DEVELOPING REFORM STRATEGY

3.1 The Scope of the Public Sector

In many countries the public sector embraces a very large range of activities, organised in a variety of ways. These activities comprise a considerable proportion, and often the vast majority of national economic activity. In addition to traditional state activities such as the maintenance of forces for defence and the preservation of internal order, it is common to find public sector ownership or control of:

• utilities, such as gas, electricity, water, post and telecommunications;
• local services, such as fire, street lighting, road maintenance and refuse collection;
• health and educational services;
• broadcasting;
• transport, such as railways, bus services, air and shipping lines (together with airports and ports);
• industries perceived to have a strategic role in the economy, such as banking, steel-making, insurance, mining and commodity production;
• industries or companies brought into public ownership because their private sector performance was considered inadequate;
• activities which grew out of public sector responsibilities and have remained in the public sector through inertia rather than design.

3.2. Setting Objectives - Key Issues

3.2.1. Setting Objectives in General

Agreeing on objectives is a necessary precondition to successful public enterprise reform, objectives should be publicly discussed, agreed and articulated so that those involved in the process are clear as to what can and cannot be expected in the reform process. Because most public enterprises have traditionally operated with a mixed (and often contradictory) set of objectives, it is vital that the objects of the reform process be clearly, simply and unambiguously stated. It is recommended that this statement of objectives be in the form of a public document. Such a document can serve as a reference to those involved in the process, and to the general public.

Below are discussed several key issues which the reforming Government will take into consideration as it sets its policy and strategic objectives in the area of parastatal reform.

3.2.2. Problems of Management and Control

Authority and responsibility are often unclear and diluted in public enterprises. Objectives are rarely clear and often conflict with one another. These issues have damaged the commercial effectiveness of public enterprises. In the case of post communist countries, management, though technically very capable, almost totally lack traditional free market "business skills" in the areas of marketing, financial management and human resource management.

As the public sector's ambit has grown, most countries' economies have become more complex. Problems of management and control have developed. The state, as owner of the activity, typically appoints management to act as stewards for its interests. The managers naturally seek a clear definition of their objectives and role. However, objectives are much less obvious for a body established to act in the public interest than for a commercial enterprise.

Often civil servants believe that they have too little information about the public sector enterprise to be sure that it is well run. As a result, they may become intrusive in performing their role as shareholder. By contrast, the enterprise managers often believe that they are distracted from their task by state interference and bureaucracy. This view is compounded by the fact that civil servants rarely have the philosophical point of view, the experience and or the formal education to evaluate the public enterprises commercially. In such circumstances, management's motivation can diminish. The complex mix of uncommercial owners, mixed objectives and goals, political appointment of managers and bureaucratic interference all lead to deteriorating economic performance of the public enterprises.

These problems can become especially severe in industries undergoing rapid change (whether technically or market led), where speedy and sound decisions are required. Telecommunications is an example of such an industry. The creation of an additional tier of control weakens the enterprise and slows decision taking. Further problems can also arise if there are conflicts about investment plans reflecting the differing horizons of politicians and managers. Broad interest has therefore developed in structural changes which would:

• define more clearly the demarcation between public and private activities and the objectives of any state intervention;
• enable swifter and better responses to changing circumstances;
• promote greater economic efficiency and commercial effectiveness.

3.2.3. Economic Efficiency

Economic efficiency is a key issue in the examination of options for structural change. The focus of debate about the efficiency of public bodies often shifts between:

• "allocation" efficiency as defined in economic welfare theory. Do prices reflect costs and is there any cross-subsidy between activities?
• "technical" or "internal" efficiency. Are the outputs being produced with the most economic mix of inputs?

Structural change may improve technical efficiency by altering the framework of management control and enabling new policies to be adopted by management. Liberalisation can open a monopolised market to competition, which may eliminate cross-subsidisation and bring prices more closely into line with costs. These benefits are the goal of privatization. The scope for realisation of this goal of economic efficiency will depend upon the history and industrial structure of the public industry, and upon the approach taken to privatization.

The problem of control described above may diminish if a structural change provides a clear objective for management, such as profit maximisation, and clarifies responsibility and accountability. The change may also:

• impose stronger and better defined pressures from the capital markets. They tend to allocate funds willingly to the successful and deny them to failures;
• allow greater flexibility in hiring and remuneration of management and employees than can be accommodated within the public sector:
• salaries for key executives can be made sufficiently attractive to attract scarce skills;
• profit sharing or bonus schemes for managers and workforce can be offered, providing incentives to efficiency.

3.2.4. Political and Social Considerations

Although enterprises sometimes remain in the public sector as a result of inertia, in most cases there is a genuine public interest aspect to their operations. They may:

• have a monopoly position and/or provide an essential service;
• have a strategic role in the economy (such as energy production or transportation);
• occupy a sensitive position in relation to foreign-owned concerns;
• undertake a politically sensitive activity (such as broadcasting).

Any examination of structural change must recognise the importance of considering these features.

There are a number of possible approaches to structural change which may solve problems of management and control. These approaches include some form of privatization. Privatization itself covers a variety of organisational options:

• transfer of ownership and control to the private sector;
• transfer of ownership and control subject to a legally defined regulatory framework;
• establishing the activity as a "trading function" within the private sector, operating on an arms length commercial basis;
• sub-contacting or franchising the management of the activity, or of an aspect of the activity (eg: the laundry services of a hospital);
• granting permission for private sector undertakings to compete in the state enterprise's market;
• dismemberment of the state enterprise into its constituent parts and the transfer of each into private ownership and control.

A common thread in most solutions proposed is an attempt to re-define the relationship between commercial and public interest objectives discussed above. This may merely involve establishing "arm's length" relationships between the government and the activities. However there is a growing support for the more radical solutions.

3.2.5. Employee Attitude Problem

This is particularly prevalent in post communist economies where years of political indoctrination changed people's attitudes towards business and work in general. Managers were not expected concern themselves with competition and product development. In the "economy of short supply", everything that was made was sold without concern for quality, any form of marketing was not necessary. Workers were accustomed to remote and ponderous government ownership. Lack of identification with "the company" resulted in negligent work practices, low productivity, material waste and little pride in workmanship. Such attitudes resulted in poor and variable quality product.

3.2.6. Summary

We have drawn attention to the key issues arising from reform and privatization. These issues must be understood and carefully addressed if the reform exercise is to be a success. This should be done principally by those in senior positions in the government and in the public enterprise. The need for resolution of these vital issues occurs at the most critical and pressing time in the reform process. Moreover, some of these issues will require knowledge, skills and experience which neither the government nor the enterprise may have readily available.

3.3. Resolving Policy Issues and Impediments

Resolution of policy issues and impediments will be necessary. This will require close cooperation with the Executing Agency and others involved in and affected by the process to resolve policy issues and impediments. The "goal-constraint matrix" developed in the Start Up Phase will serve as the starting point for resolving these issues.

3.3.1. Resolving Policy Level Concerns

Governments must balance their legitimate concern to protect national sovereignty with the need to attract foreign investment. This concern is especially intense when issues of sovereignty are blurred with the desire to protect particular commercial activities which are defined as "strategic". These "strategic" activities can range from infrastructural activities (telecommunications, electricity and energy production and distribution, airports and airlines) to purely commercial activities (bread, sugar, tobacco, alcohol).

There are a number of mechanisms by which a government can protect its interests. Ownership of enterprises is possibly the least desirable and least effective. Others include regulation, minority ownership, golden share provisions, etc. A successful strategy for public enterprise reform requires a clear articulation of the role of foreign investment, the range of activities which the Government deems strategic, and agreement on the mechanisms which can protect the government's perceived interests.

Additionally, privatization is typically a threat to vested interests. This produces a range of issues which must be addressed. These are discussed in Section 7.14.

3.3.2. Impediments

Impediments will continue to be identified and described, throughout the study. The privatization process must identify possible means of resolving the impediments. This will require:

• assessment of Government policy particularly in respect of industrial development and economic efficiency;
• consideration of internal public enterprise issues;
• identification of supplier and customer concerns;
• the need to allow time for recommended changes to the business Unit to become effective; Consideration of impediments will identify a number of factors which could include:
• political factors that will affect overseas or internal investment, or competition;
• customer or supplier related issues that may diminish or increase the value from sale; and
• "sale" packaging issues for the potential purchaser which may alter his perception and interest in the public enterprise.

3.3.3. Evaluating Official Support/Resistance

In the course of the project, the Project Team must be able to form a view on the level of official support for the task of privatization.

Part of this process will be to:

• Identify supporters;
• Identify potential resistance;
• Negotiate areas of consensus;
• Develop incentives to privatize; and
• Crystallise governmental resolve.

3.4. Evaluating the Investment Environment

Prospects and procedures for increasing private investment should be examined. In this context, policies should be formulated to encourage foreign private investment in those enterprises offered for privatization.

The following tasks should be completed:

3.4.1. Evaluating Present Capital Market Potential

The potential size, depth and vigour of the local capital market will be assessed. Potential "pent up" demand, if any, will be gauged in discussions with relevant financial institutions, the business community, owners of private sector enterprises in related industries and those international investors now involved in the local economy.

Possible potential groups for underwriting a stock issue and the formation of investment companies to hold investments in newly issued shares will be investigated. This will involve calling on local development and commercial banks, relevant financial institutions and technical assistance consultants in related projects.

Depending on the potential size and depth of the market, a strategy for share issues and a possible schedule for absorbing new issues can be developed.

3.4.2. Evaluating Present Investment Environment

For the privatization program to be successful, the country must have an environment that fosters and encourages investment. This means that the regulatory and competitive environments must both be assessed. As with the enterprises themselves, we need a benchmark on the current investment environment in which the privatization program will operate.

• Tax Issues Income taxes, VAT, capital gains taxes, the treatment of dividends to local and international investors, issues of dividend franking, customs duties, tariffs, excise taxes, withhold taxes must all be investigated and understood.
• Import/Export Regulations and Issues The implications of the present regulations affecting imports (banned and restricted items, quotas, etc.) will be evaluated. The operational details of concessions and impediments, any issues relating to free trade zones, bonding arrangements, local content requirements, value added concepts will be surveyed and analysed.
• Investment and Securities Regulations Regulations affecting local individual investors, funds managers and corporations, and off-shore investors, including non-resident nationals, foreign individuals, funds and corporations will be surveyed. Regulations regarding initial public issues of securities and secondary trading will be assessed. Special attention will be given to the availability and treatment of "grey market" monies now in the hands of residents who would be potential investors if permitted to declare their funds.
• Price Controls and Other Market Distortions Determination will be made on the extent of market distortions caused by price controls, and other regulatory devices. Guaranteed credit arrangements, subsidies and government purchasing regulations will be studied.
• Other Commercial Issues Issues such as company law, business licensing requirements, etc. will be considered and analysed.
• Labour Laws Existing Labour laws, relating to hiring, disciplining and firing workers, pension and health benefits, and related issues need to be understood.
• Land Ownership Issues The right of foreign individuals to control land use, or buildings must be surveyed and understood. The impact of current land ownership laws on the viability of divestment will be studied.

3.4.3. Evaluating Present Socio/Political Environment

In addition to understanding the legislative and regulatory environment in which the privatization program will occur, the subtle nuances of the human side of the equation must also be understood. These relate to Labour, to the bureaucracy and to the general public.

• Labour
  A full understanding of the significant labour issues is needed. Beyond an analysis of the laws and regulations associated with labour, a full understanding of the psychology and personal agenda of labour will allow the development of a sensible and sensitive privatization which takes these important issues into account. The entire subject of social safety nets, critical to this analysis, is discussed in Section 7.4.
• Holding Companies
  Officials and managers within the holding companies will be effected by the privatization of the public enterprises. Their support is essential to a successful process. Consequently, the nature and degree of benefits they now derive from their jobs and methods of protecting their prestige and prerogatives will need to be understood.
• Ministerial Level Officials
  As with holding company management, Government officials have a vested interest in the status quo. The nature of their present commitment to privatization, their level of perquisites, their personal goals and ambitions must be taken into account when the privatization strategy is forged.
• Government
  The goals and objectives of the Government itself must be monitored. Even if the Government has shown a keen resolve to restructuring and divestment, swings in official mood must be monitored. During the course of evaluating the environment for privatization, this issue must be revisited and re-examined. The level of official support for the privatization program must be gauged, as well.
• Public
  The prevailing public attitude toward the concept of privatization should be gauged. Depending on the results of this analysis, strategies can be formulated to mould public opinion and to educate the public on the benefits of privatization.

3.5. Establishing a Legal Framework

The success of parastatal reform can be enhanced by ensuring a commercial environment which encourages and protects private investment. This typically requires a thorough review of the existing legal accounting framework. Changes in this framework are often required to allow reform to succeed. Emphasis should be to maximise economic benefits of commercial activities and to foster an attractive business environment. This requires a workable legal framework that is clear and unambiguous. Retention by Government of arbitrary powers to approve commercial activities or to own enterprises competing directly with the public sector is "the kiss of death" to successful parastatal reform.

The role of government should be limited. Its legitimate concerns are to ensure the Rule of Law under which investors and businesses can operate. Government should concern itself with creating a "market friendly" business environment. Beyond that, and the regulation of certain industries, government's legitimate role in the commercial sphere should be limited to providing a legal framework that encourages competition.

More specifically, government must provide and protect workable commercial laws relating to property, contracts, company law, accounting, auditing, banking, creditor's remedies, debtor's protection, liquidation, bankruptcy, investment laws, capital markets, securities, labour, taxation, currency, foreign exchange, import and export, dispute settlement, international law, etc.

The enacting of specific privatization legislation is often a useful process. It focuses political thought and will. It provides an official document which justifies the process and articulates the rationale of public enterprise reform. Most important, it establishes the ground rules under which the privatization will occur.

3.6. Promoting Reform

Action needs to be taken to encourage the reform process. A number of critical areas require review and recommendations will be made on how to proceed. These recommendations would be developed in close cooperation with the Executing Agency.

Recommendations will cover each of the critical areas:

3.6.1. Regulatory Environment

• Tax issues (income tax, VAT, capital gains, franked dividends, customs duties, excise taxes, withhold taxes, etc);
• Import/export regulations/issues (banned and restricted items, tariffs, free trade zones, bonding, local content requirements, value added concepts);
• Investment regulations (foreign investors, non-resident country nationals and grey market investors);
• Price controls and other market aberrations.
• Other commercial issues (business licensing regulations, etc.)
• Labour regulations; and
• Land ownership issues.

3.6.2. Promoting a Competitive Environment

• Price supports;
• Subsidies;
• Credit guarantees;
• Government purchasing regulations;

3.6.3. Banking Reform

A systematic program of banking reform should be implemented in parallel to parastatal reform. Often, the state owned banking system will not be in a position to promote the privatization or restructuring of public enterprises. These banks are generally not experienced in lending to private sector borrowers. They typically do not have the credit systems, treasuries or trade finance departments necessary to support and promote private sector commercial development. As agents of the state, they have generally had a passive, unsophisticated and often unconstructive role to play as banks to the public sector. A complete restructuring of the banking sector is often needed, which would normally include the installation of modern responsive banking systems, comprehensive training, and meaningful central bank supervision.

There is a second reason that public sector banks are typically unable to help promote public enterprise reform. In addition to lacking the skills and abilities to assist promote privatization and restructuring, they themselves are often in extremely bad financial shape. Public sector banks, with a history of lending to public enterprises, are typically plagued with large non-performing loans from public enterprises. They are generally illiquid and often technically bankrupt. As a result, these banks are not able to play a constructive role in the restructuring or privatization of public enterprises.

This reality presents a difficult "chicken and egg" paradox which must be managed with skill and determination. Without strong banks it is difficult to have a robust private sector. Without a robust private sector, it is difficult to have strong banks. This paradox is generally understood and can be taken into account as banking reform and public enterprise reform move forward together in a reciprocal manner. The success of each reform process is dependent on the success of the other.

It may be wise to segregate the past borrowing activities of the public enterprises from the new commercial activities of the newly privatized firms. In the same manner, the process of banking reform should either create new banks with clean balance sheets or quarantine previous parastatal borrowing activities from new lending activities. Indeed, probably the best approach is to leave the old parastatal loans with the parastatal banks, and to start fresh with new banking directives, policies, procedures and systems. This is a massive task and requires significant training and retraining of banking staff.

Admiralty International understands this interdependence. It has developed a range of comprehensive and sophisticated services and products to assist the process of banking reform, including "turn-key" credit systems, treasuries, information technology systems and trade finance departments, as well as training programs covering the full range of banking activities.

3.6.4. Encouraging Small Scale Enterprises

• In General
  The future economic success of most developing nations lies in the promotion of a robust and diverse range of small scale enterprises. These small scale businesses are able to pursue niche markets and operate with low overheads. Because of their small size, they are able to respond quickly to changes in market conditions. They can be resourceful, resilient and efficient producers. They provide the testing ground from which larger, more efficient commercial enterprises grow. In a Darwinian sense, the stronger, better managed among today's small scale enterprises will grow to become the industrial giants of tomorrow. It is impossible to select in advance those companies and managers who will succeed. The process of natural selection operates automatically to do that. Government's role is simply to provide a level playing field, to encourage competition and to allow the more efficient producers prevail.

  The natural tendency of governments to try to select (and thereafter promote) the winning enterprises and industries of the future flies in the face of logic, experience and the operation of the marketplace. By the same token, governmental attempts to bolster failing public enterprises which may be in the wrong industries and suffer from inadequate management are also doomed to wasteful expense and eventual frustration. The best path to economic reform is the promotion of small scale enterprises. This strategy should rank high in any government's plans for economic and parastatal reform.

• The Benefits of Encouraging Small Scale Enterprises
  Privatization and public enterprise reform in many countries places special reliance on the development of robust small scale enterprises. This is true for several reasons:

  • Economic growth can be expected to come from the private sector. Until such time as larger public enterprises adjust to the major readjustments that will be required and develop the necessary commercial experience to operate successfully, the small scale enterprises may prove to be the engine for economic reform and growth.
  • Major public enterprises will take some time to restructure. In the case of many enterprises, restructuring will not be possible, and the enterprises will be liquidated. In such cases, many of the goods and services formerly produced by the liquidated public enterprise will be provided by small scale enterprises.
  • Management talent is generally lacking in many nations where privatization and public enterprise reform is now underway. This will inhibit the development of successful larger enterprises. Management experience will be more quickly and efficiently gained from small business. The successful small business will grow to be larger enterprises. Likewise, successful managers of small scale enterprises will be the likely source of many of the more successful managers of the larger enterprises.
  • The process of restructuring major enterprises can be expected to produce a large number of redundancies. The development of small scale businesses can absorb many of these redundant workers. Most promising is the probability that those workers with the most initiative will be successful in operating small scale enterprises, given sufficient support and encouragement.
  • Small scale enterprises can provide a viable part of a government's social safety net strategy. There is a need for strong local enterprises, in countries as diverse as low income, agriculturally based developing nations to the former East Bloc nations now undergoing massive reform after decades of stultifying central planning. It is from many profitable, well managed small scale businesses that many of these economies can hope to develop. For these reasons, Admiralty International and its associates have targeted small scale enterprise development as a critical part of any successful privatization strategy.

• Socio-Economic Requirements for Small Scale Enterprise Development
  

  The requirements for promoting small scale enterprise development will vary little from nation to nation. However, the degree to which those requirements can be quickly and easily met will vary greatly. Eastern European nations with a long history of commercial activity only temporarily interrupted by Socialism can be expected to adjust quickly. For example, Riga's historic role since the days of the Hansiatic League will quickly re-establish itself. Likewise, Asiatic republics of the former Soviet Union will quickly re-discover traditional trade and commercial methods indigenous to that part of the world. For other nations which have never had a history or tradition of trade and commerce, the adjustment to open market economies will be slower and more painful.

  In general, the requirements for successful development of small scale enterprises might be:

  • An open economic system which permits commercial success, rather than penalising it.
  • A legal framework which supports the conduct of business, including companies laws, contract law, creditor's remedies, debtor's rights, etc.
  • Access to capital, both equity and debt.
  • Adequate infrastructure (transport, energy, communications, etc.)
  • A basic banking system, to support payments, settlements, etc.
  • Adequate training.
  • A core group of commercial risk taking individuals.

  3.6.5. Socio/Political Issues

  Significant social, political and structural issues which could impact upon the success of the privatization will be considered as a basis of relevant recommendation. Issues associated with social safety net are discussed more fully in Section 7.4.

  3.6.6. Public Relations Campaign

  The acceptance of a privatization and restructuring project will depend largely on how it is viewed by those affected, from the highest level to the general public. Our recommended approach would include engaging a public relations firm with experience in promoting the privatization exercise, where privatization was "marketed" with great success to the general public. The UK experience can be considered a model in this regard.

  3.6.7. Role of Multilateral Agencies and Donor Nations

  The multilateral agencies (such as the World Bank, the IMF, the UN agencies, European Community, etc) and donor nations can and do play a crucial role in promoting reform. These agencies provide guidance and funding to reform measures. They can be relied on to maintain high levels of professionalism and to monitor the process of reform. The use of loan and grant conditionalities provides leverage to assist the successful implementation of necessary reforms.

  These agencies also have a "collective memory". This memory ensures that desired policies and programs survive changes in administration in the country where reform is (or should be) underway. It also ensures that the programs survive changes in local or head office personnel in the agencies themselves. This collective memory provides a long term consistency to reform measures.

  3.7. Parastatal Reform and Divestment

  3.7.1. In General

  The approach and methodology is based on previous experience in carrying out divestments in New Zealand and developing countries and our experience in the international commercial markets. Our previous experience has shown the following aspects are central to a successful divestment program.

  • Involvement of Senior Government Ministers and Officials
  • A Project Director of high standing
  • Adequate consultation with affected interest groups
  • A transparent approach
  • Detailed research on potential investors, including capital market research
  • Experienced consultants
  • Effective internal communications
  • Effective communications with multilateral providers of the technical assistance
  • Early identification and pragmatic resolution of impediments.
  • A balancing of considerations

  These are discussed below.

  3.7.2. Involvement of Senior Government Ministers and Officials - Steering Committee

  It is essential that senior, accountable Governmental officials, with the power to make day-to-day decision, are involved in the divestment process.

  The creation of a Steering Committee with members of appropriate high standing in Government is normally suggested to demonstrate the Government's support of the policy an the processes needed to implement it. This committee should meet as often as necessary to ensure guidance and authority of the divestment process.

  The main purposes of Steering Committee meetings should be to:

  • ensure effective communications on the progress of the assignment between Government Officials and the consultants;
  • provide a vehicle for discussing matters of policy and for giving guidance to the consulting team on matters of local concern;
  • agree strategies for restructuring units to enhance value;
  • determine units for divestment;
  • determine units for liquidation
  • determine units for restructuring and retention by Government
  • provide a mechanism for making decisions required to implement the divestment.
  • monitor and minute progress in the process.

  Official Government sponsorship of the process is vital to successful divestment. In our experience, officials generally start in favour of divestment. However, they may tend to withdraw their support when confronted with the many real difficulties and constraints associated with the process.

  3.7.3. A Project Director of High Standing

  The Project Director assigned to the team must be of high standing within the Government. This Official must be committed to the process. The Director must be able to access key officials and ministers on an as required basis. Additionally, he will be principal source of knowledge on the Government's attitudes and agendas.

  The Project Director will also have a key role in maintaining public credibility of the process. He (along with local counterpart consultants) will provide understanding of local background information essential to the success of the project.

  3.7.4. Adequate Consultation with Affected Parties

  Successful restructuring and divestment can best be effected after careful and thorough consultation with affected parties. There is a natural human resistance to the restructuring and divestment processes. People are naturally fearful of change. This fear is exacerbated by the real risk of loss of (often substantial) benefits. For those individuals in the public enterprises to be restructured and/or privatized, there will be resistance relating to loss of job and many job related benefits. For those in the government ministries, there will be fear of a loss of prestige, power and perquisites.

  To a large extent adequate consultation may neutralise or limit this opposition. Programs of public relations and the implementation of a social safety net can help.

  Divestment must be thoroughly and skilfully marketed within government, with public enterprise management, staff and labour; to the labour sector generally; and to the public.

  The benefits of divestment must be developed and well presented if they are to be understood and accepted by affected parties. The success of the divestment exercise will be greatly enhanced by successful marketing of the concept. A successful "marketing of divestment" will be the responsibility of the Government. The project team can assist in two ways: It can ensure that its own activities emphasise the positive benefits of divestment in all contacts within the country. The Team can also assist Government and the consultants to related TA projects in designing and implementing an appropriate campaign to present the benefits of divestment to affected parties.

  Opposition to divestment is largely politically based. To some extent adequate consultation can neutralise or limit this opposition. There are often already established a number of institutions with a legitimate interest in the outcome of each enterprise with which the project team and must interact. Careful consideration of the interests of each and appropriate involvement of these institutions is necessary.

  Often, a number of other technical assistance projects are underway simultaneously which impact on the outcome of a divestment program. It is important that the project team establish and maintain a working relationship and dialogue with these other projects. This will maximise the benefits to each project and will optimise the benefits of the program. Our team's collective experience in the area of divestment, their maturity and diplomacy, will be key ingredients to a successful program.

  3.7.5. A Transparent Approach

  The methodology must ensure that it does not generate impediments to divestment. It must be seen as producing unbiased recommendations. It must be fair to all parties. Equally important, it must be seen to be fair to all parties.

  Use of experienced international consultants will ensure fair and unbiased recommendations. It will also assist in making the process seem transparent.

  3.7.6. Detailed Research on Potential Investors

  Review of potential investors, the local and international capital markets and sources of capital is a vital early step in the divestment (this is reviewed in depth in Section 3.4). This research will identify:

  • the underlying strength and capacity of the local capital markets;
  • the identity and interest levels of potential investors to purchase the public enterprises;
  • possible underwriting syndicates for public offerings or private placement of debt or equity;
  • interest and ability of existing lenders to the public enterprises to convert debt to equity;
  • offshore sources of debt and equity (including multilateral donor agencies)

  Our approach would call for a detailed survey of these issues early in the project.

  3.7.7. Senior and Experienced Consulting Team

  The consultants assigned to the project must be people who have the necessary technical knowledge and experience in corporate restructuring and divestment. They must also be experienced at working with senior Government officials and in developing countries. We have proposed a team of such people. We believe they will be capable of generating the necessary confidence within Government, within the bureaucracy, within the holding companies and within the public enterprises to be privatized to implement the intended divestment.

  3.7.8. Effective Internal Communications

  Regular communications between the Steering Committee of government, line ministries and the project team is vital to the success of the project. Examples of effective communications would include:

  • Minutes. Important meetings should be minuted. Minutes can be circulated to concerned individuals and departments.
  • Working Papers. Working papers should be produced at key points in the program. These will reflect the status of the project and will present the current results of key findings and recommendations.

  • Monthly Reports by the consulting team, outlining progress and key recommendations agreed in advance with the Steering Committee is an effective way of keeping communications open and of securing decisions. The tasks involved in implementing divestment are not complicated in themselves but there tends to be a large number of them. Monthly Reports will help identify the tasks to be completed and will facilitate the discussion and agreement of the priorities and responsibilities for completing them. This discipline will ensure the orderly progress of the assignment.

    The Monthly Reports, the working papers and minutes of meetings will keep the Steering Committee, key government officials, other affected individuals and institutions, the consulting team, consultants involved with other related projects and the multilateral donor agencies aware of the status and outcome of specific activities and project developments. Additionally, other documents will probably be produced and circulated, including:

  • Appraisal Reports. Appraisal Reports should be completed on those enterprises which are eventually evaluated for divestment, restructuring or liquidation.

  3.7.9. Effective Communications with the Multilateral Providers of Assistance

  In most cases, the divestment program will be sponsored by a loan or grant from a multilateral donor. This agency will normally have a number of professionals involved with supervising the implementation of the program. The written reports described in section 3.7.8 above will be distributed to appropriate individuals at the multilateral agency. Additionally, regular meetings are recommended to update the multilateral Task Manager and his team of progress.

  3.7.10. Early Identification and Pragmatic Resolution of Impediments

  There will be impediments to the restructuring and divestment processes. These may be many and varied. Chief among are likely to be labour issues relating to redundancy and loss of job, market distortions and price control mechanisms, inadequacies in the regulatory and legislative environment which affect commercial activities, lack of commitment or cooperation on the part of affected individuals, lack of depth in the capital markets, competing claims over assets and other ownership issues, etc.

  The project team must aim to identify impediments early in the process. It can then recommend to the Executing Agency or its Steering Committee various possible ways of eliminating them or circumventing them in as practical a way as possible.

  3.7.11. Balance of Consideration

  Several balancing acts must occur in the successful implementation of a divestment program. The first is the balancing of varied governmental interests and the resolution of issues relating to those interests. Issues will include the resolution of the government's continuing role in public enterprise ownership, the degree of divestment (including issues related to strategic holdings, golden shares, natural monopolies, regulation, infrastructural enterprises, staged divestment, and restructured, etc.).

  At the same time, the consultants must strike a careful balance in their own work. Successful implementation of the process of divestment, restructuring and, as necessary, liquidation of public enterprises requires steady progress. Depending on the mandate the consultants have, it is critical that the project team does not become bogged down in minor detail or in specific enterprises. This requires a careful balancing between hands-on involvement with specific enterprises to ensure a satisfactory outcome for those enterprises and retaining sufficient distance and objectivity to monitor and manage the entire process of divestment. This balance of hands-on involvement and "big picture" objectivity requires considerable maturity, experience and understanding of issues. We believe a team such as ours has the judgement to provide this balance.

  3.8. Skills Transfer

  The reform strategy should deliberately incorporate a methodology of skills and technology transfer. A large number of expatriate experts will be involved in the process of public enterprise reform. It is important that the experience and skills of these experts be shared with local counterpart staff. In this way, the benefits of the many Technical Assistance programs will be amplified and continue beyond the life of the TA contracts.

  A successful strategy to ensure maximum skills transfer has two components: The creation of a body of carefully selected local counterpart professionals and the selection of expatriate experts with both experience and interest in training, education and skills transfer. These are discussed below.

  The responsibility for public enterprise reform should be vested in one organisation within government. This has been discussed elsewhere. That organisation must consist of a stable group of educated, motivated, sincere financial, administrative and commercially minded individuals. They should be involved in the process of public enterprise reform and privatization for the duration of the reform process (often a decade). Additionally, each line ministry should designate key individuals with the intelligence, motivation and educational background to benefit from the intensive association with highly qualified international consultants. These individuals should have the responsibility of learning as much as possible from the consultants and passing that knowledge on to their own countrymen in a systematic and organised manner. It is in this way that one of the chief benefits of the reform process -- the ready availability of experienced, technically proficient industry experts -- can be harvested. International experts chosen to complete the Technical Assistance projects must be selected on the basis of their ability to promote and encourage skills transfer and technology transfer. Too often, the consultant views his job as coming into a country, making a study, writing a report and leaving little behind but the report itself. This is not sufficient. A written report should not be seen as the object of the consultancy. Rather it is the process of making the study that is significant to local interests. Terms of reference could be drafted to state clearly that skills transfer and technology transfer are a critical and central part of the consultancy. Consultants should be recruited and selected on the basis of their success in training and motivating their local counterpart professionals.