Privatisation Process

The privatisation process, which is aimed at selling government property in an open and transparent way with a view to obtaining the best possible price, varies somewhat depending on the nature of the asset being privatised, on the proportion of shares being offered for privatisation, and on whether a transfer of management is involved. The Board of the Privatisation Commission decides as to what kind of process will be followed. The following flow chart's provide detailed steps:-

A brief description of some of the steps common to all transactions is provided below:

Identification:

The first step is the identification of the entity or list of entities to be privatised. In a typical transaction, the Privatisation Commission, in consultation with the relevant ministry, submits a Summary of the proposed transaction to its Board. The Summary justifies the need for privatising the property, outlines the likely mode of privatisation, and sometimes seeks guidance on issues relating to such matters as pricing, restructuring, legal considerations, and the regulatory framework. Once endorsed by the Board, it is submitted to the Cabinet or its subcommittee, the Cabinet Committee on Privatisation, for approval.

Hiring of a Financial Advisor

In major transactions, the process to hire a financial advisor is carried out by the transaction manager with the approval of the Board. Terms of reference for the FA are finalised, expressions of interest from prospective FAs are solicited, an evaluation team is constituted, and short listed firms are invited to submit technical and financial proposals in a common format. The evaluation team scores the technical proposals and the highest ranked firm based on both technical and financial scores is invited for contract negotiations and signing. In November 2001, the Board approved regulations for hiring a financial advisor in order to make more transparent the procedures that were largely being followed over the last decade Hiring of Financial Advisor Regulations 2001

Due Diligence:

The next step is to carry out the legal, technical, and financial due diligence. This is aimed at identifying any legal encumbrances, evaluating the condition of the assets, and examining the accounts of the company in order to place a value on the company. For most industrial units and some small transactions, this is done using in-house transaction managers and staff, or by sub-contracting out part of the work to a domestic legal, technical, or accounting firm. However, for major privatisations in banking, infrastructure, or utilities, the FA carries out this function. Following due diligence, the FA finalises the privatisation plan. This may include recommendations on any needed restructuring, in addition to specifying the amount of shares or assets to be privatised. For major privatisations or when the proposed privatisation mode is different from the initial plan, the plan is then submitted to the Board, the CCOP, or the full Cabinet for approval.

Enacting any Needed Regulatory and Sectoral Reforms

For many major transactions, the ability to privatise and the amount of proceeds realisable depend critically on the level of regulated prices for the public enterprise’s inputs or outputs and other sectoral or regulatory policies. For many monopolies or quasi-monopolies, the “rules of the game” specifying the competition framework post-privatisation, the manner and type of regulation, and the institutions regulating them are key to investor interest. In addition to rules determining prices or tariffs, there may be rules determining standards, penalties for non-compliance, the extent, form and timing of any proposed deregulation, and the evolving structure of the market following liberalisation. Clarification of these rules and passage of needed laws and regulations will often be necessary before taking the transaction to market.

Valuation of Property:

In order to obtain an independent assessment of the value of the property being privatised, the Commission relies primarily on external firms. The Financial Advisor, where there is one, carries out the valuation to obtain a “reference price” for the property. In other cases, the Commission contracts with an external valuation firm or accounting firm as specified in the rules on the valuation of property, which can be obtained from the PC website. The methods used for the valuation vary with the type of business and often more than one method is used in determining the value. These include the discounted cash flow method, asset valuation at book or market value, and stock market valuation. Despite using scientific methods, valuation remains more an art than a science. The true value is dependent on many difficult to quantify variables such as country risk, corporate psychology and strategy, and perceptions of future macroeconomic performance. Only the market can determine the true value. Therefore it is important to focus on designing appropriate transaction structures, on advertising in relevant media, in choosing and implementing appropriate pre-qualification criteria for bidders, and in following an appropriate bidding process to obtain a fair price for the privatisation.

Pre-bid and Bid Process:

Expressions of Interest (EOI) are invited by advertising in the relevant media. The PC Ordinance 2000 spells out some of the advertising procedures. Depending on the kind of transaction, the EOI describes the broad qualifications that potential bidders must possess. Those submitting an EOI and meeting the broad qualifications are provided with the Request for Proposals (RFP) package containing the detailed pre-qualification criteria, instructions to bidders, draft sale agreement, and other relevant documents. Interested parties then submit a Statement of Qualifications (SOQ), which is evaluated to determine whether an interested party meets the requisite qualifications. Pre-qualified bidders are then given a specified period to conduct their own due diligence, following which they are invited to a pre-bid conference where their questions and concerns can be addressed. The meeting is useful in determining the bidding procedure to be followed (for example, open auction, sealed bids, or some combination) and could even determine the proportion of shares that the Government may want to offload. The bidding itself is done openly, with all bidders and media invited.

Post-bid Matters:

Following bidding and identification of the highest bidder, the Board of the PC makes a recommendation to the CCOP as to whether or not to accept the bid. The reference price is a major determinant in the recommendation, although the Board may recommend the sale even if the offer price is below the reference price. Once the bid price and bidder are approved, the PC issues a letter of acceptance or a letter of intent to the successful bidder, indicating the terms and conditions of the sale. Following negotiations with the bidder, the PC then finalises the sale purchase agreement, collects the sale proceeds, and transfers the property. Under PC’s current policy, privatisation proceeds are required to be paid upfront rather than over time, as had been the case for many earlier transactions. Within 30 days of the sale, the PC is required to publish the summary details of the transaction in the official gazette. Three transactions, namely LPG business of SSGC, LPG business of SNGPL and divestment of shares of MCB, were published in the gazette in 2001.

In summary, the privatisation process is lengthy for major transactions, mainly to assure transparency in the process. After receiving CCOP approval for the privatisation, it typically takes about 18 months to close a major transaction, even when no major restructuring of the company is required see chart. This includes about six or seven months to appoint a Financial Advisor and another three or four months for the FA to complete its legal, technical and financial due diligence and to propose a privatisation strategy. Following approval of the strategy, the marketing and bidding process may take five or six months (valuation efforts proceed in parallel), while it may take another two months after bidding to obtain approvals, finalise sale documents, and close the transaction. Additional delays in privatisation are often caused by waiting for the necessary regulatory framework and sectoral policies to be put in place and for any needed restructuring to occur.