secondary
sales or primary issues.
Partial privatization usually results in a joint state-private
companyll9 (or it may be the further privatization of an already joint
With mixed state-private enterprises, the nature
state-private company).
of continued government involvement is of concern to the private party,
especially in terms of the retention of rights beyond those that are
normally attached to shareholding (and other than regulatory in certain
instances).
Private investors fear that a government may continue to
pursue non-commercial goals for the enterprise or simply interfere with the
Often, continuing government
operations and management of the company.
shareholdings is viewed unfavorably, although most potential investors will
accept up to a certain level of government shareholding, provided it is
118/ On the "hybrid" character of this and other British privatizations,

see David Heald,
"Will the
and the implication
of control,
Privatization of Public Enterprises Solve the Problem of Control?,"
Public Administration, 1985, Vol. 63, No. 1, pp. 12-17.
!L9/ Or "hybrid company", see D. Steel, "Government and the New Hybrids: A
Trail of Unanswered Questions", Fiscal Studies, 5:1, February 1984,
pp. 86 - 97.
- 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).
120/ The British Telecom offering prospectus quotes a statement of the

Secretary of State for Trade and Industry which reads in part as
follows: "HM Government does not intend to use its rights as an
ordinary shareholder to intervene in the commercial decisions of
British Telecom.
It does not expect to vote its shareholding on
resolutions moved at General Meetings, although it retains the power
to do so. The Government appointed Directors have no special powers
and their duties, like those of all Directors, are to the company as a
whole." A distancing provision appears in the offering prospectus of
July 6, 1987, for a new share issue of Saskatchewan Oil and Gas
Corporation (bringing the Province of Saskatchewan's shareholdings
down from 58 percent of the voting shares to 46 percent).
- 121 -
Widespread Distribution of Ownership

The promotion of wider share ownership among both employees and
the general public has been a major objective of the privatization programs
of several countries. As stated by the United Kingdom Treasury:
"This is part of the Government's policy of extending the
ownership of wealth more widely in the economy, giving people a direct
stake in the success of British industry, and removing the old
distinctions between
"owners" and "workers."
The privatization
programme has contributed much to the increase in the number of
private investors in the United Kingdom; between 1979 and 1985 the
number of shareholders probably doubled to at least three million and
market research conducted in late 1985 suggests that the actual figure
could be much higher.
(British Telecom alone attracted over two
million private investors, including one million who had never owned
shares before.)
And over eighty percent of employees have taken up
shares in their companies on privatization 121
*"
The United Kingdom trebled the number of shareholders through

privatizations,
while France's goal was to quintuple it (and spread
ownership so widely that companies cannot easily be renationalized). Beyond
increased share ownership, several countries have also aimed to develop
their capital markets through privatization.
Further, in parallel with public offerings, countries have
implemented mechanisms to avoid economic concentration of holdings, as
explained on page 123 below.
Governments
have deployed various techniques to encourage
widespread share ownership.
Several are relevant to countries intent on
privatizing through public ofi-erings. They include phasing (so as not to
crowd the market), allotment techniques, incentives to purchase and ad hoc
distribution mechanisms.
Phasing is equivalent to gradual privatization.
Carefully weighted allotments have been used in recent privatizations to
give priority
to employees
and small investors.
The British Gas
privatization is a case in hand. The planned initial allotment is for 40
percent of the offering to go to individual investors, 40 percent to
British institutions and 20 percent to be offered abroad.
However, if
applications
from individual investors reach twice their 40 percent
allotment, shares from the allotments to institutions and foreign investors
will be transferred to them, up to 64 percent of the total. Restrictions
on individual shareholdings, as described in the following section, are
121/ "Privatization in the lJnited Kingdom,"

Treasury, London, 1986.
Background
Briefing,
H.M.
- 122 -
themselves a method of allotment.122

As far as maintaining those initial
allotments is concerned, incentives have been offered, such as loyalty
bonuses for investors holding on to initial shareholdings for a minimum
period of time (used by France with Saint-Gobain and the United Kingdom
with British Gas).
In Chile, loan advantages are eliminated if the buyer
sells the shares to a third investor.
The sales promotion techniques
applied will largely influence the attainment of allotment targets.
Incentives to purchase used in recent public offerings include
pricing at a discount, the remittance of vouchers against the price of
utility bills (e.g., gas vouchers to purchasers of shares of British Gas),
low minimum share investment, and payments in installments (on the latter,
see page 144 on Financing of Privatization).
The "Popular Capitalism"
mechanisms applied in Chile are an example of a comprehensive incentive
package.
Distribution
mechanisms have proven to be a key element in
achieving widespread share ownership, not only where developed capital
markets
and intermediaries
exist, but also, and perhaps even more
importantly, where these exist to a more limited degree. The NCB offering
in Jamaica met with an unexpectedly high response, probably because the
network for share distribution included 400 outlets for a population of
only two million people (branches of local banks and post offices were used
as collection and distribution points).1 2 3
Restrictions on Ownership Composition. Controlling Interests12 4 or Foreign
Ownership
A large number of governments
have restricted
individual
shareholdings
in privatized
enterprises to limit the potential for
undesirable controlling interests or private concentration of economic
power, both domestic and foreign. As described earlier, a public offering
with well-devised allotment procedures is a main vehicle for achieving
widespread shareholdings. This section reviews the mechanisms used by some
governments, which can be divided into the following groups:
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 -
Limitations on Individual Shareholdings
Options with respect to Foreign Ownership
Other
Limitations on Individual Shareholdings

It is necessary to differentiate between the sale of shares to
the public and a sale of shares or assets to a single purchaser or a group
of purchasers.
In the latter case, the government selling the SOE or its
assets selects the purchasers and may decide not to proceed with the
transaction if certain prequalification criteria are not met. That is, the
prospective purchasers are known in advance. When inviting the offers, the
government or owner will indicate any restrictions to them. Restrictions
may, in theory, also be placed on the power of the new private owner or
shareholder to dispose of its interest (but it may not always be possible
to limit the transferability of shares, nor would purchasers, in all
likelihood, agree to such restrictions).
In the case of a public offering of shares, the purchasers are
not known in advance, and the government may want to avoid certain patterns
of ownership for general policy reasons or because of the characteristics
of the enterprise (e.g., to avoid monopoly control in the case of public
utilities).125
The techniquaesdiscussed below to limit shareholdings are,
therefore, of particular relevance to public offerings.
A country's general legislation governing investmentsl2 6 may, as
in the case of Nigeria (Nigerian Enterprise Promotion Act of 1977),
restrict
individual
shareholdings.
In many cases, however,
such
limitations prove counterproductive and cumbersome, especially if they
apply to non-strategic enterprises for which the government wants the
flexibility to sell larger blocks of shares. However, legislation limiting
shareholding may be appropriate to a number of situations, which is why
some countries have introduced such limitations under special privatization
legislation. In carrying out its fourth privatization program in 1986,127
the government of Chile determined that diffusion of ownership was
125/ Of course, economic concentration may also be the result of the

limited availability
of capital in relation to the volume of
transactions. See, for instance, Chile in Volume Two.
126/ Antitrust legislation is not covered here; it should be kept in mind,
however, that the credibility of anti-trust
(as well as other
regulatory) mechanisms
is intertwined with the desirability of
privatization.
127/ See Volume Two: Chile.
- 124 -
essential, and it enacted special legislation for specific groups of

enterprises providing that no investor could control more than 23 percent;
more than 50 percent of the capital should be held by shareholders who own
directly or indirectly no more than 10 percent; and at least 15 percent
should be owned by 100 or more independent investors.
The French privatization law12 8
provides that, in the case of a
public offering, the Minister in charge of Economy may rule that no party
may acquire more than 5 percent of the shares offered. Further, if, for
certain enterprises, the national interest so requires, a "special share"
(see Annex D) may empower the Minister in charge of Economy to retain
specific approval powers for shareholdings by any party or groups of
parties exceeding 10 percent of the capital of an enterprise (or 5 percent
in limited cases).
The law sanctions any shareholdings in excess of
specified limits by providing, first, that voting rights may then not be
exercised and, second, that excess shares must be surrendered according to
a specified procedure for forced disposition.
In Senegal, the Law on
Privatization mandates the Minister of State Participations to specify in
each case the maximum number of shares allowable in the hands of one buyer
or a group of buyers.
Restrictions may be incorporated in the specific legislation
authorizing the privatization of a given enterprise or in the articles of
association of the company to be privatized.
In the United Kingdom,
limitations on shareholdings were introduced, inter alia, in the articles
of association of British Telecom and British Gas (public offerings) and
Sealink (private sale), as part of the readying process.
In the case of
British Telecom, any party with an interest in voting shares of 5 percent
or more of the total must notify the company of that interest.
The
directors of the company should thus be able to ascertain if the limit of
15 percent or more has been exceeded. Relating enforcement mechanisms are
also provided for.1 2 9
In the case of the privatization of the Canada
Development
Corporation
(CDC),1 3 0 limits were placed in the charter
documents as to the permissible level of share ownership by any one
shareholder or group of shareholders.
Part of the readying for the
privatization
of National
Commercial
Bank
(NCB)
in Jamaica
128/ Law No. 86-912 of August 6, 1987, Articles 9 and 10.

129/ Summaries of such provisions on limitations of shareholdings can be
found in the respective offering prospectuses, e.g., the British
Telecom Offering Prospectus.
Such measures must normally also be
accompanied by the introduction of special securities (golden share)
to ensure maintenance of these provisions in the charters of the
enterprises (see Annex D).
130/ See Volume Two: Canada.
- 125 -
was the incorporation of provisions in the new articles of association

limiting to 7.5 percent of thes total voting shares the number of shares in
which any single shareholder cr group of shareholders acting in concert can
have an interest.
A similar 10 percent limitation was introduced with
respect to Malaysian Airline System Bhd. (MAS). The detailed mechanisms
are similar to those applied in the above-mentioned privatization in the
United Kingdom.1 3 1
In privatizing all nationwide commercial banks, Korea restricted
maximum
equity holdings.
In several Asian and African countries,
governments are faced with the need to take into account the distribution
of ownership among ethnic groups. A substantial number of shares of MISC
in Malaysia (described on page 105) were reserved for and preplaced with
Bumiputera institutions and not subject to the public offering.
In the
combined offer for sale and offer for subscription of MAS, the entire offer
for sale of existing shares was reserved for government approved Bumiputera
institutions.132
The main disadvantage of limiting single shareholders or blocks
of shareholders to a few percent of the shares is that it prevents the
concentration of ownership that enables shareholders to pressure management
to improve its performance. To turn a company around, some core group may
need to have and to use a large if not controlling stake in the enterprise.
While perhaps not a serious issue with well-managed firms with a strong
technical partner, it is of concern where the firms to be privatized are
weak or under-performing, often the case in developing countries.
Options with Respect to Foreign Ownership
A number of governments have allowed foreigners to acquire
interests in their SOEs.
Some have done so with limitations in general
instruments such as general investment laws or privatization laws, quite a
number without limitations, and some with limitations only for specific
Other countries have limited foreign
enterprises or certain sectors.
participation as a general policy (Brazil's mandatory privatization rules
exclude foreign participation if voting control is to be transferred) or
with respect to specific enterprises (Jamaica). Yet other countries, such
as Senegal, have provided for general priorities to local investors but
131/ and are also provided for in the offering prospectus.

132/ The
the
the
the
Unit Trust Scheme (Launched on April 20, 1981), aims in part, at

restructuring of Malaysian society so that a 30 percent share of
capital of private and public limited companies will be owned by
Bumiputera community. See Volume Two: Malaysia.
- 126 -
permit, within controllable limits, foreign participation.

The record
shows that many countries are quite successful at divesting to local
investors; C6te d'Ivoire has reportedly transferred about half of its 28
privatized SOEs to Ivorian interests. In Guinea, a country without a
capital market, several companies were either sold outright (SOCOMER, a
fishing enterprise) to a local private company, or local investors acquired
substantial interests.
Policy Restrictions on Foreign Participation13 3 Some countries
restrict foreign investment in certain sectors, either on grounds of the
political
sensitivity
of certain industries for reasons of national
interest, or to reserve for local enterprises those industries with
relatively simple technical and financial requirements (e.g., retail and
wholesale trade).
Nigeria has issued a list of industries in which
foreigners may participate and to what degree, which varies according to
the capital and technological requirements. A number of countries such as
Mexico and the Philippines and most centrally planned economies restrict
foreign investors to minority equity participation
without specific
government approvals.
France's privatization law of August 1986 limits
Some countries
foreign participation for reasons of national interest.
have declared a preference for local purchasers, although a primary
criterion has been that purchasers be able to ensure the long-term
viability of the enterprise (as in Spain and Italy, where there is heavy
foreign participation).
Policy toward foreign investment in privatization depends to a
large extent on the basic objectives of the government with respect to
privatization. The problem in many economies will be that there are only a
small number of corporate investors with the financial resources and
management expertise required to acquire larger SOEs. It appears that, in
terms of foreign participation, a large number of governments have followed
very practical approaches, as illustrated below.
They may want to secure
the technological expertise and management capacity of foreign partners and
investors to help the recovery of particular companies, or to enhance the
flow of foreign investment which, in some countries, has fallen to very low
levels.
However, very low limits on the level of foreign holdings would
deter foreign investors. Relaxation of the rules for their participation,
particularly allowing them to take a significant minority interest, is
likely to be a precondition of their involvement.
If foreign buyers are excluded, the result may be a lower price
because of less competition, as well as foregone access to market know-how,
technology, and the like. In many countries that have virtually no capital
133/ For a country-by-country description, see Foreign Private Investment

in Developing Countries, IMF Occasional Paper 33 (Washington, D.C.,
1985) Appendix II: Restrictions and Regulations Concerning Foreign
Investment in the 25 Major Developing Country Borrowers.
- 127
markets, foreign money can be an important resource for privatization.

However, the belief that countries with no developed capital markets have
to divest to foreigners only could be partly dispelled by recent examples
described on page 142. In general, the total exclusion of foreigners may
be unproductive, although all the gains and costs need to be weighed.
In
particular, decisions on foreign participation may have a very heavy
political content, and what makes business sense may simply not be feasible
politically. A strong political debate arose when the Canadian government
proposed transferring de Havilland Aircraft of Canada, Ltd. to the Boeing
Company of the United States.
In the end, Canada sold all the shares to
Boeing because it felt that Boeing's technology, financial and marketing
strengths gave de Havilland the best chance of a commercial success.
A
balancing of foreign and local investment is the best approach to this
issue.
Implementing
the Restrictions. Similarly to restrictions on
individual
ownership
or shareholdings,
restrictions
on foreign
participation will mostly be addressed differently depending on whether the
privatization is a public offering or a private sale.
There may, of
course, be all encompassing restrictions as well.
As to general provisions, a number of countries have instituted
general limitations on foreign investment. Others have done so in general
privatization legislation.13
Originally, Malaysia limited foreigners to a
30 percent stake under the New Economic Policy (NEP). Recently, however,
it has relaxed its limitation on foreign equity investment considerably,
and investors now can have a majority (or more) share if a company is
export-oriented,
involves higher technology and does not involve the
processing of non-renewable resources.
This general relaxation of the
foreign
investment
rules is expected
to benefit
the government's
privatization program.
In France, the privatization law sets a limit on
foreign investment of 20 percent which can be lowered if national interest
requires.
Senegal's law on Privatization requires the Minister of State
Portfolio to specify for each enterprise the proportion of shares to be
transferred in priority to Senegalese buyers. The shares are then offered
to the local market for a specified period.
Articles of association of enterprises to be privatized may
contain certain specific restrictions as well. The articles of association
of MISC in Malaysia, whose privatization is discussed elsewhere in this
report, contain provisions giving the right to directors to refuse to
register any transfer of shares which may result in foreign persons having
134/ The limitations can be applied to the level of participation by

individual investors, although generally they apply to foreign
investment in a given company in the aggregate.
- 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 -
5. EMPLOYMENT ISSUES AND EMPLOYEE PARTICIPATION

The restructuring that many accompany privatization can result in
retrenchment, and perhaps unemployment, or a new owner may reduce the work
force in the short term in order to turn the company around.
In certain
cases, the single most important issue or obstacle to divestiture is the
impact on employment. Labor commonly opposes privatization because of the
potential effect on jobs. Privatization can be extremely difficult unless
ways are designed to counter these situations.
It should be noted
generally that the employment issue often is a latent one with SOEs, which
is not brought about by, but rather needs resolution under, privatization.
Indeed, for many SOEs it may not be possible to attract private equity
capital if excess employment issues are not resolved. This section reviews
the issue of unemployment
resulting from privatization,
along with
questions related to the transfer of employees from state to private sector
labor regimes.
Addressed first are the instances in which privatization
results in unemployment or ot:heremployment-related difficulties. Reviewed
next are ways to minimize the negative effects on employment.
Employment-Related Difficulties
The type of privatization determines the range of employment
problems likely to arise.
In the sale of shares in part or in whole,
employment contracts do not necessarily change, since the enterprise is
transferred as a going concern. However, enterprise restructuring prior to
The sale of assets
a sale of shares may, as noted, affect employment.
usually involves a major transformation (and possibly liquidation) of the
business that may involve termination and possible reemployment by the
The privatization of
purchaser (or transfer of the employment contract).
Japanese National Railways involves the gradual laying-off of 92,000
employees (almost one-third of the work force); the SEAT privatization in
Spain likewise involved substantial employment issues.
Privatization does not necessarily involve severe employment
issues.1 3 6
For instance, while experience in Canada indicates that there
can be some job losses when a company is privatized, some privatizations
have increased the need for new employees.
This was the case with the
Canadian government's sale of de Havilland Aircraft of Canada, Ltd. to the
Boeing Company. 1 3 7 The British Telecom privatization did not, per se,
136/
In comparison with job losses in manufacturing in 1979-1981 and

employment reduction in still-nationalized steel and coal enterprises,
U.K. privatization have not been associated with heavy job loss. Nor
have the sales of French SOEs.
137/ Minister of State (Privatization)

Regulatory Affairs, Canada.
and Minister
responsible
for
130 -
result in substantial lay-offs, but significant steps were still taken to

deal ahead of time with the concerns of employees (see below). In fact, if
the SOE to be privatized is in a growing industry, employment in the future
may be enhanced by the privatization. Jaguar in the United Kingdom created
two thousand additional jobs after privatization. British Airways reduced
its staff from approximately 58,000 to approximately 38,000 as part of the
readying process for privatization and soon thereafter increased it to
approximately 42,000.
In the case of British Telecom, an industry that
involves rapid technological
change, a slight gradual reduction
in
employment would be necessary, irrespective of ownership.
On the other
hand, in the case of inefficient enterprises whose work force has grown
well out of proportion with needs and constitutes a significant burden,
government divestiture, whether through liquidation or privatization, will
result in a reduction in employment.
Employment will be a much bigger
problem in several developing countries than they have been under, e.g.,
U.K. or French privatization. Fears of unemployment are leading Sri Lanka
to pace its privatization slowly. This situation has been observed by the
World Bank in many instances in several West African countries where it has
been asked to assist in rationalizing SOEs. It is mostly at the readying
stage that overstaffing needs to be addressed, since investors may avoid
enterprises with excessive work forces because of the difficulty of
addressing
labor issues after privatization.
However, there may be
instances where the excess employment issues are just left to the buyer to
handle, like in the case of the Compagnie Gen6rale de Constructions
Telephoniques (CGCT), a sale of assets. Various regulations required the
initial absorbtion of all personnel by the party acquiring the assets.1 3 8
Substantial layoffs of about one-fourth of the work force subsequently took
place.
Employment issues also arise under management contracts at SOEs
where overstaffing is a problem.
In one case, a manager under a Jamaican
contract required, as a precondition, that the owner effect a plan to sever
personnel in excess of those required.1 39
Other problems connected with
personnel, staffing policies and the right to hire and fire may become
unduly difficult.
Even in the case of retained SOEs, current economic policy in
many countries no longer supports chronic overstaffing or guaranteed
employment on grounds of efficiency.
In other works, the perceived
negative employment effects or privatization would undoubtedly occur in any
event as part of restructuring aimed at greater efficiency.
In some
countries, SOE reform per se has generated as much labor opposition as has
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 -
privatization. For governments that can no longer support and inefficient

SOE, privatization may be a way to avoid winding it up and liquidating it,
in which case it is a solution to rather than a cause of employment
problems.
Even where there is no probable or significant reduction in
employment, the employees of an SOE may still oppose the privatization if
they perceive that less employment security would result under private
ownership, or if they would lose civil service or quasi-civil service
advantages, benefits and the 'Like. As many developing countries do not
possess the income maintenance system of developed countries, termination
from (just as recruitment to) public employment tends to become very
politicised. Pension benefits are a major issue as well, as illustrated by
the privatization of Jabatan Telekom Negara in Malaysia and British Airways
in the United Kingdom.
For example, employee attitudes are strongly
influenced by whether index-based pensions are to be maintained. It must
be noted, however, that a switch from civil service to private employment
is not always negatively perceived.
In C6te d'Ivoire, the transformation
of Palmindustrie into a Societe d'Economie Mixte (mixed state-private
company) has been well receive-dby management as it permitted the company
to escape the civil service salaries alignment.
Experience seems to demonstrate that in many circumstances it is
absolutely essential to address employee concern at the earliest time of
initiating and implementing a privatization program. Several governments,
including Morocco and the Province of British Columbia in Canada, have
carefully presented the issues in initial announcements (see page 76) on
privatization.
The weight placed on personnel factors will logically
determine the degree of employee confidence in the privatization process.1 4 0
Remedies to Negative Employment Effects
With respect to remedies to negative employment effects, there
are many options, a few of which are discussed below. Again, circumstances
will dictate which approach or combination of measures is best.
Productive Dialogue. Productive dialogue with workers, workers'
associations or unions addresses the merits and rationale of privatization.
Measures to lessen the adverse consequences on employees should be widely
publicized.
It should also be explained that under any circumstances,
is no guarantee
of continued
government
ownership
of enterprises
employment.
In recent years, some SOEs have, in fact, reduced their
140/ Specific experiences and possible alternative responses have been

analyzed in a report "Privatization and Employment Policy" for the
U.S. Agency
for International
Development
by the Hay Group,
Washington, D.C., February 1987.
- 132 employment substantially (e.g., Canadian National Railways). The long-term

benefits of privatization should also be emphasized (particularly to trade
unions), such as the possibilities for sustained or expanded employment as
the private sector grows.
Without reform, there is a risk that the
enterprises would have to be closed at a later date.
Workers are
frightened by the privatization process, as they do not understand it.
Management must make all necessary efforts to speak to them and alleviate
unjustified fears. Even where employment was not a major issue, as in the
case of the British Telecom privatization, the company still went to
substantial lengths to try and alleviate employee fears and address union
concerns.
This type of dialogue is a fortiori even more important where
severe employment problems are expected to arise.
In some cases, employees can become supportive of privatization
schemes.
If an ailing SOE with uncertain employment prospects is to be
restructured and then privatized through a capital increase (i.e., a
primary issue to new investors) as a first step in keeping the SOE afloat,
employees may see the process of justified and desirable because it
ultimately creates additional job security.
Residual government-held
equity may then be transferred to the private sector at a later stage with
little resistance or with support from the employees.
Employee Participation in Ownership.
Specific measures can be
taken at the enterprise level to provide employees with incentives to
support restructuring or privatization (these measures in turn lessen union
concerns).
One measure used in a number of privatizations
is the
reservation of shares for employee participation, with employees encouraged
to participate.
This was done for public offerings in Malaysia. As part
of the privatization plans for several British companies, the government
gave each employee a number of free shares, offered two shares for every
one share employees bought outright, and gave them preferential allotments
for the balance of shares. In the case of British Telecom, 96 percent of
eligible employees applied for and were allotted shares.
Ninety-four
percent of British Airways' employees are shareholders in the privatized
company (which also has a new profit-sharing plan for employees). Similar
schemes have been used in all privatizations in France through public
offering: 10 percent of the offerings were reserved for employees, who can
purchase the shares at a 5 percent discount (or 20 percent if they hold the
shares for two years).
Canada similarly encourages employee share
ownership programs. In the privatization of Teleglobe Canada, a condition
of the sale was the setting up of an employee share plan (approximately 5
percent of the shares were to be offered to employees at a 10 percent
discount with the benefit of interest free loans). In the case of Canada
Fishery Products International Ltd., employees were given about 4 percent
of the shares.
The recently completed privatizations of the NCB and the
Caribbean Cement Company (CCC) in Jamaica relied partly on a sophisticated
employee share scheme (see Figure 5).
As observed by the financial
advisers in this transaction: "It was devised drawing on elements of the
United Kingdom experiences but giving access to employees to buy for
- 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
141/ J. Redwood and 0. Letwin, op. cit.

142/ Assistance consists, inter alia, of up to one week's consulting time
from a private firm to help a group of employees affected by
privatization to develop a business proposal.
143/ See page 33 on management/employee buy-outs.
- 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
50, being 25 free

and 25 purchased
1 Free for each

share purchased
at offer price
850 DiscountedShares 50
10% discount on the

offer price
850 Priority Shares
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 -
The Management/Employee Buy-out. Employee acquisition are often

regarded as a restructuring measure to avoid employee layoffs. Certainly,
this option leaves the work force more inclined to agree to restructuring
measures as owners than they would have as employees, one reason buy-outs
may succeed where other methods prove difficult. (See pages 29 to 34 for a
review of the techniques for employee/worker acquisition of SOEs.)
Lessening the Adverse Conseguences on Employees. In all cases,
country-wide measures to encourage employment may be considered the most
effective palliative to negative employment consequences of privatization.
They are not, however, within the scope of this report. Retrenchment may
necessitate specific compensatory measures that entail considerable costs
to the government and/or SOE.
Such measures include severance pay and
bonuses for employees who voluntarily resign.
Proceeds from initial
payments made to the government of Sri Lanka on account of the sale of two
tile factories were applied to severance payments due to layed-off
personnel. For the purpose of facing such and other costs, a special fund
is being set up in Mali. Similarly, a fund for financing retrenchment was
set up in Sudan. Reduction through attrition, early retirement and other
common employment
reduction measures can also be used to ease the
transition. Basic welfare concerns and the need to deflect possible labor
unrest call for the establishment of a support system for displaced workers
and public officials.
In some instances, governments are considered
applying proceeds of privatization to retraining. Other measures include:
*
Government absorption of employees.

Out of a total workforce of 559 in Tunisia's Fluobar company (referred to on
page 27) the government, having agreed with institutional
investors on the number of surplus jobs (150), was expected
to assume the cost of the wages of these workers while
trying to find alternative employment for them elsewhere.
In most of the recent privatizations of industrial SOEs in
Guinea, the government retained in the civil service, as a
transitional rneasure,the employees of the dissolved SOE who
were not reemployed by the new private company.1 4 4
Such a
measure
would
nevertheless
be regarded
as a costly
palliative.
Special payments to emplovees retiring voluntarily or laidoff. British Airways established such a program as part of
its readying for privatization.
Severance packages were
offered on a voluntary basis and approximately
22,000
employees took them (and reportedly, largely used them to
set themselves up in small businesses; British Coal is
144/ A program has been developed, with French bilateral assistance, to

retrain public sector employees and to support financially and
technically those who elect, or have to, leave public employment.
136
reportedly also helping excess employees set themselves up

independently).
Payments to laid-off employees have varied from the minimum
legally required severance pay to more generous ad hoc
compensation.
Adjustments to pension benefits.
In the case of British
Airways, index linked pensions actually had to be bought out
as part of the conversion from public service to private
employment. The Turkish privatization law14 5 provides that
personnel of SOEs to be privatized may, if they wish, be
kept under the State Retirement Fund.
In Canada, where
Crown Corporation employees are members of the Public
Service Superannuation Plan, the government requires the new
owner to implement a new pension plan at least as generous
as the norm for the industry in which the new company
operates.146
Obtaining a commitment by the private purchaser to maintain
employment. This was done in the case of Bangladesh's jute
mills.
In the case of two matchmaking
industries in
Bangladesh, the purchaser reportedly agreed not to lay off
workers for two years so that attrition could play a key
role.
Further, excess equipment could be sold only if the
acquiring
party agreed to take related operating and
maintenance personnel. The tender documents for the sale of
British Rail Investments Limited contained provisions
regarding staffing.
The invitation to tender under the
offer for sale by public tender for twenty-one hotels
required
a purchaser
to take over the contracts
of
employment of each of the employees of the hotels.
In
addition, a purchaser was required to provide pension rights
in respect of the future service of employees under overall
not less favorable terms.1 4 7
These provisions reportedly
substantially allayed the fears of trade unions.
However,
the introduction of conditions in respect of employment may
render certain transactions extremely difficult to carry
through. A major address by H.M. the King of Morocco on
April 8, 1988, initiating a large scale privatization
145/ Law No. 3291 of May 28, 1986.

146/ Minister of State (Privatization)
Regulatory Affairs, Canada.
and
Minister
responsible
for
147/ Such requirements were without prejudice to a purchaser's obligation

to indemnify the vendor against any redundancy or unfair dismissal
claim arising out of the sale.
- 137 -
program specified that protective measures in respect of

employment
should
include
the postponement
of some
transactions
and requirements
for buyers to maintain
employment in the short term. The "Cahier des Charges" for
sale of enterprises or assets in Tunisia routinely include a
requirement for bidders to commit themselves to take all
personnel; in practice negotiations have in at least one
case led to an agreement for absorption of about 80% of
workers, with the vendor, a holding company, absorbing the
remainder in other subsidiaries.
As another example of addressing employee concerns, the
negotiations for the acquisition of the Urban Transportation
Development Corporation Ltd. from the government of Ontario
focussed to a large extent on employment levels and the
retention of two specific manufacturing facilities.
Other
examples of this are certain privatizations of RUMASA group
companies and t:he sale by the Italian holding ENI of the
Lanerossi textiLe company.
Only partial solutions have been found to the very difficult
problem of redeployment of redundant staff.
Several privatizations have
been handled without specific arrangements.
Dissolved SOEs have simply
laid-off all personnel, with legally required severance pay, leaving it up
to a reconstituted new enterprise (acquiring the asset of the former) to
re-employ all or part of the work force. Job retraining can offset some of
the dislocation of labor reductions, but the experience with these programs
is inconclusive.
The more effective approach appears to be direct
incentives to existing and potential employers in the private sector and
the provision of adequate redundancy settlements directly to employees.
The employee then has a safety net while attempting to find another job of
An information network and access to
even to start a small business.
counselling
for laid-off
employees
are also vital.
The parallel
development of business advisory services and credit facilities linked to
enterprise restructuringl4 8 or privatization programs have potential to
enhance the mobility of laid-off employees.
Recent initiatives in
developing countries like t:he Bureau d'Assistance a la Reconversion
d'Agents de la Fonction Publique in Guinea should be reviewed shortly to
assess their results.
It should be borne :Lnmind that, while purchasers may be willing
to try to lessen the employment effects of privatization, they generally
want a reduced purchase price as the quid pro quo. However, to the extent
that a purchaser's proposed handling of the employment problems helps solve
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 -
certain critical issues, the foregone proceeds may be sound investment by

the government. Greater reliance on the purchaser and/or privatizedSOE to
help solve the employment difficulties can be envisaged.1 4 Incentives (tax
or otherwise) to the SOE to absorb part of the cost might be appropriate.
6.
COSTS OF PRIVATIZATION
This section analyzes the elements that have to be taken into

account in assessing or establishing the cost of privatization.15 0
It is
advisable for governments to carefully estimate the costs of different
scenarios before deciding what course of action to follow. There further
ought to be an effort at reporting a posteriori the actual costs of
individual transactions.
Reviewed first is the cost of the measures
necessary to carry out a privatization transaction.
Next, the possible
residual cost of privatization
are discussed, such as any continued
budgetary burden related to liabilities that remain after privatization.151
149/ Under the sale of trucking and distribution services by Canadian

National Railways, Route Canada, the purchaser, and CN worked together
to minimize any adverse impact of the sale of employees through early
retirement,
relocation,
financial
assistance
and placement in
alternative jobs. See Privatizations to Date, "Information Kit" by
Minister of State (Privatization) and Minister for Regulatory Affairs,
Ottawa.
150/ It should be noted that several of the cost items referred to in this
section may also apply in the case of the liquidation of an SOE.
151/ Not addressed here is the inherent cost to the government of accepting
a lower sale price so that the transactions will go through (e.g.,
opting for an employee buy-out when competitive bidding would have
yielded a better price, or setting a low price to achieve a wide
distribution of shares). This question was addressed on page 109,
dealing with valuation and pricing.
- 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.
-
Togo was left with substantial residual liabilities under

suppliers' credits for the acquisition of its steel mill
leased
to a private
operator,
Soci6te Togolaise
de
Siddrurgie. The price agreed upon by Togo for the sale of
textile plants to Pen Africa corresponds to a fraction of
their cost. In many similar transactions, governments will
continue
to service
guaranteed
loans on account
of
facilities they no longer own.
The terms of Malaysia's privatization of the container

terminal at Port Kelang permitted the relating development
loans to be paid off.
Two further observations need to be made.

One relates to the
major difference between the sale of shares (where the purchaser acquires
asset and liabilities) and a sale of assets (where the purchaser generally
does not take over the liabilities). In the latter instance, the purchase
price may or may not cover the liabilities, and the state may or may not
retire the liabilities from the proceeds of the sale. The second relates
to the residual costs of privatization (such as continuing liabilities). A
large residual does not necessarily mean that a transaction is not
financially beneficial because it may still be less costly to sell the SOE
- 141 -
than to retain it.

It may, however, create substantial problems in that
the budgetary cost must then be recognized.
7.
RESOURCE MOBILIZATION: FINANCING PRIVATIZATION
This last section reports on some of the techniques which can be

observed as increasing or having the potential to increase the flow of
private resources into privatization.
It reviews actions taken to
compensate for the weaknesses of some local financial markets. It reports
on the extent of the use of payment terms and direct borrowing as a means
of financing privatization ancdthe very few instances to date in which debt
equity swaps may have been instrumental in facilitating privatization
transactions.
Various additional measures to facilitate investments in
privatized SOEs are also discussed. Some constraints to the mobilization
of capital such as the lack of local entrepreneurship and nationalism or
resistance to foreign investors are not discussed, as they are not the
subject of this report. However, some policy considerations in respect of
foreign ownership restrictions are discussed on page 125. Furthermore, the
feasibility of various resource mobilization vehicles in a given country
may also influence the initial privatization strategies. As stated in the
Philippines' Operating Guidelines for the Asset Privatization Trust:
"In developing the disposition strategy for each assets, due
consideration will be given to the availment of public securities
markets, employee stock ownership plans, debt/equity swap plans and
other possible sources o:Ecapital."
Capacity to Mobilize Private Resources/Domestic Financial Markets1 5 3
As described on page 68, the level of development and of
liquidity of domestic financial markets, and especially equity markets, is
a determinant of the method o:Eprivatization to be applied.1 5 4
Development here refers to the extent to which there is
the general investing public or other investors for privatization
which in turn depends on the availability of intermediaries
distribution, other financial services, the sophistication of
access to
purposes,
for share
potential
153/ See David Gill, "Privatization: Opportunities for Financial Market

Development." Paper presented at a Conference on Privatization held in
Buenos Aires, Argentina on April 27, 1987.
154/
In several countries, long-running bull markets have expanded the

possibilities of public offerings far beyond initial expectations; the
present
downturn
may affect substantially
the pace of future
privatization decisions, although transactions in progress indicate
continuation of programs.
- 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 -
including government officials, lawyers, doctors and business persons

(includingmember of the well known group of shrewd and wealthy market or
business women in Lome) (the InternationalFinance Corporation (IFC) also
subscribed to the capital increase). Several of the recent privatizations
of industrial SOEs in Guinea call for substantialshareholdingsto be sold
to Guinean investors. Typically,the SOE would first be transformedinto a
joint venture in which a major private (overseas,regional or local) party
would take a 51 percent position, often with new equity. The government
would then "carry" shares representing its 49 percent holding for gradual
disposal to local interests. The Gambia was partially successful in
offering government shares in a bank and a trading company to the general
public. The sale of blocks of shares in Industries Textiles du Mali to
local investors shows that they can be attracted even in very undeveloped
financial markets. However, in totally undeveloped or embryonic capital
markets, they will often, but by no means always, be
investors with
specific business interests in the field of activity of the SOE to be
privatized. As pointed out by Waters:1 5 9
"There is no point in complaining that organized local
financial markets dlo not exist in many of the less developed
nations. The process of raising funds for privatizationcan be
the vehicle for recognizingthe existence of unofficial financial
markets, and an incentive to permit the emergence of official
ones. It provides an opportunityto create the missing organized
financial structures."
An analysis of Asian Stock markets1 6 0 concludes that the
Philippines,India, Pakistan and Sri Lanka would need more developed stock
markets to facilitate the divestment of SOEs, and it explains that in
Bangladesh the sale of enterprises to the private sector helped in the
growth of the stock market.
Where funds cannot be raised as readily, creative approaches to
increase investor interest in SOEs to be privatizedmust still be explored.
Public offerings should not be attempted if there is no
recognizable liquidity in the local market. However, there sometimes are
more investable savings than governments may recognize, and mostly they
159/ A.R. Waters, "Privatization: A Viable Policy Option?," in

Privatization: Policies. Methods and Procedures (Manila: Asian
Development Bank, 1985. Paper presented at the Conference held on 31
January - 1 February 1985 in Manila, Philippines.
160/ A. Rowley, Asian Stockmarkets: The Inside Story, Hong Kong: Far
Eastern Economic review, 1987.
- 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.
161! In several developing countries, there is a low utilization rate of

banks for savings, particularlywhere holders are required by tax and
other authorities to account for the source of their money. In such
situations, the potential investing public will also be reluctant to
purchase significant amounts of government stock, at it implicitly
would disclose the level of its cash resources. Such problems have
been identified in two West African countries as important factors
that may stand in the way, if not of privatizationper se, at least of
wide distribution of shares. The possible remedial actions greatly
depend upon the circumstances.
- 145 -
In Chile, the later privatization phases16 2

no longer permitted
debt-led transactions as had been the case between 1975 and 1979. However,
a recent example of a highly leveraged transaction would be the worker's
buy-out of ECOM in Chile (see page 31), for the purpose of which CORFO (the
national holding company acting as vendor) granted a loan for almost 90
percent of the sales value.
In this case, the risk of a highly leveraged
transaction benefitting the workers was weighed against closing down ECOM
(the liquidation value of ECOM was low given its weak financial condition).
The reprivatization of Chi-Le's two largest commercial banks is another
example.
CORFO was authorized by special law to capitalize U.S.$200
million equivalent in Banco de Chile and US$120 million equivalent to Banco
de Santiago.
In exchange, CORFO received new preferential shares, which
were offered to the public.
Payment terms were offered to prospective
buyers up to certain limits (2 percent of the issued shares combined with
further formulas).
Purchases above the limit were allowed, but without
payment terms. As the shares were offered as payment guarantee, sales of
shares would accelerate payment. The above mechanism was thought justified
since it would facilitate the sale of shares to the general public.
The
"popular capitalism" mechanism (as it is termed in Chile) permits in this
case privatization of highly subsidized banks while not transferring the
subsidy to specific buyers.
Purchases of shares in French privatizations have been on a cash
basis.
In one most recent case, the Compagnie Financiere de Suez, the
government changed the procedure after the offering (following the Fall
1987 downturn in the stock market) allowing small investors to pay in two
installments (one-half in November 1987 and the second in November 1988)
with a prepayment requirement prior to selling the shares. The policy on
payment terms is open for the future.
A number of privatization stock offerings such as in the U.K.,
and France have yielded a substantial premium which was of course greatly
enhanced if seen as a percentage of initial outlay for acquiring the shares
under installment arrangements. Extreme caution must however be exercised
when selling shares on an installment basis.
In the case of the
privatization
of Canada Development Corporation,
the purchasers who
acquired shares for Can. $11.50 in September 1985 found themselves making
final payment in September 1986 for a share then trading at close to
Can. $6.O0.l63 However, the shares were sold only through, and therefore
upon the advice of, brokers, and the offering prospectus highlighted that
the shares were not guaranteed by the government.
162/ See Volume Two for a full discussion.

163/ The reason for the unforeseeable price collapse was the deteriorating
performance of CDC which was heavily concentrated in oil businesses.
Afterwards, the price increased -- CDC stock was recently trading near
Can. $15.
146 -
Payment terms may be based on standard policies, but often also

The purchaser of the Ontario
are the result of ad hoc considerations.
government-owned Urban Transportation Development Corporation Ltd. pays the
government Can. $10 million in cash, as well as Can. $20 million income
debenture bearing interest equal to 25% of pre-tax profits over the next
ten years and becoming payable then.16 4
There are only limited indications of why governments have
The Philippines'
decided to provide or not to provide financing.
guidelines for privatization by the Asset Privatization Trust provide some
indications on the reasons why a government would be reluctant to accept
installment payments except in special circumstances:
"As a rule, the Trust should not take a new portfolio position by
selling on installment basis since this would impose the burden of
multi-year account monitoring, lead to the possibility of subsequent
foreclosure, or extend beyond the life of the Trust. For sales on an
installment or deferred payment basis, the Trust should require a
Such a
covering guarantee from acceptable financial institutions.
of the
the bankability
guarantee would further and establish
transaction, and would allow the Trust to discount the receivable
paper without recourse."
The Brazilian privatization texts simply provide that alternative
forms of financing may be studied. In the case of the sale of a controlling
Brasileira S.A. (SIBRA), the bidding
interest
in Eletrosiderurgica
documents indicate that the vendor (BNDES, the national development bank)
will provide financing for 80 percent of the purchase price over 12 years
at 12 percent interest per annum (and monetary correction). A bank security
may be provided instead of real or personal guarantees, but in no case will
shares of SIBRA be accepted as security. Experiences elsewhere have indeed
shown that, in case of default, pledged shares may lead to the undesirable
result that the privatized SOE then may revert to government ownership.
Bank guarantees have been sought by other countries in the sale of SOEs,
including Costa Rica and Columbia.
Direct Borrowing
The decision to borrow for purposes of acquiring government-held
shares or assets, or for making a new investment in an SOE, rests
essentially with the purchaser. It is, therefore, not dealt with here in
much detail. It should be noted, however, that the availability of credit
sources may be a determining factor for a given transaction to proceed,
whether a public offering is envisaged (see page 132 describing interest
free loans for employees to buy shares), a private sale of shares or
assets, an investment in new equity or even a leveraged management/employee
164/ C. Maule, op. cit.
- 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
170/ See page 33.
- 149 -
Institutional Investors and Holding Trusts

Measures can be taken, such as the modification of laws or
charters
governing
pension
funds,
insurance
companies
and other
institutional investors where they are presently restricted to a very
narrow range of assets to foster required large-scale investments. Recent
legislation in Chile now allows pension funds to invest in shares of
selected state companies.
In a number of instances, governments or companies approach
specialized institutional investors to take equity in SOEs which are in
need of rehabilitation before they can be offered to the market, as
illustrated on page 27 in the case of Fluobar in Tunisia.
In some countries,
state-owned
holding trusts and mutual
investment funds are being considered (Guinea, Togo and others) to foster
privatization. They would be designed to acquire and hold a number of SOEs
and sell shares in the fund to investors who otherwise would not acquire
shares in the individual SOEs.
Or they may function as a caretaker
holding.
Apart from a trust set up for such purposes in Costa Rica with
assistance by the U.S. Agency for International Development, no such fund
is yet in existence and it is too early to comment on their usefulness.
However, the experience with privately held holding trusts or even
partially state controlled holding trusts such as Mediobanca in Italy
(partially controlled by IRI) could be analyzed for relevance.
Other Measures
Other measures to increase the flow of private resourcesl7l
purposes of privatization would include, inter alia, the following:
for
Tax incentives especially directed at privatization programs.

Tax concessions
introduced in Chile include a reduction of
taxable income of investors by 20 percent of the value of SOE
shares purchased as well as tax-free dividends on selected
shares.
Senegal's law authorizing selected privatizations
specifically requires the Commission on Divestment to assess and
propose any special incentives, namely tax incentives, to
accompany any privatization.
The granting of tax advantages
obviously must be assessed very carefully as they in themselves
may constitute a substantial budgetary cost and defeat policy
objectives.
Assistance provided by development organizations.
171/ Reference is made to a report by the former Industrial Restructuring

Division
(A. Kapur and K. Murphy,
"Mechanisms
for Promoting
International Investment: and Know-How") which deals with overall
measures to increase private foreign investment.
- 150
The World Bank, the International Finance Corporation (IFC), the

African Development Bank, the Asian Development Bank, and several
bilateral
development
agencies,
including
USAID with the
assistance of the Center for Privatization, have provided direct
or indirect assistance in the restructuring and privatization of
SOEs. Several references to IFC supported operations are made in
the text.
The World Bank is presently establishing a new affiliate designed
to complement
its efforts to encourage the flow of investments for
productive purposes, the Multilateral Investment Guarantee Agencsy (MIGA).
MIGA will serve this objective by guaranteeing foreign investments in its
developing member countries against non-commercial risks and by carrying
out a wide range of advisory and technical assistance activities.
Covered
non-commercial
risks will
include the risks of
restrictions on the repatriation of investment proceeds in freely usable
currency (transfer and inconvertibility risk), the risk of expropriation
and similar measures, the risk of breach of contract by the host government
in certain cases of denial of justice and the risk of war, revolution and
civil disturbance. Guarantees will be available for equity investments and
a broad range of contractual arrangements with equity features; these will
include minority equity participations (possibly with a government or an
SOE as majority partner), portfolio equity investments, as well as longand medium-term
leases, management contracts, franchising agreements,
licensing agreements and turnkey contracts where contractors' returns
substantially depend on the operating results of the project. Coverage is
adopted
confined
to new investments; draft operational regulations
unanimously by a preparatory committee which are to be submitted to MIGA's
Board of Directors for approval clarify that this includes investments
"that assist[s] the host country in restructuring its public sector."
equipped to provide
As a result, MIGA will be adequately
guarantees to foreign direct and portfolio investors in privatized
enterprises; it may also extend its guarantee protection to nationals of
the host country that acquire interests in privatized enterprises with
funds repatriated from abroad. By enhancing the security of investments in
privatized enterprises, MIGA may not only assist governments in attracting
investors, but also enable them to launch privatization programs on terms
more beneficial to them.
MIGA's potential support is not confined to divestitures of SOEs.
Since its guarantee program, unlike that of most national investment
guarantee agencies, encompasses both non-equity forms of direct investment
and the breach of contract risk, MIGA can cover the interests of foreign
parties to whom government operations or services have been contracted out.
MIGA may, moreover, guarantee the interests of construction firms under
build,operate, and transfer contracts.
- 151 -
As part of its advisory services, MIGA may provide assistance to

developing member governments in designing and implementing privatization
programs.
This assistance could extent to the marketing with potential
investors of interest in enterprises earmarked for privatization.
The
provision of technical assistance could be combined with the provision of
investment guarantees.
The Convention establishing MIGA entered into force on April 12,
1988. As of June 8, 1988, MICA counted 40 member states, including 12
industrial countries. An additional 36 countries had signed the Convention.
MIGA's business organization is currently being established and the Agency
is expected to be in full operation before the end of 1988.172
The International F:inance Corporation (IFC) has, in addition to
its traditional financial services, introduced an arrangement referred to
as Guaranteed Recovery of Investment Principal (GRIP) whereby the investor
provides the funding, IFC makes the investment in its name and assumes the
full risk of loss of principal (in U.S. dollars) for any reason; dividend
income and capital gains on the investment are shared; and, at the end of
an agreed period, the investor may decide to become full legal and
beneficial owner of the shares, or to disengage from the investment with
principal intact. An application of the arrangement in a privatization is
referred to on page 27.13
172/
For a comprehensive discussion of MIGA's history, features and initial

policies, See I.F.I. Shihata, MIGA and Foreign Investment: Origins.
Operations.
Policies
and Basic Documents
of the Multilateral
Investment Guarantee Agency (Boston: Nijhoff, 1988.)
173/ See J. Silkenat, "GRIP: Guaranteed Recovery of Investment Principal",

International Financial Law Review, March 1988.
- 152
ANNEX A.
BASIC METHODS OF PRIVATIZATION --
SUMMARY
Methods
Characteristics
Public offering
of shares.
Distribution to the general public

of all or part of shares in public
limited company (as a going concern).
If SOE Is in required condition, standard

processing of public offering on the basis
of prospectus. If not in required form or
or condition, then readying process necessary. Offer can be on flxed price or tender basis.
Procedures
Private sale
of shares.
Sale of all or part of government

shareholding In a stock corporatlon
(as a going concern) to a single entity
or group. Can take various forms such
as a direct acquisition by another corporate entity or a private placement
targeting institutional investors. Can
be full or partial privatization (i.e.,
transformation into joint venture).
Sale may result from negotiation

or competitive bidding process. May be done ad hoc or
may be subject to mandatory country procedures or guidelines on valuation, prequalification, evaluation of proposals, terms of
payment, etc. In some cases, prior restructuring necessary. Involves investor search.
Sale of
government
or enterprise
assets.
Sale of assets (instead of shares).

Private sale.
Alternatives: sale of assets by government;

disposal of some assets by SOE; dissolutlon
of SOE and sale of all assets; other. Procedures for private sale of shares generally apply.
Fragmentation.
Reorganization of a SOE into several

entities (or one holding company and
several subsidiaries.) Each entity
will be then be privatized separately.
Depends on structure of SOE.
New private
investment
in SOE.
Primary share issue subscribed by the

private sector (dilution of government's equity position instead of disof shares).
Public offering or private issue of new

shares on basis of standard procedures for
new issues, possibly in conjunction with
disposal of government equity. New private
investment may be for capitalization of new
company embodying assets transferred by
government.
Management/
employee
buy-out.
Acquisition by management and/or workforce of controlling interest in SOE.

Leveraged management/employee buy-out
(LMBO) consists of purchase of shares on
credit extended either by seller (government) or by financial institutions.
Negotiations by government, management,

employees and lenders to cover wide range of
issues.
Leases and
management
contracts.
No ownership transfer. Under lease, fee

is payable to owner of productive facilities; lessee assumes full commercial
risk. Under management contract, owner
pays for management skills, while manager
has full management and operational corntrol.
Many variations exist.
No standard method; see actual cases in

text.
- 153 -
Preferred
Applications
and Special
Featuires
sound going concern with reasonable

earning potential
or can be readied
to become so.
-Objective
is widespread
ownership.
-Existence
of equity
market or feasibility
of structured offering.
-Generally
more appropriate
for larger
offerings
than
direct
sale.
-Often
more acceptable
politically.
-SOE
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).
- SOE may need prior

difficult
decision
prior
to sale.
- Employment.
- Need for mandatory
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.
- Cash flow or other security

lying element of LMBO.
- Risk to employees.
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 -
the SOE is constituted by a legislative instrument.
The enabling requirements may vary according to the nature of the

transaction. The French privatization law referred to below sets different
procedures depending on whether the state owns a majority of the capital.
Management contracts and leases in many instances do not require specific
authorizations (although management contracting may be subject to approval
procedures set in the country's procurement laws).
The following examples illustrate the types of authorization
requirements that may apply. While, on the one hand, countries are bound by
their own legal system as described above, most have a certain degree of
discretion in selecting the types of authorization methods and instruments
to apply. For instance, if legislative approval is to be granted, it can be
done case-by-case or in the aggregate, with the latter establishing that no
further authorization is required for individual enterprises.
Individual Legislative Authorizations
Several of the United Kingdom's privatizations were based on an
individual act (e.g., the Telecommunications Act 1984) that aimed at
reorganizing the sector, transferring a government undertaking and vesting
property to a new public limited company represented by shares, establishing
a regulatory framework, authorizing the necessary licensing, etc.
In
France, the SOEs which are riot included in the list of 65 under the Law of
August 1986, may of course be privatized if authorized by a special law.16 6
Overall Legislative Authorization
The French privatization laws of 1986 authorize and establish
detailed procedures for a list of sixty-five SOEs in which the state has a
majority interest. This authorization in the aggregate permitted expedient
processing of individual privatizations.
Senegal's privatization law of
1987 authorizes the sale of government's interest in twenty-six mixed
economy enterprises, in full for some and partially for others.
In the
Philippines, Proclamation No. 50 of December 8, 1986, "proclaiming and
launching a program for the expeditious disposition and privatization of
certain government corporations and/or the assets thereof, and creating the
Committee on Privatization and the Asset Privatization Trust," is the
overall enabling legislation, designed to maximize the efficiency of the
divestiture process.
This instrument provides for the transfer of SOEs to
an Asset Privatization Trust: and authorizes disposition under the authority
of a Committee on Privatization.
Turkey's Law No. 3291 of May 28, 1986,
authorizes the Council of Ministers or a designated government agency,
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 -
depending on the nature of the enterprise, to decide on privatization.

In
Sri Lanka two bills recently passed parliament providing for the modalities
of conversion of government-owned bodies into companies whose shares will
initially be held by the Secretary of the Treasury in view of divestments.
Authorization by the Executive Branch
In most cases where legislative authorization is a prerequisite to
state divestment and an umbrella law was passed for the purpose, the
conditions
of individual
transactions
must be authorized
by an
interministerial committee or by specific ministerial order. The Tunisian
law on privatization provides that a ministerial committee must authorize
any given sale transaction and specify its conditions. The actual sale then
becomes effective by joint order of the Minister of Planning and Finance and
the Supervisory Minister to which the enterprise is responsible.
No Legislative or Government Authorization
There are many circumstances in which no legislative approval or
authorization is necessary. This would be the case in most instances where
a government holding company sells its subsidiaries.
The privatizations
carried out by Istituto per la Ricostruzione Industriale (IRI) in Italy
involved simple corporate decisions.
Subsidiaries of directly government
held SOEs in France may be privatized by the parent, but only after
authorization of the Minister of Finance.16 7
General
Different governments may be guided by different concerns in
devising the proper authorization mechanism. The aim should be to balance
the need to assure expediency while maintaining safeguards to protect the
public patrimony.
167/ Titre III of the Law of August 1986.
- 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 -
The Law covers the modalities of compensation

employees.
If the SOE to be privatized cannot provide
funding, the state may provide special compensation.
for affected
the necessary
The Law provides further that no legal proceeding or recourse can

suspend or interrupt the process of privatization provided for in the Law.
Banzladesh
The required
processing
corporations16 9
was as follows:
(a)
of
the
privatization
of
abandoned
A Tender Committee examined the validity of tenders;
(b) A Scrutiny Committee verified the title and nationality of former

owners; and
(c) A Working Group on Disinvestment
examined the valuation of
properties/assets/shares and made recommendations to a Disinvestment
Board; and
(d) The Disinvestment
Board made final decisions.
For each
corporation, a floor price called the "National Reserve Price" (NRP)
A
had to be worked out as a basis for considering a tender offer.
corporation was the sold either at the NRP or to the highest bidder.
The successful bidder was to pay a 25 percent down payment if the corporation was located in developed areas and a 20 percent down payment
if the corporation was in a less developed area. The balance was to be
paid in three or four equal annual installments depending on where the
corporation was located.
Payment of installments started after
24 months from the date of execution of a deed of agreement for sale.1 7 0
Brazill
public
71
In the early 1980s, Brazil launched a program to cut back the

enterprise sector.
A Special Commission for Destatization was
169/ After independence

in 1971, the government
enterprises abandoned by their owners.
decided
to
take over
170/ Shamsul Chisty, "Privatization in the Bank's Developing Countries: The

Experience of Bangladesh," Conference on Privatization: Policies.
Methods and Procedures (Manila: Asian Development Bank, 1985).
171/ The instruments referred to in this Section had, at the time of
finalization of this report, been replaced by a new Decree No. 95.886
of March 29, 1988, governing the Federal Destatization Program; other
new instruments are under preparation. Their review is not included in
this report.
- 159 -
created in 1981 establishing certain procedures and restrictions in the

processing of privatization at the federal level (privatization by state
governments is not described here).
Decree No. 91-991 of November 28, 1985, established a new legal
framework for the privatization process with the creation of an Interministerial Privatization Council.
It consists of the following Ministers of
State: the Chief of the Planning Secretariat in the Office of the President
of the Republic, and the Ministers of Finance and of Industry and Trade, the
Special Minister for Debureaucratization,
and the Ministers who have
corporations attached to their ministries which are included in the
Privatization Program. The CoTuncil is assisted by a secretariat for technical and administrative support responsible for coordinating and monitoring
all procedures included in the privatization program and which shall have
the technical
and administrative
support of the SEPLAN
(Planning
Secretariat). The lead in the privatization process is taken by the Minister of State responsible for the SOE to be privatized. Mandatory procedures
for the transfer of SOEs to the private sector were defined in the above
Decree as well as in the Interministerial Order No. 010 of January 15, 1986.
In defining the privatization operation, the Minister of State
concerned must be advised by a consulting firm from the private sector. The
privatization operation is widely announced in all phases.
If voting
control is transferred, acquisition of shares is limited to Brazilian citizens resident in Brazil or companies under Brazilian control.
Operations
are analyzed and assisted by external auditors. Transfer of operations is,
whenever possible, to be implemented through the stock market, and incentives are granted to employees of the enterprises to facilitate the acquisition of shares.
When the privatization operation is satisfactorily
defined, the Minister concerned submits a detailed implementation proposal
to the Interministerial Privatization Council which approves it.
The
Minister of State concerned then sends to the Council a detailed report on
all stages of the process, widely disseminated and accompanied by the opinion of external auditors. The inclusion of state enterprises in the privatization program must be announced in the form of a Decree from the President of the Republic upon recommendation of the Ministers of State.
Criteria for pre-qualification are: owners' experience, financial
capacity to purchase and restructure the enterprise, if necessary, and
technical or scientific capacity of the candidates.
Pre-qualified candidates may visit the firm, examine its books and audit its reports.
The
Interministerial Privatization Council may choose among various bidding
procedures: single offer to purchase (submission by qualified candidates of
their respective bids in sealed envelopes), public purchase offer (or
auction, mostly handled by one of the stock exchanges on a service basis) or
direct negotiation (if there is only one qualified candidate, if juridical
and contractual
circumstanc:e so require or if contractual provisions
stipulate that the admission of new partners depends on the consent of the
other partners).
If the highest bid is less than the floor price, the
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);
areas of experience of the prospective buyer; and
backing to finance the purchase, at the reference price given by

CORFO.
Prequalified bidders are then invited to bid. Usually a bid bond

of between 5 to 10 percent is required, and the same information requested
in the prequalification process is again needed. It is required to provide
more detailed information about financing the purchase.
172/ See Volume Two: Chile.
- 161 -
In respect of the qualifications of buyers, the financial backing

rather than other criteria is being stressed except in very limited cases
(CORFO has sought an expertise in telecommunications in the case of CTC, a
telephone corporation).
Consistent methods have been adopted for price
setting as well.
France
In France, mandatory procedures for privatization are described in
Law No. 86-912 of August 6, 1986, applying to the 65 SOEs covered by the law
of July 2, 1986 (other procedures may be provided for other SOEs).
The privatization
of entities where the majority of capital
belongs to the state requires a valuation by a Privatization Commission.
The Commission has seven mem'bers who are appointed for five-year terms.
They are chosen on the basis of their competence and experience in economic,
financial or legal matters and are bound by professional secrecy.
Upon request
of the Minister
of Economy,
the Commission
establishes the value of the enterprise or assets to be privatized.
Its
In the case of an exchange offer, the
valuation must be published.
Commission must also be consulted regarding the value of the assets received
by the State in exchange f'or its interests in the enterprise to be
privatized.
The offering prices and exchange parities are fixed by the
They may not be below the values established by the
Minister of Economy.
Privatization Commission.
Privatization of most of the companies to be affected will occur
However, the Minister of
through public offering in E'rance and abroad.
Economy may decide to do a private placement, subject to conditions to be
established by decree that must be approved by the Council of State.
Feasible procedures are provided for for private sales (of shares or of
assets).
Certain restrictions on ownership are set down.
described on page 124 dealing with restrictions on ownership.
Those
are
Preferential terms are to be offered to employees.

described on page 132 dealing with employment issues.
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
include APT, a government financial institution (Development Bank of the

Philippines and Philippines National Bank) or the parent government-owned
corporation concerned, in the case of their subsidiaries.
Operating Guidelines for the discharge of APT's functions have
been established by COP. They are summarized in a set of policies and procedures described in a booklet "Doing Business with the Asset Privatization
Trust."
Standard formulae are used for the valuation of assets. Since the
rule is to sell through bidding procedures, a floor price is determined for
each corporation.
Where the bidding procedure does not provide the basis
for determining a fair floor bid price, a mechanism to determine a fair
floor price is worked out by the APT and approved by the COP.
Cash is given preference and all bids must have a posted bond from
an acceptable financial institution. The bidding rules and procedures to be
followed for the disposition of any particular asset must be publicized and
made known well in advance for the guidance of prospective bidders.
Sales of acquired assets17 3
to previous owners are discouraged,
but not prohibited.
However, previous owners should not be qualified for
bidding where there are at least three bidders for an asset.
Senegal
Senegal's Law No. 87.23 of August 18, 1987,174
authorizing the
sale of state holdings in several SOEs institutes a "Commission sp6ciale de
suivi du d6sengagement de l'Etat" (Commission on Divestment) to assist the
Ministre Charge du Portefeuille de l'Etat in carrying out privatization (its
organization, functions, and powers are set by separate decree).
services.
The Commission
is the only body allowed to retain advisory
It recommends any incentives (particularly tax incentives).
The Law requires

that, unless
justified
by exceptional
circumstances, the shares of an SOE be sold by competitive bidding (the
specific procedures being set out by a decree). It provides guidelines on
valuation.
It provides further that, unless a special exception is granted
by decree, shares must be fully paid upon transfer.
Special
provisions
are also included
to limit ownership
concentration (with the possibility however, to sell an enterprise to a
173/ Mostly assets and companies acquired by state-owned banks

foreclosure or otherwise in satisfaction of debt obligations.
174/ Journal Officiel No. 5192 of September 12, 1987.
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:
-
an SOE Restructuring Commission (CREP) is responsible for

valuation and determination of specific transfer conditions
(pricing, payment
terms, employee participation, foreign
participation). It is a 7-member independent commission. It
proposes the conditions of specific transactions to the
Ministerial Commission.
A Ministerial Commissionauthorizesthe conclusionof any specific

transactionand its terms. Any transactionbecomes effective only
upon joint decision of the Minister of Plan and Finance and the
Ministre de Tutelle.
An ImplementationCommission ("Commissionde Suivi") at the stock

exchange will follow up on the various measures required in cases
of public offerings such as (i) listing; (ii) distribution of
information;and (iii) actual sale of stock.
In cases of private sales or sales of assets, the SOE and its

supervisoryMinistry implementthe transaction.
175/ At the time of finalizationof this report, revisions to the provisions

of this law were being considered.
- 164 The law specifies some basic valuation principlesand methods. To

encourage widespread share ownership, special incentivesmay be granted to
employees and former employees. Incentives includepriority allotmentswith
favorable payment terms and the distribution of free shares (with
limitations on further transfers). Other incentivesmay be granted such as
a 5 year exemption of corporate income tax. Shares may be paid for up to
50% of their price by surrenderingsecurities (bonds) previously issued by
the state.
Presumably to permit the alleviation of SOE debt liabilities,the
law authorizes the state to waive its preferred creditor rights. But prior
to such a waiver, the state may negotiate with creditors who would benefit
from the waiver, compensatory arrangementssuch as reschedulingor partial
cancellationsof debt claims, or the applicationof recovered debt claims to
the acquisitionof interests in the SOE.
Special rights of control of the state over mixed state/private
enterprisesprovided by state enterpriselegislationmay be waived when the
state's participationin a restructured/privatized
SOE is reduced below 50%.
The waiver is for five years maximum, provided the acquiring party
undertakes to acquire 67% of the capital after these five years (in which
case no special state controlswill apply).
- 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 -
to appoint a specified number cf directors of the company. The "Preference

Share" in the case of MISC and MAS in Malaysia requires government consent
for the disposal of certain major assets. In theory, a variety of actions
could be subjected to the specific approval of the special share, so that
its application could in principle be widened. In the case of Sealink, the
government retained a golden share requiring the ships to remain under
British flag and allowing for requisitioning in case of national emergency.
In Senegal, the Law on Privatization requires introduction of an "action
sp6ciale" through the modification of SOEs' charters where the SOE is still
covered by government loan guarantees or if government loans have been
onlent to it. The special share provides for rights designed to protect the
state in ensuring that such loans are repaid by the privatized enterprise.
However, in most cases, it was used principally as an instrument to preclude
controlling
interests in an
individual
shareholders
from acquiring
enterprise.
Another method for achieving government control over certain
decisions of an enterprise is used with mixed enterprises
(societ6s
The
d'dconomie mixte) in countries with a French legal tradition.
establishing instruments or charters of these enterprises may provide that
the state, even though it is only a minority shareholder, in addition to its
rights as a minority shareholder, can control the decisions of the board
of directors through the presence of a representative (commissaire du
gouvernement) who, while having no voting power, has a veto power over
decisions deemed contrary to the interests of the state. Such a technique
has effects similar to those of the special share to the extent that the
matters subject to veto power are carefully delineated, i.e., the articles
of association must specify fully the terms and conditions under which the
An open-ended power to veto would be regarded
government can intervene.
by investors as a threat to the autonomy of the enterprise (see also page
120 of the report) and would act as a disincentive to private sector
participation.
The authorization and issuance of different classes of shares with
different rights is another method of granting rights to the government
In cases of privatization through
beyond its proportionate shareholding.
private sale, as with the creation of joint ventures, the government, as
part of the readying process, and along with the private partner as part of
the negotiation process, must decide what types of shares are to be
authorized for the joint company, and what rights each type will confer upon
In addition to common or ordinary shares, preference
the shareholder.
The special classes of
shares carrying special rights may be created.
shares may confer different rights as to dividends, participation in assets,
etc. as well as to control, namely voting rights and rights to appoint a
specific number of directors.1 7 6
176/ On the latter, see further: L. Rapp, op. cit., pp. 40-42.
168 -
ANNEX E
RESULTS OF RECENT PRIVATIZATION ACTIVITY
The following statistical tables are generally based

Three but include certain additional data.
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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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Cl
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0 3 319
0
l011161
0060
eAaa
linrag
'AtTSIl
811300
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RECENT WORLD BANK TECHNICAL PAPERS (continued)

No. 65.
Hegstad and Newport, Management Contracts: Main Features and Design Issues
No. 66F.
Godin, Preparation of Land Development Projects in Urban Areas (in French)
No. 67.
Leach and Gowen, Household Energy Handbook: An Interim Guide and Reference Manual
No. 68.
Armstrong-Wright
No. 69.
Prevost, Corrosion Protection of Pipelines Conveying Water and Wastewater: Guidelines
No. 70.
Falloux and Mukendi, Desertification Control and Renewable Resource Management in the
Sahelian and Sudanian Zones of West Africa (also in French, 70F)
No. 71.
Mahmood, Reservoir Sedimentation: Impact, Extent, and Mitigation
No. 72.
Jeffcoate and Saravanapavarn, The Reduction and Control of Unaccounted-for Water:

Working Guidelines
No. 73.
Palange and Zavala, Water Fbllution Control: Guidelines for Project Planning and Financing
No. 74.
Hoban, Evaluating Traffic Capacity and Improvements to Road Geometry
No. 75.
Noetstaller, Small-Scale Mining; A Review of the Issues
No. 76.
Noetstaller, Industrial Minerals: A Technical Review
No. 77.
Gunnerson,
No. 78.
Heyneman and Fagerlind, University Examinations and Standarized Testing: Principles,

Experience, and Policy Options
No. 79.
Murphy and Marchant, Monitoring and Evaluation in Extension Agencies
No. 80.
Cemea, Involuntary Resettlemient in Development Projects:Policy Guidelines in World BankFinanced Projects
No. 81.
Barrett, Urban Transport in WVestAfrica
No. 82.
Vogel, Cost Recovery in the health Care Sector: Selected Country Studies in West Africa
No. 83.
Ewing and Chalk, The Forest Industries Sector: An Operational Strategy for Developing
Countries
No. 84.
Vergara and Brown, The New Faceof the World Petrochemical Sector: Implications for
Developing Countries
and Thiriez, Bus Services: Reducing Costs, Raising Standards
Wastewater Management for Coastal Cities: The Ocean Disposal Option
The World Bank

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ISSN 0253-7494
ISBN 0-8213-1111-5

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Plusquellec and Wickham, Irrigation Design and Management: Experience in Thailand

Bord na M6na, Fuel Peat in Developing Countries

Simmonds, Farming Systems Research: A Review

Segura, Guidelines for Evaluating the Management Information Systems of Industrial

Tschannerl and Bryan, Handpumps Testing and Development: Proceedingsof a Workshop

Bamberger and Hewitt, Monitoring and Evaluating Urban Development Programs:

Bamberger and Hewitt, A Manager's Guide to "Monitoring and Evaluating Urban

Technica, Ltd., Techniquesfor Assessing Industrial Hazards: A Manual

Silverman, Kettering, and Schmidt, Action-Planning Workshops for Development

Sheldrick, World Nitrogen Survey

Goodland and Webb, The Management of Cultural Property in World Bank-Assisted

Mould, Financial Information for Management of a Development Finance Institution:

Urban Transit Systems: Guidelines for Examining Options (also in

(List continues on the inside back cover)

WORLD BANK TECHNICAL PAPER NUMBER 88

The World Bank

Techniquesof privatizationof state-ownedenterprises.

This report was initiated largely in response to interest by

INTRODUCTION AND SUMMARY...........................................

PART I - METHODS OF PRIVATIZATION.....................................

BASIC METHODS OF PRIVATIZATION................................

Public Offering of Shares......................................

OVERVIEW OF THE EXPER:EENCEWITH PRIVATIZATION.................

DETERMINANTS OF POSSIBLE TECHNIQUES...........................

Objectives of the Government..................................

ANCILLARY ARRANGEMENTS ........................................

PART II - SELECTED IMPLEMENTATION ASPECTS .............................

PLANNING AND MANAGEMENT .......................................

Initiating Measures ...........................................

READYING SOEs FOR PRIVATIZATION .........................

VALUATION AND PRICING .....

DETERMINING FUTURE OWNERSHIP .....

Partial vs. Full Privatization .....

EMPLOYMENT ISSUES AND EMPLOYEE PARTICIPATION ..

Employment-Related Difficulties .....

COST OF PRIVATIZATION .....

RESOURCE MOBILIZATION AND FINANCING PRIVATIZATION .....

MANDATORY PROCEDURES AND GUIDELINES FOR PRIVATIZATION

RETENTION OF SPECIAL RIGHTS BY THE GOVERNMENT

RESULTS OF RECENT PRIVATIZATION ACTIVITY

TECHNIQUES USED IN CERTAIN COMPLETED

PRIVATIZATION OF PUBLIC UTILITIES AND SERVICES.............

SURVEY OF ON-GOING AND COMPLETED PRIVATIZATION

SURVEY OF PRIVATIZATION TRANSACTIONS BY SECTOR............. 172

REGIONAL AND COUNTRY SURVEY OF PRIVATIZATION

CORFO'S PRIVATIZATION STRUCTURE...................

ONGOING PRIVATIZATION OF MALAYSIA'S TELECOM ...............

PRIVATIZATION IN THE UNITED KINGDOM ........................

STEPS WITH RESPECT OF THE OFFERING OF CERTAIN

SHARE SCHEME ......................

SPECIAL ("GOLDEN") SHARE................................... 166

The report contained in this Volume I was initiated largely in

INTRODUCTION AND SUMMARY

1/ SOE, as used in this report, refers to enterprises and/or productive

-2To develop recommendations on or to assess divestiture programs,

3/ Although the owner and seller is referred to as the government, it might

While some privatizations involve little more than the sale

4/ Elliot Berg and Mary Shirley, Divestiture in Developing Countries, World