Executive summary
Policy makers and privatisation experts agree that it is critical to “get privatisation right.” A well-planned and executed transaction, backed by sound rationales, strong institutional and regulatory arrangements, good governance and integrity can have consequences on future divestment activity by enhancing investor confidence while gaining the support of stakeholders and the public. Drawing on the internationally agreed OECD Guidelines on Corporate Governance of State-Owned Enterprises and decades’ worth of national experience across both OECD and partner economies, this Policy Maker’s Guide to Privatisation provides practical advice to newcomers on key stages of the process from inception to post-privatisation. With global privatisation activity trending upwards, this Guide can support policy makers in their decision-making process in the years to come. The key findings are as follows:
Stage 1: Guiding principles to inform policy makers
-
Before embarking on a privatisation process, policy makers should be clear on the guiding principles and rationales underlying the transaction and should communicate these to the public. At a high level, objectives for divestment are likely to be political and economic and require balancing trade-offs between public, private and mixed ownership. For individual privatisation “candidates”, policy makers should ensure that there is a good business case, underlined by value-for-money. How the process will balance revenue maximisation and the achievement of other policy objectives should be clearly articulated, transparent and communicated at the outset of the process, including potential uses for privatisation proceeds and the fulfilment of public service obligations post-privatisation.
-
Privatisations are complex; they require transparent and credible institutional frameworks that appropriately involve stakeholders. Decisions should be backed by high-level political support. There is a multiplicity of actors involved in the privatisation process and their respective roles and responsibilities must be well-defined. A professional and informed authority, operating at arms-length from policy making and regulatory responsibilities, should steer the execution of the transaction in close coordination with decision makers, with the early involvement of key stakeholders including the company’s board and management, external advisors, employees and labour groups and in communication with the public. The overall process should benefit from high-level political support and inter-ministerial dialogue to overcome bureaucratic inertia.
Stage 2: Measures to be undertaken prior to divestment
-
Appropriate competition and market regulation should be in place prior to the privatisation. Industry or company restructuring might be necessary to ensure readiness for the sale. Careful consideration of the transaction’s impact on the company, market and wider economy should be given to ensure appropriate staging of the transaction. Sound competition and other market regulation should be in place prior to embarking on the transaction. Factors such as the size of the asset, the absorptive capacity of the market and the pre-existence of a competitive market are factors that might necessitate either industry or company restructuring. Moreover, additional steps might be necessary to evaluate the “readiness” of the company and to ensure that its equity story is in line with the stated objectives of the sale. Policy makers should also be prepared to go to parliament in case a legislative act is required to undertake the transaction.
-
The sales method will be dependent on the asset, market conditions, relative maturity of the economy and the objectives determined at the start of the process. Policy makers should carefully consider the relative merits/demerits of various sales options, including their relative costs, staging, complexity and potential exposure to risks of corruption/illicit behaviour.
Stage 3: Organisation of the privatisation process
-
Getting appropriate advice before and during the sales process (separately for the SOE and government seller) will be necessary. Advisors should be selected according to quality, competence and experience. To avoid conflicts of interest, the separation of advisory and sales mandates is critical. The process of privatising involves both decision-making within the state and practical measures taken by the SOEs. Depending on the size of the SOE and complexity of the transaction, these advisors will be providing legal counsel, accounting and financial advice, strategic and transaction advice, public relations advice, and communications and market research advice, among others. Special care should be taken to avoid conflicts of interest, including by separation of sales and advisory mandates.
-
Appropriate determination of company valuation is an important measure of success and is commonly based on the principle of fair market value. An appropriate valuation will ensure the state can justify its pricing of shares to assure a fair price, achieve value for money and attract sufficient interest from investors. It will also be a key indicator to measure post-privatisation outcomes. Should a government sell at below market value (e.g. selling shares to employees at a discount, or attracting a strategic investor to facilitate technology transfer, spill overs, etc.), the reasons should be clearly identified, justified and transparent at the outset to ensure the integrity of the process. Establishing a special commission or steering group that is sufficiently independent and qualified to make an informed opinion on the valuation, as well as on the methodology used, can help to ensure objectivity in the process.
-
To avoid irregular practices, buyers should be selected based on a set of pre-qualification criteria. Bids should be transparently handled, while respecting confidentiality. Selected bids should reflect fair market value to avoid violations of state aid rules. It is common to establish criteria for potential buyers and conduct due diligence on their financial and technical capacity, future solvency, and even corporate conduct and compliance track records. Buyers will also expect to receive a certain amount of information on the business relevant to the sale. Depending on the sales method, this will occur either through the publishing of a prospectus, or the exchange of confidential information contained in a sales book, information memorandum and/or secure data room. A minimum price can be communicated to bidders beforehand and any bids accepted should ensure fair price to avoid violations of state aid rules.
Stage 4: Steps to take post-privatisation
-
The post-privatisation phase includes wrapping up the sale, handling proceeds and establishing good governance practices if the state remains a shareholder. Assurances to ensure adequate protection of shareholders is key. Systematic ex-post evaluation and audit are critical to independently evaluate the sale and to ensure the integrity of the process.