APPROACH TO DIVESTMENT OF PUBLIC ENTERPRISES

5.1. In General

Based on a classification of each enterprise, and the priority assigned it by Government, those enterprises identified for priority divestment will be treated according to the methodology discussed below.

5.2. Developing Divestment Strategy for each Enterprise

Having developed a benchmark on each enterprise and a benchmark on the investment environment, it will be possible to develop a divestment strategy for each enterprise. Steps involved include:

• Identify viable options (and explain rejection of others)
• Deal with case specific constraints and impediments
• Establish timing priorities among enterprises
• Agree order of privatization and timeline for each
• Produce Final Short List of enterprises to be privatized
• Implement pre-privatization Value Enhancement Action Plan for short listed enterprises

5.3. Value Enhancement

In some cases, a strategy to increase value will be implemented before divestment. In most cases, it will be left for the investor to make such changes. However, in certain circumstances, such as enterprises intended for public float, or changes which are easily effected, a value enhancement strategy may be implemented prior to divestment.

5.4. Seek Government Approval for Divestment

Final approval for divesting of any company will be in the hands of the Government. The project team would assist the Executing Agency in preparing recommendations for presentation to Government.

5.5. Preparing for Divestment

Steps to a successful marketing of the enterprises include:

• Valuing — A value must be placed on the enterprise, balancing book and market value of assets against projected earnings stream.
• Method of Sale — Determining whether to sell by tender, by total share issue, or partial share issue.
• Terms of Sale — Price, method of settlement, deposits and other details of the sales process.
• Preparation of Offering Documents — Including full disclosure, description of business, management, markets, financial analysis, and details of offering.
• Organising Selling Group — In the case of a public issue of shares, a selling group must be organised to underwrite, promote and sell the issue.
• Secondary Market Support — Some formal mechanism may be installed to support the secondary market in shares.
• Sale of Assets — In some cases, an investor will prefer to buy only the assets of the enterprise.
• Management Participation — Management may participate in the purchase of shares, or assets.
• Performance and Management Contracts — While no sale of an enterprise would occur, a marketing strategy would nonetheless be required.
• Leases — Identifying, qualifying and negotiating with a suitable candidate is necessary.

5.6. Developing Linkages with Potential Investors

For the divestment process to be successful, it will be necessary to forge linkages with local investment companies, private sector industrialists, indigenous businessmen, non-resident nationals, provident funds, development banks, commercial banks, offshore sector investors, offshore funds managers, and multilateral and donor nation investors (World Bank, IFC, ADB, EBRD, UNDP, OPIC, etc.).

5.7. Financing Sales of Public Enterprises

5.7.1. In General

Divestment of public enterprises will require adequate levels of both equity and debt financing. Several particular governmental policies can have a significant impact on the investment climate, including government borrowings in the local capital market, infrastructure development, and regulatory ambiguity.

5.7.2. Local Investors

A significant pool of capital generally exists in the hands of private investors, including indigenous businessmen, non-indigenous businessmen, non-resident nationals, parallel market funds, funded pension schemes, other institutional investors, local banks, and managed investment funds.

5.7.3. Offshore Investors

A range of offshore investors may be interested in owning public enterprises, given attractive opportunities.

5.7.4. Foreign Government and Multilateral Support

A number of programs exist to reduce a foreign investor’s risk of investing. Guarantee and insurance programs such as the World Bank’s MIGA and the US’s OPIC provide strong levels of support to a privatization strategy. The IFC is often interested in looking at equity roles in countries where privatization is underway.

5.7.5. Debt-Equity Conversions

In many countries, where blocked funds are held, a swap of blocked debt funds into equity in a public enterprise represents an attractive “win-win” structure for privatization.

5.8. Executing Sales of Public Enterprises

In order to execute the sale of a public enterprise, certain steps must be taken, including governmental approvals, negotiation and final deal, documentation, payment and settlement, closing details, and underwriting fees and sales commissions. An experienced investment banker and lawyer are recommended at this stage.

5.9. Supervision and Monitoring of Divested Enterprises

5.9.1. Supervision during Divestment

The process of divestment can be a complex and stressful time for management, staff, the bureaucracies and ministerial officials. Supervision is needed to maintain orderly business practices, provide support to potential investors, manage the transformation of the enterprise, and prevent abuses.

5.9.2. Supervision after Divestment

Once privatized, the enterprise needs no more supervision than any other private sector company. A clear policy must be communicated that the supervisory regime of the line ministry or other officials will terminate once the firm is privatized, except in cases of natural or statutory monopolies and Golden Shareholdings.

5.9.3. Monitoring Privatized Enterprises

There may be good reason to continue monitoring the performance of recently privatized enterprises. The multifaceted impact of divestment on the nation should be monitored and reported.

5.9.4. Regulation of Privatized Enterprises

Certain enterprises operate in areas of natural or statutory monopoly. These may require an ongoing regulatory regime to protect the consumers. To the extent that competition can be and is encouraged, the need to regulate is minimised.

5.9.5. Golden Shareholdings

When strategic enterprises are privatized, the government may want to maintain some control to protect its legitimate national interests. In such circumstances, the Government may take one Special Share (often called a “Golden Share”). This technique has been successfully employed in divestment programs in countries such as Canada, the United Kingdom, France, New Zealand, Turkey, Brazil, Malaysia and Senegal.