Guide to Privatisation
Glossary
Access rights | The level of rights given to the auditing body regarding access they have to the documents of the organization which they are auditing. |
Activity-based costing (ABC) | A methodology which assigns costs to products or services based on the resources they consume. It calculates the direct and indirect functional costs of a certain activity of an organization and then traces them to the product or service which allowed that activity to be performed. This method highlights how effectively resources are being used and how all relevant activities contribute to the cost of a product or service. Such information can be very helpful when making decisions about whether or not to restructure or privatise an activity. |
Aftermarket | The period immediately after the shares of a company have been issued on the stock market for the first time. In a flotation this is the period just after the company has been floated on the stock exchange. |
Allocation | The method by which the shares are divided between the various investors in a flotation or secondary sale of shares. The vendor must decide which proportion to allocate to individual, institutional and foreign investors. |
Articles of Incorporation | A document which lists the regulations that govern the running of a company, agreed by the shareholders. |
Asset | Any item of economic value, especially those which can be converted to cash. |
Asset management | The process by which a business collects and maintains data about all it owns. The data is used in connection with the financial aspects of ownership e.g. depreciation, insurance. |
Asset sale | The transfer of ownership and/or management of assets, commercial-type enterprises, or functions from the state to the private sector. |
Auction | A public sale in which enterprises or assets are sold to the highest bidder. It was used in several countries which formerly had planned economies to transfer a large amount of small enterprises from the state to private hands. |
Base data | The core data on a company, usually containing detailed business plans and forecast. |
Benchmark value | A benchmark is a point of reference for measurement. A benchmark value is a value that needs to be reached (either high or low) for certain conditions to begin to apply (e.g. for a profit to have been made). |
Benchmarking | A method of encouraging good practice by comparing the performance of an organization with another (good) one or several others. |
Bid | In an auction a bid means the offer of a specific amount of money for the
enterprise or
asset that is being auctioned. |
Bidder | The legal entity which is responsible for making a bid. |
Bonus share | A share which is freely distributed for a given amount of shares acquired, and is held by the private investor for a given length of time. |
Book value | A method of valuation of a company’s assets and liabilities, which is generally only used if a business is breaking up and its assets being liquidated. It is based on a calculation of the net value of assets on the company’s balance sheet (i.e. the gross value minus liabilities). It tends to underestimate the value of assets because it is often based on historic costs. |
Bookbuilding | A process in which potential investors in a company indicate the number of shares they are prepared to purchase at various prices. It can be used by the vendor in a flotation to determine a good price for the shares. |
Bought deal | A bid through which an investment bank acquires the entire block of shares to be allocated, in a very short period, to final institutional investors. |
Business risk | Risk associated with the unique circumstances of a particular company. |
Business segment | A specific unit of a business classified geographically or according to function. |
Capital market | The market for long-term loans and equity capital. It is used by both companies and governments to obtain funds for long-term investments. It includes the stock market, the bond market and the primary market. In a privatisation a potential bidder will often need to obtain financial backing from the capital market before making a major bid. |
Capital structure | The permanent long-term financial situation of a company. |
Chinese walls | The establishment of a communication barrier between distinct sections of an enterprise in order to prevent potential conflicts of interest. |
Clawback | Provisions, usually limited in duration, in the terms of a sale contract which entitle the vendor to receive, in defined circumstances, a proportion of any subsequent profit made by the buyer after the sale. For instance, if the buyer sells on the enterprise they have bought a short time later and makes a profit the vendor can claim a proportion of that profit. |
Co-investor | An investor who provides financial backing to another investor or group of investors (e.g. a management buy-out team) who do not have enough capital to make the complete investment themselves. They often provide this money through venture capital funds or private equity funds. |
Commercialisation | A process in which public institutions are made more market-orientated but while remaining wholly or partially in the public sector. |
Comparable companies | In certain methods of valuation, especially price:earnings ratio, certain data may be necessary in order to make the calculations which is not available from the company being valued itself (for example, if it is a state enterprise it is likely not to have the accounting structure to provide such information). In such situations for the sake of having usable data it is necessary to take it from comparable companies and assume that the enterprise being valued would have similar accounts if it was listed on the stock market. Comparable companies are companies which are operating in the same sector either in the same country or abroad, though both the business and the accounting practices need to be similar in order for the companies to be truly comparable. The data must also be applied with care and interpreted effectively in order to provide meaningful information about the enterprise which is being valued. |
Competition | The existence within a market of enough providers and enough customers that no single participant has enough influence to determine the price of the goods or services on offer. Competition generally stimulates low prices and high levels of customer service as providers must compete for the patronage of the customers. |
Competitive tendering | A process in which a business invites several other businesses to make a formal offer to provide services at a specified cost and evaluates these offers with regard to specified criteria. |
Competitive tension | A situation in which competitors are forced to make their offers of goods/services/bids as attractive to the customer as possible so as not to lose their position to rival competitors. If a trade sale is conducted well, competitive tension between different bidders can produce a better deal for the vendor. |
Concession terms | The terms on which a bidding company takes over an enterprise or service. For payment of a fee they win concessions from the Government to operate in a particular market which may have been closed before. |
Conflict of interest | A situation in which a certain person or organization is acting in two capacities, the goals or interests of which conflict with each other. For example, when conducting a pre-sale valuation of an enterprise it must be done by someone who is independent of both the vendor and the buyer. This is because the valuation must be an objective estimate, and the vendor has an interest in it being high, whereas the buyer has an interest in it being low. The desires of either side for the valuation to be high or low mean that their interests conflict with the goal of having an objective valuation. Also, this term seems to be used as a euphemism to describe what in plain language would be described as an opportunity for someone to abuse their position and authority for their own personal gain. |
Consumers | Individuals who buy goods or services for personal use and not manufacture or resale, and with regard to public services, the people who use them. This essentially means the general public. |
Contracting out | A process in which a government body pays a private company to provide a service instead of providing it itself. It should ideally and usually does follow competition between the private providers to offer the best service to the Government for the best price, and the Government can change a contractor if the service they provide is not judged acceptable. |
Contractors | Individuals or companies who provide goods or services which are specified in a contract, for a specified fee. They differ from the normal employees of an organization in that they do not work for it permanently, but only for the duration of their contract. |
Controlling interest | Ownership of more than 50% of company’s voting stock. (See also majority shareholder). |
Corporate governance | The system by which companies are run. It includes the laws and customs affecting this task, and also the responsibility of those directing the company to ensure that it is properly and honestly managed. |
Corporatisation | The transformation of a state enterprise into a joint stock company organized under company law. |
Deadline | The point in time by which something must be completed. For instance, in a trade sale there may be a deadline for submitting bids, after which the vendor does not accept any more. |
De-monopolization | The ending of a (usually state-) monopoly in a particular market, usually effected by the Government. |
Discount factor | A formula used for calculating the present value of future costs and revenues, which works by subtracting from them a certain percentage to account for the fact that they have not happened yet and will be worth more in the future than they are in the present. This method works on assumptions about long-term business conditions, and is used in the discounted cashflow method of valuation. |
Discounted cashflow | A method of valuation in which a company’s present cashflows (costs and revenues) are projected into the future, and a discount factor applied to them to work out their present value. |
Divestiture | Also known as divestment, it means the reduction of some kind of asset, or of a particular company or government’s role in it. It is hence the opposite of investment. Privatisation generally involves divestiture on the part of the Government, and investment on the part of the private sector. |
Downsizing | A reduction in the staffing requirements of enterprises which can happen after privatisation for a number of reasons, such as the management’s response to market pressures, or the new owner’s desire to increase the profitability of the enterprise by cutting its costs. It often involves voluntary or compulsory redundancies. |
Due diligence | The process of identifying all the potential liabilities and risks in a financial transaction. In a privatisation both the vendor and potential buyers need to undertake due diligence with regard to the enterprise being sold, its prospects and the other party in the transaction. |
Dutch auction | A type of auction in which the price of an item is gradually lowered until it gets its first bid, and sells at that price. This method was used for flower auctions in Holland in the 16th century, from which the name originates. |
Employee Stock Ownership Plan (ESOP) | In an ESOP, employees take over or participate in the management of the enterprise that employs them by becoming shareholders in the enterprise. Such a plan can be adopted as part of a privatisation, especially in a flotation. |
Enterprise | A commercial-type organization which can rest in public or state hands. |
Equity | The part of a company’s capital which belongs to its shareholders. |
Expert panel | A small group of sector specialists who meet to provide advice and give their opinions on a specific topic. |
Feasibility study | A preliminary study undertaken before the real work of a project starts in order to ascertain the likelihood of its success. With regard to a privatisation a feasibility study addresses the question of whether privatisation is possible, appropriate and likely to be successful and beneficial to the relevant enterprise. |
Fines | Cash penalties imposed on someone for breaking a law, rule, or code of practice. Sometimes a government fines private utility operators if the quality of service they provide is judged to be unacceptably short of performance targets. |
Fixed-price tender offering | An offer to purchase a stated number of shares at a fixed price, usually at a premium over the current market price. |
Floor price | After the valuation and pricing of an enterprise have been carried out, the floor price is calculated as the minimum price the vendor will accept for the enterprise, beneath which it will not be sold. |
Flotation | The sale to individual investors, financial institutions and private sector businesses of shares which can then be traded on the stock market. If this method is employed for a privatisation then the institution must first be transformed into a joint stock company which makes it possible to sell its shares. |
Franchise | In a franchise a private company is given the exclusive right to provide a service in a certain market or geographical area. As such it is a form of monopoly. |
Franchising of external services | In this practice, the Government grants a
concession or privilege to a private company to conduct business or provide a service in a particular market or geographical area. the Government may regulate the service or the price, but users of the service pay the provider directly (user fees). Examples include the local monopolies granted to train and water companies when these industries were privatized in the |
Franchising of internal services | In this practice, government departments provide administrative services to other government departments on a reimbursable basis. It can be used if the skills of one department are temporarily needed in another. |
Global coordinator | A financial institution (e.g. investment bank, accountancy firm) which coordinates the marketing of an international share offer. |
Going concern | An enterprise which is expected to continue operating indefinitely and not to go out of business. |
Golden share | A share in a company, which may be a minority share, which gives its holder a special position in the management decisions of the company: certain provisions in the company’s Articles for Incorporation cannot be changed without the permission of the golden share holder. These provisions vary from case to case, but if a golden share is agreed in a privatisation it is normally because the vendor wants to limit the percentage of the company that any one person or group can hold. In privatisations of enterprises which are judged to be of strategic importance the Government may use a golden share to limit the proportion of shares that can be held by foreign investors. |
Government-sponsored enterprise | A privately-owned company set up by the Government designed to increase the flow of credit to specific economic sectors. They typically receive their finance from private investment. The credit markets assume that they have implied financial backing from the state, but they generally do not actually receive any financial aid of this sort. |
Greenshoe option | An agreement in a flotation by which the Government can make a supplementary offer of shares up to a certain maximum percentage of the initial subscription. |
Gross sale proceeds | The proceeds that the vendor makes from a sale before the deduction of the costs they have incurred (which leaves the net sale proceeds). |
Holding company | A company created to own the stock of other companies, thereby often controlling or influencing their workings and management. Investment Privatisation Funds (IPFs) and Voucher Privatisation Funds (VPFs) are two names for the type of holding company that developed in the East European voucher schemes. |
Horizontal integration | Horizontal integration is a structure of ownership and control, in which a company creates several smaller subsidiary companies to sell one type of product in various markets, either in different market sectors or in different geographical areas. An example is a clothes manufacturer which holds two subsidiary companies of which one has a high-class image and sells expensive clothes and one has a more down-to-earth image and sells cheap clothes. |
Incentive | Something that induces someone to do something. For instance, it is held that if managers are paid in relation to their performance this is an incentive for them to work hard. Likewise, the fear of being fined by the Government if they don’t meet performance targets is an incentive to companies who own franchises to meet the standards of public service set by the Government. |
Indemnities | Conditions of sale by which a vendor agrees to pay costs incurred by the buyer if certain events specified in these conditions occur. |
Individual investors | Individuals who buy shares in a company, as opposed to other companies (institutional investors) |
Initial public offer (IPO) | The first public offer of a company’s shares. At IPO the company’s shares are listed on the stock market for the first time. |
Institution | An established organisation or foundation, especially one that is dedicated to education or public service, such as a school, hospital, or electricity supplier. Also, an organization which holds assets such as a bank or insurance company. The term institution encompasses the term enterprise, though enterprises also have a commercial character, which not all institutions have. |
Institutional investors | Companies which buy shares in another company, as opposed to individual investors. |
Intellectual property | A product of the mind that has commercial value, including copywrited property and ideational property such as patents, business methods and industrial processes. |
Intermediary | An agent, individual or corporate, who represents the interests of and acts on the behalf of individual investors in a certain business or businesses. Holding companies are a type of intermediary. |
Internal control | An accounting system designed to promote efficiency, implement policy, safeguard assets and avoid error or fraud. |
Investment privatisation fund (IPF) | The type of holding company which developed in some of the East European voucher schemes. They were barely regulated and are considered by many to be an important cause of many of the problems the schemes faced. Also known as Voucher Privatisation Funds (VPFs). |
Joint stock company | A company whose capital is held in transferable shares of stock by its joint owners (shareholders). |
Joint venture | |
Joint venture company | A company which is formed by two or more parties jointly to undertake a business venture, sharing the initial investment, risks and profits. |
Liabilities | Costs and problems which may be incurred after a sale, and which are either transferred to the buyer or retained by the vendor. |
Liquidity | The ability of an asset to be converted into cash quickly and without any loss of value. |
Listed company | A company that has satisfied the requirements for its shares to be listed on a recognized investment exchange (see stock market). |
Long-term investors | Investors who are expected to maintain their shares in a company for a long time. |
Majority shareholder | A shareholder who owns more than 50% of a company’s shares. |
Managed competition | In this situation a public department competes with private companies to provide public services under a controlled or managed process. the Government makes clear to the public department how it wants them to approach the activity, and the department provides a bid for the service along with the private companies. |
Management buy-out (MBO) | The sale of an enterprise to its management, giving them control over future management. It is sometimes used in privatisations, and can be either competitive or non-competitive. |
Management contracts | A situation in which the management of a public service is contracted out to a private company. The bulk of the service remains under public control, however, and all of it under public ownership. |
Management or employee buy-out (MEBO) | The same as an MBO except that in this case other employees apart from just the management are also involved in buying the enterprise. |
Market domination | A situation in which one supplier has a major share of the market, though not a compete monopoly. |
Market economy | An economy in which key elements in the financial and industrial sectors are owned by private companies rather than by the state. |
Market soundings | Discussions with the industry or experts to see whether organizations are likely to bid enthusiastically for a contract before it is offered on the market. |
Market stabilization | Various processes by which the Government can support the issue price of shares following a flotation or secondary issue of shares. |
Marketing | The process by which the
vendor attracts the interest of
bidders/investors in a sale. |
Mass privatisation | This is a somewhat loose term, referring to slightly different processes which have taken place in various countries. Broadly speaking however the term refers to a programme of widespread privatisation, which may include the broad participation of the public as investors (e.g. voucher schemes) and is often part of a rapid move away from a planned economy towards a more market-orientated economy. |
Minority shareholder | A shareholder who owns less than 50% of a company’s shares. |
Mixed economy | An economy in which some key elements in the financial and industrial sectors are owned by private companies and some are owned by the state. |
Monopoly (state private) | A situation in which one supplier controls the whole market. A state monopoly means control by a state institution and a private monopoly means control by a private company. Monopolies can also be either natural monopolies, or coercive monopolies which are enforced by government. |
Nationalization | A process whereby the ownership of a certain enterprise or assets are transferred from the private sector to the state. It is the opposite of privatisation. |
Natural monopoly | An industry which by merit of its cost structure must inevitably end up with one supplier coming to dominate and all others squeezed out of the market, as competition is not economically viable. Many public services such as water, electricity, gas and railways are effectively natural monopolies. |
Natural person | A real human being, as opposed to a company which is often treated by the law as a fictitious person. This is of relevance in auctions, when an individual might be bidding against companies for a particular enterprise or asset. In such cases precisely what constitutes a company, natural person etc. must be clearly defined. |
Net sale proceeds | The total proceeds a vendor receives from a sale after all the sale costs and expenses have been deducted from the gross sale proceeds. |
Off balance sheet | Ways in which a company can raise capital that do not appear as liability on their financial statements. |
Open book accounting | A generic term which describes a level of access to accounting data inside a partnership which would not normally be available under a conventional procurement method. |
Open trading | The ability of shareholders to buy and sell shares in a company freely, without the management’s interference or approval. |
Outsourcing | In this arrangement the Government remains fully responsible for the provision of a service and maintains control over management decisions while another body performs the service. Outsourcing includes contracting out and the granting of franchises to private companies. |
Parent company | A company that controls subsidiary companies through voting stock, as well as running its own business. |
Performance audit | An independent examination of how economically, efficiently and effectively the audited body has carried out its tasks. It is generally carried out by the Supreme Auditing Institution ( |
Performance indicators | A series of criteria by which the success of an enterprise is measured. |
Performance targets | Targets set by the Government or a public regulatory body (see regulation) for the quality of a public service, which may be provided by a state institution or a private enterprise. |
Perverse incentive | An incentive which has the opposite effect to that intended. |
Planned economy | An economy in which the most important financial and industrial interests are controlled by the state. |
Portfolio approach | Investment by a business in a diverse range of projects or enterprises in order to spread risk, given that it is probable that there will be a range of successes and failures. |
Preferred bidder | In a trade sale, the bidder who is selected by the vendor as being the party to whom they wish to sell the enterprise, subject to the completion of negotiations and legal arrangements. In the later stages of the bidding process the vendor will likely move into exclusive negotiations with the preferred bidder. |
Premium | The amount by which newly issued shares are traded on the stock market above the price at which they were issued. That is, the difference between the share issue price and the trading price. |
Pre-qualification process | In a trade sale or similar privatisation, a process in which aspiring bidders demonstrate to the vendor that they have the technical skills and financial resources to carry out the services that the customer requires from the enterprise they intend to purchase. |
Price capping | Limits set by the Government or a regulatory body (see regulation) for how much a provider of a public service or utility can charge for use of that service. |
Price earnings ratio | A method of
valuation which is the share price of a business divided by its earnings per share from annual profits, after tax. This method is normally used to value businesses with an established, profitable history, which can present a difficulty in
privatisation, as state enterprises do not, of course, have this kind of structure. So when applying this process to a state enterprise the standard practice is to take the appropriate data from
comparable companies and assume that the enterprise being valued would have similar financial ratios if it was listed on the stock market. |
Pricing | When selling an enterprise (in a privatisation or otherwise), the vendor carries out pricing in order to decide what price to sell the enterprise at. Pricing follows on from valuation, but apart from just the value of the enterprise it also takes into account the context in which it is being sold, and how this might affect the amount a potential buyer might be prepared to pay for it. It also involves the balancing of various trade-offs which reflect the complexity of the vendor’s objectives in selling the enterprise. |
Primary offering | An issue of new shares in public equity markets in order to raise capital. |
Private equity fund | Funds which are available to businesses from private investors, usually for a limited time period. A company may seek such a fund if it requires money for restructuring or expansion. |
Private sale | An equity placement of a company’s stock to one or more strategic investors. |
Privatisation | A process in which central or local government transfers the ownership and/or management of enterprises or assets from the state to the private sector. It has been widely practiced in recent years in many countries around the World. There are various methods of privatisation, including trade sale, management/employee buy-out, auction, flotation and voucher schemes. |
Proceeds | The sum of money that the vendor receives from the sale of a particular enterprise or asset. |
Prospectus | An official document which is despatched to institutions which are judged likely to invest in an enterprise which is about to be privatised. It contains information about the enterprise and details of the offering. |
Public offer | An official document which is despatched to institutions which are judged likely to invest in an enterprise which is about to be privatised. It contains information about the enterprise and details of the offering. |
Public watchdog | A public body which guards against loss, waste, theft or undesirable practices. SAIs can be considered public watchdogs. |
Public-private partnership | In this arrangement, which is sometimes referred to as a joint venture, government and the private sector form a contractual arrangement in order to provide a public service. In the partnership, public and private resources are pooled and responsibilities divided with the intention of each side’s activities complementing the other’s. Usually each partner shares in the income resulting from the partnership in proportion to the investment they have put in. |
Pyramid scheme | A fraudulent money-making scheme in which people are recruited to make payments to others above them in a hierarchy while expecting to receive payments from people recruited below them. In order to function the scheme must carry on growing, and eventually, when the number of new recruits fails to sustain the payment structure, the scheme collapses, with those near the bottom of the hierarchy losing the money they paid in. |
Qualitative criteria | Criteria whose importance cannot be measured in terms of numbers, and are purely based on subjective judgements. |
Quantitative criteria | Criteria whose importance can be measured in terms of numbers and statistics. |
Rate of return | The price paid to lenders and investors for the use of their money. |
Real time audit | An audit of a process which is conducted as the process is going through rather than afterwards. This can be helpful to identify mistakes before they have serious consequences, but on the other hand the usual practice of auditing a process after it is complete has the advantage of being able to view events with hindsight, and removes the chance that the |
Redundancy | The dismissal of an employee from work for no longer being necessary. Redundancies can be voluntary but if not as many employees as the management require will leave voluntarily then the management sometimes carries out compulsory redundancies. |
Reform | Changes to the way in which an organization operates. Reforms sometimes accompany restructuring in preparation of an enterprise for privatisation. |
Regulation | A method by which the state exercises some control over public or private enterprises and institutions, either directly or indirectly through another public body. It is especially common if a private company or government department is operating an industry or service which tends towards monopoly (e.g. utilities), as in such situations the lack of competition makes it necessary to protect the interests of consumers. |
Replacement value | A method of valuation of a company’s assets and liabilities, which is generally only used if a company is breaking up and its assets being liquidated. It estimates how much it would cost to replace the assets if they were destroyed. It tends to overestimate the value of assets, as the cost of replacing them would be more than their actual value. |
Residual management | The management of any remaining responsibilities or liabilities by the state following the privatisation of an enterprise. |
Residual shares | Sometimes in a privatisation the state retains a certain proportion of residual shares in the enterprise which is being sold. This occurs occasionally in a trade sale if the Government wants to keep some influence in the company, but is much more common practice in a flotation. In that situation it is generally used if the vendor anticipates that the value of shares will rise significantly some time after they are issued on the stock market. So the vendor retains a certain proportion of the shares (usually about 40%) in the initial offering (IPO) when prices are likely to be low with the intention of selling them later when prices have risen, thus maximizing proceeds for the Government from the flotation. |
Restructuring | Processes by which the vendor makes changes to the structure of an enterprise in order to prepare it for privatisation. |
Retail market | The market for individual investors in a flotation. |
Return on equity (ROE) | A method of measuring how well a company used reinvested earnings to generate additional earnings, which is calculated from a fiscal year’s after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage. It is used to provide a general indication of a company’s efficiency, that is, how much profit it is able to generate given the resources provided by its shareholders. |
Return on investment (ROI) | Most generally, the income that an investment provides in one year. The term also refers to a method for measuring a company’s profitability, by taking a fiscal year’s income and dividing it by common stock and preferred stock equity plus long term debt. |
Risk management | A technique for identifying, preventing and minimizing risks which would result in negative effects on a business. See also due diligence. |
Risk register | An official written record used as a tool in risk management to record and monitor identified risks to a business. |
Safeguard | A protective measure to guard against a particular undesirable eventuality. |
Secondary equity offering (SEO) | A public offering of existing shares in a listed company, in which revenues of the sale go to shareholders who are divesting their own shares. |
Securities | A generic term for shares of stock, bonds, and debentures issued by companies or governments to provide evidence of ownership and terms of payment of dividends or final pay-off. |
Service shedding | This is a form of divestiture in which the Government reduces the level of a service they provide, or stops it altogether. The hope is that the private sector will step in to provide the service if there is demand for it. |
Sponsoring body | An organization, commercial or otherwise, that agrees to lend money to someone to carry out a task that they can’t afford to complete themselves. They may or may not be required to pay back the money. Sometimes in auctions people have obtained sponsorship for the purchase of enterprises or assets they wanted to buy but could not afford at the time of auction, agreeing to pay back the borrowed money at a later date. |
Starting price | The price that the vendor sets at which to start the bidding in an auction. |
State-owned enterprise (SOE) | They are defined as economic entities which are owned or controlled directly or indirectly by the state, and which generate the bulk of their revenues from selling goods and services. The state is able to control the management decisions of an |
Step in rights | A clause in the sale contract which allows the Government to reassume roles and responsibilities from the private company in the event that it fails to fulfil its obligations (e.g. through major failure to deliver services or bankruptcy) |
Stock market | The general term for the organized trading of stocks and shares through exchanges and direct negotiation (“over-the-counter”). |
Strike price | A price set by the vendor which represents the lowest amount they are prepared to sell a certain enterprise or asset for. See also floor price. |
Subsidies | Financial aid given by the Government in order to support a particular institution or enterprise. Subsidies are often provided to government departments or privatised companies that provide services which are uneconomic but considered to be in the public interest. They are also sometimes provided to the suppliers of such services in order that they can keep charges for the public artificially low. Again this is uneconomic but is sometimes judged to be in the public interest. |
Success fees | Fees paid to advisors in which the level of payment depends on the transaction they advised on being completed successfully. |
Taxpayers | The citizens of a country, whose taxes have been invested in state institutions. |
Tender evaluation | The process of evaluating different offers or bids for services, contracts, enterprises etc. |
Tender offering | A takeover bid in the form of a public invitation to shareholders to sell their stock, usually at a price above the market price. |
Tendering | Making a formal offer or estimate for a job or contract, or an offer to supply goods or services at a stated cost or rate. |
Trade sale | A method of privatisation which involves the direct sale of an enterprise in state ownership to a private buyer following a competitive sale process of marketing and bidding. This includes joint ventures and part sales. |
Trade-off | A trade-off means balancing and reconciling the relative importance of various objectives of a sale or privatisation. For instance there is a trade-off between the desire to maximize proceeds and other economic, political and social objectives of the Government’s policy. |
Tranche sale | The sale of part of an enterprise in a flotation. |
Transparency | Transparency means that information is freely available to the public for dissection and scrutiny. It is considered to be an effective way of preventing corruption and abuse of the law in government, and is especially important in processes such as privatisation, which can provide numerous opportunities for corrupt practice. |
Triangulation | A process whereby more than one method of valuation is used to calculate the value of an enterprise. It can be helpful as it provides a range of results, which together give a more reliable idea of the value of an enterprise than just one result, as no method is precisely accurate. |
Underwriting | A practice which has now generally fallen into disuse. In a flotation, if the vendor fears that not all the shares will sell they can get financial institutions to agree to buy unsold shares, in return for a fee. The fact that the vendor has to pay the institutions for this service and that the institutions can often effectively decide the price they are willing to pay for the shares makes this practice very expensive and wasteful for the vendor, and in recent years it has generally been replaced with techniques such as bookbuilding which get a better deal for the vendor. |
User fees | Fees for the use of a certain public service. Intended to create a situation in which the service is paid for by those who use it rather than out of the pool of government revenue from taxes. |
Utility | A basic public service such as water, gas or electricity. |
Valuation | A process which should be carried out by an independent authority to calculate the value of an enterprise or asset before it is sold or privatised. Various methods can be used, including price:earnings ratio and discounted cash flow. Valuation should be followed by pricing in order to decide the price at which the enterprise or asset should be sold. |
Vendor | The legal entity which owns the enterprise or asset being sold in a transaction. In the case of a privatisation it is generally the Government department which owns the enterprise which is being privatized. |
Venture capital fund | Funds which are available from investors for new companies and small businesses which are judged to have high growth potential. Such funds usually provide investment for a few years but withdraw it when they can get a large return on equity. |
Vertical integration | Vertical integration is a structure of ownership and control, in which various parts of a company are united in a hierarchy and share a common owner. Usually each part of the hierarchy produces a different product, but the products are generally geared towards the needs of the whole hierarchy rather than separate markets. An example is a company which owns a factory, but also owns the production of the raw materials which are used there, the power source from which the factory is powered, and the vehicles which transport the raw materials and manufactured goods. It is the opposite of horizontal integration. |
Voucher privatisation fund (VPF) | The type of holding company which developed in some of the East European voucher schemes. They were barely regulated and are considered by many to be an important cause of many of the problems the schemes faced. Also known as Investment Privatisation Funds (IPFs). |
Voucher scheme | A method of
mass privatisation which has been adopted by some governments, especially in |
Vouchers | Documents which can be exchanged for shares in a privatized enterprise or for shares in a fund which holds shares in a privatized
enterprise (holding company,
VPF,
IPF). In this context they represent a kind of artificial currency. |
Warranties | Provisions in a sale agreement through which the vendor guarantees certain matters to the buyer about the enterprise being sold. |
Wind-up | The occasion when a business liquidates its assets by sale or disposal. |
Back to: Guide to Privatisation index