The previous chapter clarified that, while following a common trend, the extent of privatization varies greatly across countries, and that political, economic, and institutional factors have shaped the process over time. The analysis has also shown that privatization involves the balancing of (sometimes) conflicting objectives in a context where economic and institutional constraints play a major role. For example, a trade-off emerges between the political goal of spreading share ownership and the one of revenue maximization, as underpricing is often necessary to tap domestic retail investors, and even more so where capital markets are not well developed. The same trade-off exists when governments resort to privatization in order to build investors' confidence and gain credibility.
How do governments design privatization to achieve these conflicting objectives? In other words, how do they deal with these trade-offs in the choice of privatization method? Finally, have these methods been useful to target the declared goals?
When governments are confronted with the design of privatization, several issues have to be addressed. The first one is the size of the stake. Governments may decide to relinquish control rapidly, or to proceed gradually with a sequence of issues. A second (and related) problem is whether to raise funds in public or private capital markets. Public equity markets are used for the flotation of larger companies, while private placements are typically chosen for the transfer of control blocks, or when stock markets are weak. Another key issue is the international profile of the sale. As to privatization in public capital markets, governments may opt either for an international/global offering, or for a purely domestic issue. As far as asset sales are concerned, they could decide to open the auction to foreign bidders, or to limit the participation to domestic strategic investors. Finally, the pricing and the allocation of shares among different classes of investors are also very important. Governments may structure the transaction as a fixed-price offering or as a book-building exercise. They may also decide to preferentially allocate discounted shares to managers and employees. 1