There are several methods of valuing enterprise assets, viz. net present value, asset valuation and leverage value. The value of enterprise assets may be made easier by a functioning stock market. The risk of undervaluation of assets is high when the capital market is fledgling. Downturns in the domestic market may cause disappointments for local share issues. Research on the pricing and valuation of enterprise assets tends not to be informative about an economy without a capital market. Concern has risen on whether recognition is given to non-tangible assets. Valuing goodwill and projecting future revenues add complication. In terms of valuation, selling assets poses the least problem. Further, the absence of a strong regulatory framework may affect the price that is received. It may lead the investors to apply a high discount factor to the value of an enterprise with a view to discounting the attendant risk. In terms of pricing, collusion is another factor when two or more bidders conspire to secure assets at lower prices. What matters is not the technical elegance of any of the valuation methods. The real deal rests on the policy or contextual assumptions, the tax and regulatory framework and the extent to which a risk is discounted for.
For privatisation, contract enforcement is an important step: the weight to be given to the factors ranging from an investment programme, training and external markets to technological capacity and location.
The provision of investment after transfer carries strong weight. Full and careful documentation should be provided in whose absence arbitrariness or favouritism may appear. Provision should be made for penalties for default. In many instances, investors/buyers have failed to fulfil contractual provision and have contravened restrictions contained in the contract.
In managing privatisation, responsibility is assigned to the ministry of finance, the ministry of planning, a cabinet subcommittee, a special secretariat or a divestment/privatisation unit. Such a unit is charged with vetting applications, conducting analyses, making recommendations, preparing background and position papers, checking the options, specifying privatisation modes, sequencing privatisation stages, and identifying resource needs. In reality, privatisation hits several snags: striking a balance between decision-making and technical assessments, tensions and misunderstandings between and among concerned agencies, weighting buyer credentials, fiscal concessions and the asking price, fiscally-driven nature of privatisation, high priority assigned to financial issues, the quality of decisions taken, the lack of a clear and viable separation of responsibility between and among agencies, the improper channel of communication, the lack of a conflict resolution mechanism, high-level managers bogged down in daily operational chores, and the conflict of interest.
Since information preparation on sellable enterprises is a demanding task, managers may have to do the work, having been freed from running routines. Curiously enough, managers tend to secure favourable post-privatisation payoffs for themselves by passing inside information to potential buyers.
In order to secure national and public interests, the government must ensure that divestment and privatisation are executed in a manner to obtain full value for the country. The incidence of unfair practices is high. Effective control should be in place to protect consumers/customers and the country against the myriad of questionable practices, viz. shell companies, company layering, subsidiaries as suppliers, ignoring the inadequate background of buyers/investors, deficiency in providing reasonable safeguards in the law, inability to protect consumers against fraud and unfairness, etc. Preventing such practices and monitoring these activities should be mandatory. The regulatory framework’s appropriateness to privatised enterprises is relevant. While returning to confrontational regulations during the derigista era is hardly an option, consumer public in most cases has no wish to embrace unregulated private monopolies or robber-baron bare-knuckle days either.
The reality is that privatisation has been or is being executed prior to the formulation of necessary institutional supports and safeguards. Privatised entities are known to take advantages of such gaps, such as siphoning cash from subsidy, misusing earnings, financing capital expansion by parent company, endemic cash abuse by subsidiaries, etc. Regulatory weaknesses are evidenced in ad hoc regulations, high profits of the utilities, the absence of generic competition and the diminuation of output delivery. Current regulatory practices are undercut by weak accounting, weak judicial review and lax procedural safeguards.
Paradoxically, privatisation has increased public sector involvement in several areas, e.g. security, foreign takeovers, ownership concentration, resale, foreign shareholding, domestic ownership, retrenchment provision and restriction provisions. Recessions, limited domestic savings, income and wealth inequalities and fraud tend to frustrate spreading and democratising share ownership broadly across the income groups. Belief is strong that privatisation can elude regulation, restore foreign domination and rehabilitate privilege-seeking rich families.
EVEN in selling shares of commercial banks, it is said that offers aim at securing the allegiance of a vocal group. It is clear that there is no substitute for protecting national interests and consumer rights. It is equally clear that in divestment and privatisation, the public sector may have to cope with unsavoury practices and audacious and unorthodox businesses. When it comes to regulation and protection, checking the history of buyers’ past behaviour and putting protection legislation and regulatory agencies in place prior to sale completion are essential.
In preparing for privatisation, the reaction of employees is a recurring concern. It is assumed that divestment would be followed either by the shedding of labour or the reconstitution of the workforce. Those expecting to be adversely affected by privatisation and even personnel in more successful enterprises take evasive action, voice concern and show resistance.
To this end, employee participation is often a reasonably effective means or securing or retaining support for privatisation. Governments should be proactive in spelling out, such provisions as tenure, dismissal, employee rights and benefits, pensions, gratuities, redeployment and public sector inadequacies in communicating to employees its intentions and proposed safeguards Still, employee fear and unease are not assuaged, especially where the labour market is fragmented and dominated by closely-held family-owned companies.
Employee resistance looks for outlets, including asset misappropriation. To head off adverse employee reaction, contain low morale and enhance employee motivation, governments have, in some instances, utilised employee share ownership and profit-sharing.
Dealing with press reports in relation to divestment/privatisation is time-consuming, lobbying is extensive, foreign buyers tend to receive favourable treatment, much representation takes place in the corridors of power to secure favourable treatment of locals or to block sales to foreigners, many local investor groups tend to oppose foreign participation and special interests launch antiforeigner campaigns in the media – these are some of the snippets of media and public relations as far as divestment is concerned. Many local groups are often unable to raise the necessary fund for larger entities, especially the foreign exchange component. Some interest groups appear to be in search of a quick kill. These factors fuel the growth and clout of an active domestic lobby. By itself, lobbying is not necessarily a pernicious problem, but if unduly unbalanced, it obfuscates the process by spreading disinformation.
Privatisation is intended to yield a number of outcomes. Overall benefits include: restoring fiscal balance, reducing deficit, eliminating/reducing subsidies and cash transfers, mobilising private savings, providing access to new sources of capital, encouraging/developing a culture of entrepreneurship, generating revenues and repaying loans, reducing public spending, improving the balance-of-payment situation, increasing allocative and productive efficiency, accessing through the financial markets to private capital and fund growth/development, greater efficiency, higher output performance, improved competitiveness, additional domestic/international business, stimulating private sector growth, deepening/broadening the financial market, enhancing the quality of investment-specific equity, increasing the size/liquidity of the market, providing industrial/ commercial balance to the stock market, remedying the overrepresentation of the financial sector, providing greater balance to investment portfolios of institutional investors, promoting economic democracy, broadening of participation of in the ownership of national assets, and promoting risk-taking/new ventures. For personnel/managers, the benefits are having equity ownership in the divested companies, an improved system of savings, an opportunity to participate in share ownership in their enterprises’ financial success and broader and more diversified stock market, and the gaining of a quoted market value enhancing the status of enterprises. For citizens, customers and taxpayers, the payoffs are improved opportunity for investment and savings, increased number of shareowners in society, enhanced financial latitude and long-term security, increased income and wealth, wider range of investment options for long-term personal financial planning, and increased opportunity to participate in productive activities. For overall management, the more streamlined and efficiently-organised public enterprises as a result of increased accountability and responsibility to their new public shareholders and improved accountability and responsibility to shareholders improving enterprise decision-making.
Some entities – unviable or marginal and in need of infusion of updated technology and marketing innovations – are not easy to sell, especially when the privatisation legislation reeks with ambiguities and restrictions. Concerns are voiced about prices, terms and the pace of divestment and privatisation. Public sectors tend to be chided at once for being too slow and red-tape-riddled and for selling too quickly and cheaply. Fraudulence, cronyism, corruption, exploitation, deception, turbulence and instability closely accompany market economies, and privatisation is a heartbeat away from such a morass.
(To be continued)
(Dr Jamal Khan was professor of public sector management at the University of the West Indies. [email protected] )
