INTRODUCTION

1.1. Background

Admiralty International's interest in projects relating to privatization, corporatization, public enterprise and corporate restructuring and public reform, is the result of a long-standing involvement of the firm's principals and associates in these areas. This involvement has been over a number of years and in a wide variety of countries.

Admiralty International have gathered together a team with a broad and complementary range of skills. They have been closely involved with corporatization, privatization and public enterprise reform in Eastern Europe, Asia, Africa and the South Pacific Rim. They have been involved with corporate and commercial financing, project finance, credit evaluation, lending, problem loans and work-outs, loan salvage, structuring and restructuring of commercial enterprises, capitalisation and recapitalisation of companies, investing and brokering investments, private placements of debt and equity, mergers, acquisitions, divestments and liquidations in numerous countries for over 25 years.

Our methodology reflects in large measure, practical experience gained on these international projects.

1.2. Privatization, Corporate Restructuring and Public Sector Reform

1.2.1. The Free Market and Public Reform

It is now widely accepted that market economies generally perform more efficiently than centrally planned economies. Those nations which have witnessed the most dramatic growth in recent decades are, without exception, those embracing the philosophy and practice of free markets. Nations which have clung to strong central planning and public ownership of the means of production have generally failed economically. The dramatic collapse of the former Soviet Union has heralded a new era in which philosophical rhetoric has given way to practical solutions in managing national economics. In the wake of these profound changes has come a wave of privatization and public sector reform.

Progress in public sector and public enterprise reform among many nations around the world is significant. In parts of the world as diverse as Britain and Mexico, Russia and Egypt, Malaysia and New Zealand the corporatization and privatization of public enterprises has occurred as central parts of sweeping public sector and public enterprise reform. While it is too soon to reach final conclusions, the evidence thus far is encouraging. Substantial literature now available on the subject indicates that public sector reform and privatization have generally proved beneficial to those nations which have accomplished them.

1.2.2. Reforms and Privatization in Eastern Europe

After almost half a century of centralised control of Eastern European economies (in the case of the CIS over 70 years), there are major deficiencies of basic modern business skills. Senior management personnel lack even basic knowledge of modern marketing, financial management and human resource management skills. Comprehensive training in these areas must be carried out "on the job" as there are no suitable well trained alternative staff.

What is not often well understood by foreign consultants is that Eastern European managers are usually very well educated from a technical perspective and have a very broad and thorough general education. Paternalism and arrogance shown by foreign consultants is not tolerated by East European managers and such an approach invariably has an adverse effect upon project results.

Foreign consulting firms should be aware that available business statistics are very often irrelevant as they do not in fact resemble reality. All data presented to consultants must be carefully selected and analysed.

Certain solutions, relevant in developing countries, are not suitable for most of Eastern Europe. Local capital markets are very weak, interest rates are extremely high, governments do not have any firm and clear business policy. There is no worthwhile historical model available for reproduction. Almost every privatization and restructuring process faces new horizons and offers new challenges for solving problems.

1.2.3. Macro economic Impact of Public Sector Reform

The process of implementing privatization and other elements of public sector reform has required significant changes. Fiscal and monetary practices are reformed to create an environment which fosters competition and open access to markets. Tax systems and incentives, investment codes, import and export regimes, regulations affecting commercial activities, civil service structures, social welfare programs and more must be overhauled. These profound changes require political will and a clear vision for the future by government officials. Section 6 discusses our methodology and approach to public sector reform.

1.2.4. Privatization and Public Enterprise Reform

A significant part of the public sector reform process relates to determining the future of publicly owned and operated commercial enterprises. The legitimacy of public involvement in commercial enterprises must be revisited; in most cases, this revisitation will result in significant rationalisation and divestment by government.

The rationale of most governments for involvement in commercial activities is complex. Governments may have viewed public enterprises as a means of ensuring employment, of securing strategic resources and services, of protecting local interests from international control, for consolidating political power, and for generating income. These complex agendas are difficult and usually impossible to balance. Often, contradictory pressures impinge on a government's ability to manage enterprises well. It is difficult to find examples anywhere in the world where the public sector has successfully managed commercial enterprises. In many cases, public enterprises operate at large losses and represent significant financial drains on the national treasuries. In those cases where the public enterprises are profitable, they often cost the nation and its consumers dearly, when compared against the private sector's ability to deliver the same goods and services.

The process of privatization requires a philosophical decision by government to quit commercial activities. This is most easily accepted by governments which recognise that economic efficiency can be better obtained through private sector ownership and management. Resistance to private ownership and the consolidation of economic power in private hands can be offset by an understanding that resultant increases in economic efficiency are for the benefit of all the citizens and the nation as a whole. Our approach and typical methodology in evaluating public enterprise divestment and privatization is discussed in Section 3.

Once the philosophical decision is made to review and reform public enterprises, a micro economic and financial analysis is needed, sector by sector, industry by industry and enterprise by enterprise to determine the government's best course of action to maximise economic efficiency. Many public enterprises are operating at losses (often massive losses). Others may be (or appear to be) profitable. Most public enterprises will have been operating in uncommercial and protected markets, badly distorted by legislation and regulations designed to discourage and prevent competition. Thus, it is often difficult to determine what the future economic viability of such enterprises would be once market distortions are eliminated.

In most cases, a review of public enterprises will conclude that divestment or liquidation will be in order. As an intermediate step, financial restructuring is often necessary to prepare the enterprise for privatization or to determine that the company must be liquidated. In the case of the successful New Zealand experience, discussed immediately below, an intermediate phase of corporatization provided a framework for the necessary corporate restructuring. Our approach to financial and corporate restructuring is discussed in Section 4.

1.3. Introduction to Admiralty International

Admiralty International is an international financial and consulting firm, specialising in corporate finance, corporate restructuring, privatization and corporatization, banking and banking reform, international investment and investment advice. It represents a group of experienced international commercial and investment bankers. It has been involved in a number of sophisticated financing projects and consultancies, taking advantage of the decades of experience of its principals around the world.

To view key principals with Eastern European experience, click here.

1.4. Associated Individuals

Admiralty International is proud to have an association with a number of individuals who have international reputations in the area of privatization, corporatization, public sector reform, corporate restructuring and finance. These include Sir Roger Douglas, who as New Zealand Minister of Finance introduced the corporatization/privatization legislation that completely changed the face of the New Zealand economy, Dr Andrzej Brzeski, previously Professor of Economics at the University of California at Davis, and now a key member of a number of international committees addressing the problems of post communist economies and Mr Olly Haggerty for 17 years a principal at Coopers & Lybrand, who has recent Eatern Europe experience and many years experience in Africa, and Mr Andrew Weeks, who was responsible for implementing New Zealand's sweeping public sector financial management and accounting reform.

Details on these specialists are presented in Section 2.

1.5. Services

Our collective services in the areas of privatization, corporatization, public sector reform, corporate restructuring and finance are comprehensive. We believe they cover the full range of services needed to complete a successful public enterprise reform program. These services are described more fully in Section 2.

1.6. Methodology

Admiralty International endorses the following methodology (discussed in depth in Section 3 through Section 6) to progress the Reform and Privatization process:

1.8. Organisation of Document

Section 2 of this Statement of Qualification introduces Admiralty International and associated individuals.

Our methodology and approach to privatization and corporatization, public sector reform, corporate restructuring and finance, and small scale enterprise development are described in Sections Three through Six. Critical issues and constraints affecting successful privatization and public enterprise reform are discussed in Section 7.

• Attachment 1 details our specific experience in the fields of privatization, corporatization, corporate restructuring, corporate finance, and public sector reform. It includes other relevant experience in the areas of small scale enterprise development experience, valuation, Information Technology and systems implementation. We see these as a central part of the public sector reform, privatization or corporatization process.
• Attachment 2 presents curricula vitae of key specialists.
• Attachment 3 presents a list of Admiralty International's references.
• Attachment 4 reviews the New Zealand experience of reform and privatization.