CRITICAL ISSUES AND CONSTRAINTS TO PRIVATIZATION AND REFORM

7.1. In General

There are a number of issues, impediments and constraints which may affect success of a privatization project. Some of these are within the direct control of government. Others are not so easily controlled. In our approach we are alert to the full range of issues impacting on a privatization and restructuring program and are able to provide early, practical solutions to overcome them, whenever possible.

7.2. Authority of the Executing Agency

The governmental agency charged with the responsibility of implementing the privatization program must have sufficient authority to discharge its responsibilities.

7.3. Ownership

A variety of issues surround the question of ownership of assets which may be divested. These ownership concerns may include:

• Issues of Concentration — A divestment which results in control going to a particular investor or investor group can be of great concern, stemming from issues of equality and fair play or practical economic concerns of concentration of economic power.
• Indigenisation — Concerns with maintaining a certain portion of state-owned assets in the hands of indigenous people is a particularly sensitive issue.
• Foreign Control — Nations often have a fear of foreign control over means of production. A balance needs to be reached between the legitimate concerns of the host nation and the need for foreign investment capital and technical know-how.
• Developing Small Investors — One of the key issues involved in privatization is the opportunity to develop a broad base of small investors. Wisely formulated privatization strategies will do more to introduce the small shareholder to investment than any number of seminars and advertisements.
• Role of Government as Shareholder — The eventual role of government needs to be established, often on an industry by industry basis. In the case of strategic and infrastructural enterprises, the government may delay divestment and may prefer to retain some involvement through shareholding or regulation.

7.4. Social Safety Net

Labour will most likely be affected by public enterprise reform and divestment. While World Bank evidence suggests that divestment typically results in an increase in employment and remuneration as enterprises begin to earn profits and grow, workers managers, holding company officials and others will be uneasy. There will need to be coordination to ensure that the necessary safety net development is synchronised with the divestiture and restructuring process.

7.5. Transparency

A successful privatization program must be transparent. The general public and other observers must be comfortable that no vested interests are being promoted. Use of independent outside consultants, open tender and negotiation, and regular accurate communication with all parties will enhance transparency.

7.6. Coordination of Relevant Programs and Projects

Other technical assistance programs may be underway which relate directly or indirectly to the activities of the privatization program. Coordination with other consultants and the sponsors for these other programs can be beneficial to all concerned.

7.7. Valuation

The Government must balance between valuing assets too low (and being criticised for selling the family jewels) and valuing assets unrealistically high and preventing any sales. Issues of valuation apply most particularly to commercial value of land, valuation of capital assets, valuation of intangibles, debt position, and negotiating differences between buyer and seller positions.

7.8. Non-viability of Many Enterprises

Many public enterprises are simply non viable. These must be liquidated in an orderly fashion, with full awareness of the impact such liquidations will have on the community. Careful attention must be paid to the manner and timing of liquidation.

7.9. Levels of Indebtedness

It is likely that most existing public enterprises have extremely high levels of indebtedness. Government assumption of debt or conversion of debt into equity will be necessary in the case of most enterprises. A case by case approach to indebtedness and debt restructuring is necessary.

7.10. Underdeveloped Capital Market

The capital markets of many nations are under-developed. We have already discussed the implications of this to a successful privatization and various methods of dealing with that limitation.

7.11. Level of Investor Interest

The local investment community is small. Most citizens lack knowledge about investment practices, procedures, benefits, risks and pitfalls. An educational program needs to be established to raise the general public’s level of understanding of and appetite for securities.

7.12. Legal

Legal issues have been discussed elsewhere. The regulatory, legislative and commercial environment will impact tremendously on the success of a privatization program. Careful attention is required to ensure the creation of a suitable environment which promotes private sector business.

7.13. Competition

Most nations now involved in public enterprise reform have limited competition in many sub-sectors. This will be a factor affecting both the value of enterprises and the social/political implications of divestment. The existence of publicly owned enterprises competing with others which are private or which the Government intends to privatize, creates difficulties associated with the potential for preferential treatment — this must be understood and taken into account in working toward a “level playing field”.

7.14. Vested Interests

We recognise the natural existence of a complex and often subtle range of vested interests both for and against divestment. Offering shares in the divested enterprises to those individuals responsible for the success of the divestment program will do much to ensure a speedy and successful public enterprise reform program. Without such incentives, self interest in preserving the status quo will slow the reform process and may altogether stop it.

7.15. Importance of Management Information Systems

Timely and accurate information is critical if management are to make the correct decisions to run an enterprise in an efficient and effective manner. Given the importance of properly functioning Information Technology (IT) to the success of any business enterprise, Admiralty International recommend a systems audit, followed by a needs analysis during the early stage of an enterprise review.