Academic journal article Journal of Financial Management & Analysis

Privatization and Public-Private Partnerships: 2001

Academic journal article Journal of Financial Management & Analysis

Privatization and Public-Private Partnerships: 2001

Article excerpt



(Publisher: Affiliated East-West Press Pvt. Ltd, No. 5, Nirmal Tower, 26 Barakhamba Road, New Delhi-110 001, India

This brilliant study on a highly topical issue by a scholar of international repute and practitioner has been published at a time when divestments, nationalisation, mergers and acquisitions are the order (fashion) of the day and the purpose of this 368-page book is to help develop, according to the author,

better government appropriately limited in size and functions, but fully capable of providing the legal, economic and (collective) goods infrastructure that will permit the private sector to reach its full potential.

The author has presented a useful set of management guidelines for Government organizing and managing the privatization process;

* Assure that the political will exists and is understood through-out the government; this is the most important requirement, without which the process is doomed.

* Assign unambiguous responsibility for the process, for it is a complicated one that requires authority, resources, knowledgeable personnel, and often consultants.

* Establish clear objectives for the privatization program. Because there maybe many different desirable but sometimes conflicting objectives, careful attention must be given to this step. Intuitive feelings are not enough.

* Select the appropriate form of privatization, choosing among the many different forms identified previously or crafting a suitable combination of them. The selection should be based on a careful analysis of the sector, sector trends, experiences elsewhere, political factors, employee relations, degree of competition that can be elicited, financial conditions, estimates of the situation-specific economic and other benefits that may be realized, and the privatization objectives.

* Enact necessary legal reforms. Privatization may require new laws to protect private investors and to allow contracting for services, selling state assets such as natural resources, or establishing long-term concessions for infrastructure, for example.

* Develop clear and transparent procedures for the process: Competitive bidding, public announcements, disclosure of prices and bidders, and oversight. But suffice it to say that the hallmarks of a good procedure are open and equitable criteria for qualifying bidders and selecting winners, a reasonable timetable, and clear standards for performance, payment, and future investment (if appropriate).

* Estimate the values of assets and enterprises that are slated for divestment by using professional assessment specialists. Different methods may be used, such as discounted cash flow, liquidation value, replacement value, book value, or comparative value, but ultimately the only valid measure is the market price as determined by a competitive process, such as auction, bid, or public share offering. Government typically have greatly inflated and unrealistic expectations of the value of their troubled enterprises and deteriorating assets. Generally speaking, the ease of gaining support for privatizing an enterprise is inversely proportional to the difficulty of finding a buyer.

The author has well researched in a highly informative way the study of monopoly enterprises before and after divestment.

Monopoly Enterprises Before and After Divestment

A study by the World Bank looked at twelve monopoly SOEs - - five utilities, four airlines, two other transport enterprises, and a state lottery - - in four countries, Great Britain, Chile, Mexico and Malaysia, both before and after privatization. A counterfactual approach was used, that is, actual results were compared to a sophisticated extrapolation of what would have happened if the enterprises had remained government owned. A complex econometric analysis examined the effects on all beneficiaries - workers, investors, citizens, and owners, and the results of the analysis were expressed as follows: the net gain due to divestment was equal to 26 per cent of the pre-divestment sales revenue. …

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