INTOSAI Working Group on the Audit of Privatisation

Introduction

First of all, we would like to express our thanks and appreciation to the INTOSAI Working Group on the Audit of Privatisation for the excellent job of issuing the guidelines of the privatization operations which are held for the transfer of the public sector ownership to the private sector through sale. Although, these directions and guidelines are important they represent one side of the privatization processes. the other side of the privatization is through the partial sale, which we are preparing for the privatization accomplishment. This type of privatization got various forms, procedures and phases, their effects are extended financially and economically for long periods. So the privatization process through partnership acquires vital importance in the exercise course, due to the legal difficulties, contractual, financial and accounting complications also. Therefor the remedies should be efficiently and reasonably tackled through all phases had gone through.

The success of such type of privatization requires, from governments, a clear vision and utter faith towards free economy, also attractive economical environment for private local and foreign investors, and to encourage and support this trend for its contribution in the development process.

To prepare the legal form and procedures necessary for the privatization process by issue of law and BI-laws to manage the privatization process, and to offer the units involved all rights to take the regard procedures for the privatization of corporations and public companies, including alteration of their laws, legal form, financial structure. The legal delegation for each sector or for every case separately. It is recommended for this authority to be handled by a council or special committee to manage privatization process with the assistant of high professional consultancy from financial intermediaries and monetary experts or consultant companies in evaluating and marketing.

The control of privatization process requires basic law evidences and BI-laws complying all corporation parts, whatever the smallness of the government contribution in the capital of the mixed companies. and in all transformation phases, make it possible to the government controlling organization execution, although they should have the sufficient calibre which is capable to carry the privatization process and those of professional managerial qualifications to control such assignment work.

Definition: Acknowledgement of Partnership

The meaning of partnership is the transfer or partial sale of public corporations owned by the government ors by constant or temporary discharge of some ownership rights through investment in companies already established or to establish and to operate new companies, to secure limited liability and legal entity which will be responsive to open market factors free from government organizations influences and contradictions. The role of government to act as any other investor. This attitude will presume that public assets to be re-evaluated and recorded by public or neutral body for limited liability formation and contractual liabilities of the contributing parties for the required financial structure.

Such definition of partnership understanding contains the following factors:-

Almostly, such contractual relations extend to many years may be to over to ten years. to continue to twenty or more.

It is reasonably to use the classification proposed by the international bank where the companies liable for privatization are tabulated to three categories:-

Category "A"

Those public projects which should continue without alteration of their situations and to be limited to projects of strategic importance on grounds of accurate definition of strategic importance.

Category "B"

Those public projects which should be dissolved and their reformation is hopeless.

Category "C"

Those public projects which can be privatized through any one of the procedures and may be directly or after reformation and reorganization consists i.e. of the following:-

• Amalgamation or division
• Sale of assets unnecessary for regular operation of the project and also sale of some monetary assets.
• Reformation of project policies concerning production. marketing and administration or re-selection of management.
• Gradual cancellation of all types of support or project preferential treatment.
• Getting rid of the projects indebtedness for delaying privatization.
• Introduction of improvements in ordinary types of operations and activities.
• Removal of bottlenecks retarding maximum capacity production process of the project by execution of some subsidiary investments.

Our concern is mainly to determine projects or public corporations whose ownership can be partially transferred to the private sector, on the grounds of government full or partial ownership of the public projects, taking in regard the future government visibility of corporation promotion, establishment and appraisal of the national economic foundation by full utilization of human and natural resources. The aim to perform gradual advance and continuous of the national income for satisfaction of the nations needs and the economic stability.

We propose division of the public projects according to this vision into three groups as follows:-

Phase of Partnership or partial sale goes through different stages before introduction of the project evaluation stage. As:-

Which of the multi-goals projects is reasonable or desirable to invite the private sector to its ownership and to work in?

The answer

Carrying of categorization and priority determination according to various standards from which selection should be carried

To carry evaluation of projects fully owned by government before partial or full tender for sale with assistance of specialized and efficient experts ( Role of independent consultancy bodies ) or financial organizations as investment bank and to plan for establishing them from before, to carry studies and to adopt latly issue of shares for these companies. The studies prepared for profitability (Earnings) to decide value of company shares, number of ordinary shares, or for both goals. This to reach fair market value which is defined as the maximum cash price at open market between fully aware parties enjoying due care and contracting without duress and undue influence.

Revaluation of projects value is considered as an obstacle that face the full or partial sale process of the public project, because historical recorded value does not represent the market value, also profits or losses do not represent the actual economic value.

Although the market value of the project is not determined only by the supply price for it. In turn this is fixed to opportunity cost, and capital market response, the probabilities of future continuity and growth. Traditional and recent ways of evaluation, of which we mention:-

• Traditional
• Historical cost
• Average historical cost
• Compensating cost
• Amended compensating cost

 Recent Procedures of re-evaluation

• Discounted cash value
• Earnings valuation

Revaluation by earning expected in future one of the most acceptance and convincing in case of companies expected to continue for the foreseeable future.

Concentration on aims and not means

Importance arises from defining the essence of necessities and inducements those lead to privatization, and those considered as means of measurement of privatization goals achievement, because it is difficult to calculate the economic, social and financial effects and consequently its success without a clear vision of privatization objectives. So it is very essential to specify the basic motives of privatization to achieve its goals. One of the questions in relation. Why many countries introducing privatization process? The essential goals of privatization as thought by international monetary fund associate of international bank as follows:-

Worthy mentioning, the 8 points above in relation to privatization objectives in addition they set basic inducements and needs for privatization in all countries, at the same time they frame the essential elements to attract foreign and local investments.

Majority of countries had adopted most or all of these objectives and inserted laws, articles and decisions regulating privatization process according to necessities of economic activity size, and the countries interference in economic situation and their contribution in corporations. Also nature of economy sector's size, and their relative and total weights in the national income.

It should be taken in consideration that objectives of privatization "Assume specific circumstances for success of conversion through presence of competitive market or reasonable organized environment financial and statutory regulations issuance to guarantee success of privatization process at any environment."

The objectives above for the comprehensive awareness of privatization process for the sake of government role contraction in the economic activity and that through freeing economic activity from formal and routine obstacles, such attitude need revision of all prevailing laws and specially those in relation to investment process, also cancellation or alteration of those already proved negative effect on investment decision, also in need for shortening administrative requirements which delay investment execution. Concentration on freeing economic activity and giving it that priority, is arising from nature of privatization process which is for enhancement of economic performance as ultimate goal of privatization such can be secured by giving free market a major role in the economic production process, because ownership conversion under the prevailing obstacles will lead to retardation and failure of privatization process.

Major countries may be combined in inducements and goals in penetrating privatization process and carrying it, but practical experiment proved, it is impossible to obtain success without a general policy carrying overall economic reformation and importance of free economy and economic identity to be clearly stated and with stability in laws and regulations, with the desire of broadening of ownership, to attract capital investment, also incentives and sufficiency of laws structure which affect investment atmosphere specifically exchange, pricing and employment utilization, income Tax, Tariffs and courts proceedings.

All these aspects should be tackled by countries at introductory or intermediary stage of privatization process. because they are indispensable for privatization implementation due to the tight link between the intermediary procedures and the transformation process. The availability of proper preparations and motivations encourage privatization completion to be without harsh obstacles or contradictions. This is illustrated by success of privatization at social and under developed countries, due to restrains of laws and restrictions holding back such transformation.

For definition of privatization we have taken the broad understanding and not to be abbreviated only in meaning of privatization as sale wholly or partially of the public projects. The different procedures and types tackle privatization as partnership or to be contractual also physical privatization as transfer of full or partial ownership from public to private sector, or shape privatization which is known as re-structure and reformation of public projects to be surrendered to private sector conditions although they are under government ownership. This shape privatization to comply with prevailing government factors, keeping at distance from political factors to avoid government interference in their decisions. For shape privatization some individuals and private sector may finance or establish new projects or make renewals for the sake of temporary ownership of the transitions period. Later on the public projects may be returned to government or to be managed on behalf of government, alternatively a joint ownership or management may be reached. such situations comply with the government attitude of encouragement and creative proposal promotion, by concentration on outcome and the demanded service as a goal and not only the means.

At the beginning of privatization process through transfer of ownership of public projects to private sector by partial sale or partnership the government should have an answer to the question. How the government can select the simplest mean and to be of minimum sensitively or of less resisting difficulties and to have the best chances to succeed.

In this scope some questions arise when procedures are thought for execution of privatization process for public projects by partnership due to variety and at all stages to seek solutions for difficulties and unwillingness of employees or trade unions or political parties in addition to citizens fearness of services subsidy reduction or monopoly of production factors by few families or large companies.

The question arising about:

• What are the intended steps or procedures to be taken by the government to overcome the resistance against privatization process?
• Are there any steps or strategy is set for privatization with time schedule for execution?
• Is there any extent on scope for privatization?
• Are objectives of privatization determined clearly?
• How excess of working power will be treated to lessen the social effects of privatization?
• Is pubic awareness is maximized and consumers anxiety are dealt with adequately?
• Are incentives and motivations of unemployment are set to decrease effects of privatization?
• Are there any checks or measures prepared to prohibit economic concentration?

Also some questions may arise about privatization success requirements as: -

• Is their efficient private sector of technical and financial capabilities?
• Is there capital stock exchange market and how its size?
• Are there restrictions on foreign ownership and to what extent and are remedies taken?
• What measures have been taken by government to enhance investment atmosphere, to attract investors?
• What are the financial articles and regulations, to be prepared, to motivate investors and act as incentives?
• Is there information system to make financial information available about privatization program with standards of performance on cost benefit basis taking in regard government views about prices structure and resources subsidy?
• What are the efforts carried to free economy from restrictions and introduction of competition and to free labour market?
• After evaluation stage which is carried by financial consultants, accounting and law firms: and on light of evaluation measures of selection are set for companies and public projects owned wholly or partially by government, which are intended to be privatized partially through sale or part of its contribution through public tender. Such situation arises some questions like: -

	Who will benefit from sale process, and who will be given prevential treatment from citizens employees or foreigners?
	What are the facilities offered to each category mentioned before?
	What portion of capital offered for circulation and who will make sale offers?
	Sale price?
	Are disclosure contents, its goals and means satisfying privatization objectives implementation?

Also the choice from variety of procedures in relation to those responsible for decisions of conversion process or transfer of projects according to government circumstances and its regulations as for:-

• Parliament decision according to each case.
• Government may be delegated this matter.
• Agency for committee or independent body from legislative or executive authorities.
• Also the choice between methods of projects evaluations those intended to be privatized, ownership transfer and means of value price fixing...etc. From such choice of ownership transfer means:-

	What is the method of share price fixing?
	What are the factors chosen to determine priorities of projects sale and what are the basis and measures taken in consideration?

Determinations of priority of ownership transfer are many and of variable procedures, according to economical and statutory regulations projects.

Conditions and market circumstances. Partial sale can be divided to the major groups as follows:-

• Transfer of ownership of projects to private sector by share applications and allotments.
• Transfer of projects management to the private sector.
• Private finance to public projects. The major three groups consist of a number of subsidiary branches. Each group had got merits and demerits and the selection of any one depend on the situation of each country. Usually such practice takes along period of time for privatization process to go through many stages especially at under-developed countries. The process begin from the intermediary to preparations and to be finalized at ownership transfer. The complications are reduced by degree of clarity and accuracy of views adopted, unless there is a need to initiate different procedures to comply with the circumstances of the country, to adopt policy of getting rid of the public projects for the private sector. There are a lot of experiences due to the variety of methods and stages of the privatization process. This situation make the country intending to go through privatization, should give considerations and its view should be comprehensive and beyond the details of short sight, to look for the financial, economical and social aspects of the privatization. And these considerations to obtain the objectives of privatization by:-

	Due care should be paid for the sake of perfection to tackle the matter of privatization and to deal with the various procedures and stages cautiously and gradually by well prepared objective program, which should be capable of execution at the public projects economic, financial and social atmosphere. These calculated steps for evaluation and reviews from time to time to guarantee not going beyond the drawn boundaries and possible limits of scope.
	To concentrate on results and goals and not to drop means and procedures by searching for alternatives and possible opportunities.
	To evaluate on basis of cost benefit and earnings and trying to strike a balance or equilibrium between them for the sake of the essential challenge of how to make privatization with the least possible cost.