EVALUATING PUBLIC ENTERPRISES

4.1. Collecting Data

Considerable work may have already been accomplished in classifying the public enterprises. If not, the project team must collect data at the enterprise level, the sector level, the national level, and internationally as it relates to the firm under analysis.

An important early task in the privatization process will be to identify and define the information requirements for each public enterprise. This will involve:

• Defining Key Data
• Collecting Data
• Developing a Financial Questionnaire
• Identifying and Training Local Financial Analysts to assist
• Evaluating Existing Data — analysing financial results, strength, trends and comparisons between enterprises in the same industry

4.2. Preliminary Analysis

4.2.1. Constraints Analysis

Section 7 discusses critical issues and constraints to a successful divestment and restructuring. These will be addressed and dealt with to the extent possible.

4.2.2. Appraisal and Valuation of Short Listed Enterprises

Once agreement is reached on the enterprises to be privatized, restructured or liquidated and priorities established, selected enterprises will be analysed more thoroughly. On site visits will allow thorough technical and commercial appraisal of each enterprise. Aspects to be investigated will include: background and history; details of administration and marketing; technical appraisal of plant and equipment; type and number of employees; maintenance management; production planning and control; quality achievement; and situational issues.

Asset valuation will use both the “going concern” and “as is, where is” scrap valuations, applying the “top down, bottom up” approach.

Factors Determining Profitability

Prospects for future profitable operation for each of the enterprises will be assessed based on the results of financial analyses, information obtained during on-site visits and the value enhancing strategy suggested for certain enterprises. Because most industries are usually operating in a distorted market, adjustments must be made to anticipate performance in a “free market”.

4.2.3. Preparation of Business Plan and Cash Flow Projections

For each enterprise, a business plan should be developed including projected income and cash flows. Steps involved include: consideration of overall objectives and strategy; review of existing marketing plans; identification of product groups; assessment of income and variable costs; analysis of suppliers and distribution costs; and projection of three-year financial plans.

4.3. Diagnostics

Once the public enterprise has been evaluated, financial experts will perform a range of diagnostic exercises relating to the health of the enterprise, its management, labour, resource and capital situation, its market, its position in the industry, and prospects for the industry. The diagnostic can also identify enterprises which should be sold quickly where strong investor interest exists and/or where the public enterprise is profitable and well managed.

4.4. Evaluating Viability

Enterprises will be classified in one of four ways:

• Profitable, viable — Ideal candidates for privatization. Timing of privatization will relate to capital market conditions, the timing of value enhancement measures, and the Government’s sales priorities.
• Unprofitable, viable — Enterprises with basic strengths which can be made profitable by certain means. Candidates for restructuring, and in most cases privatized after the value enhancement action plan has been effected.
• Profitable, non viable — Trading profitably but in sectors for which no future is projected after completion of economic reforms. The Government must decide if it is prepared to sell these enterprises to buyers with a more optimistic view.
• Unprofitable, non viable — In the case of enterprises for which no possible improvement can be foreseen, the method of divestment will be clear — liquidation or merger with stronger enterprises.

4.5. Review of Options

The full range of privatization and divestment options will be explored. Possible options include:

• Liquidation and scrapping of assets — Enterprises which are “unprofitable and non viable” should be closed and assets liquidated.
• Merger of Enterprises — A combination of certain enterprises or parts may maximise the Government’s value.
• Spin-off of operating units — Public enterprises may have operating units which may prove profitable on their own.
• Corporatization — Often an ideal transition phase in the process of improving economic efficiency and divestment. Boards of Directors are constituted with commercially minded individuals with a mandate to run the enterprises profitably.
• Commercialising — Creating sufficient profit motivation in management by placing it on a commercial basis.
• Sale by tender — An enterprise may be sold by tender as a going concern.
• Sale of shares — Selling up to 100% of the shares through an Initial Public Offering.
• Granting of shares — Shares in public enterprises may be distributed to parties for little or no consideration, or at a deep discount to par value.
• Joint venture arrangements — Multinational corporations or others may be interested in joint venture arrangements.
• Performance and Management contracts — Contracts with existing management may achieve many of the benefits of privatization.
• Leases — Assets of an enterprise may be leased to other enterprises or to private sector manufacturers.
• Mothballing — A public enterprise may simply be closed with a skeleton crew retained to keep assets from wasting.

4.6. Agreeing a Reform Strategy

Once the public enterprises have been classified and evaluated, it is possible to recommend a priority amongst them for privatization, restructuring and liquidation. Our approach to divestment is presented in Section 5; our approach to restructuring in Section 6.