Key Stages of Privatisation

3. Methods of Sale

e) Voucher sales

i) What type of situation it is suitable for

Voucher sales were an experiment that has for the most part only been attempted in a quite specific set of circumstances. They are also know as mass privatisation, due to the fact that in voucher sales a very large number of enterprises are privatized quickly, at the same time, and to a great many new owners, who typically comprise a significant proportion of the adult population (sometimes up to 80%).

The circumstances in which voucher sales have been adopted seem to be exclusively in countries which had recently made the transition from a planned economy to a market economy. In such situations the government in many cases chose to carry through mass privatisation using vouchers for a number of reasons. These included the fact that the vast majority of enterprises, employment and production remained in the hands of the state, which was no longer able to run them all effectively. In any case, the fact that these countries had chosen to leave a planned economy meant that the majority of people did not want such a high percentage of the economy to be controlled by the state. The experience of the former economic system had allowed for a mentality of “dependence” on the state for guidance, but despite the fact that often the citizens possessed neither the means to buy enterprises nor the skills to run them, there was a general belief that the assets and enterprises of the country belonged to the people.

This is the typical political and economic background in which voucher sales took place, and it seems that the objectives of the schemes were motivated by a mix of what are essentially Communist beliefs on the one hand and the strong desire to move away from Communism on the other. As has already been mentioned, there was still something of a belief that the ultimate owners of the country’s assets were the people, and one of the most important objectives of mass privatisation was to spread ownership widely and deeply into the society, however in a private rather than a public-controlled framework. It seems that this objective reflected the desires of a large proportion of the population of the relevant countries at the time. People wanted to own things, and the pro-Western, pro-market governments generally wanted to create capitalism by getting the population of their countries to participate in it directly. With this in mind, voucher schemes were intended to introduce citizens to capitalist practices such as investment, of which there was very little concept in these societies, and it was hoped that state enterprises with low productivity could be made more productive if they were transformed into companies operating in a free market. By distributing the ownership of state enterprises to the population as a whole, the Government also hoped to prevent the country’s economy becoming dominated by foreign companies, who had much more resources to buy any assets for sale than the citizens did themselves. The ideal of the voucher schemes was therefore to ensure the transfer of assets from that state to the people of the country in a capitalist framework.

Another reason for the desire of the Governments to sell a very large amount of state assets in a very short time period was that they feared that the Communists might regain control of the state, and by pushing the country’s economy as far away from a Communist structure as quickly as possible they also hoped to make it harder for the Communist system to be able to reassert itself.

The idea of vouchers is that they should be freely or very cheaply distributed to the population, who then uses them to “buy” shares in companies of their choice from a selection of nearly all the enterprises owned by the state, which are all privatized at the same time. Hence vouchers serve as an artificial currency. The whole process is intended to take only a few months.

ii) Strategy and timetable

In planning a voucher sales scheme, it is necessary to draw up a strategy and timetable for action very early on, because the process is complex and the various stages need to be carried out in the correct order.

The first decision the vendor (who in the case of voucher sales can only be the Government itself, seeing as so many institutions are being privatized) must take is which state enterprises they wish to privatize. It will often be a very long list, as governments implementing voucher sales schemes tend to have a large amount of state assets which they want to sell.

They also need to decide what percentage of the enterprises they wish to sell. State enterprises which the Government intends to privatize in voucher schemes are typically turned into joint stock companies so that the shares can then be distributed to the public through the vouchers. However, the Government does not usually intend to sell the entirety of the company’s stock using vouchers, and a certain percentage of the company is typically marketed to strategic investors who have more money to put into the company than the public do. In the Czech voucher scheme, for instance, an average of 61% of each company was distributed by vouchers and the other 39% was sold to strategic investors. It has been suggested that selling 39% of the company to strategic investors is not enough, as it means that no investor has the power to make real change in an enterprise, and ultimately no one takes responsibility for improving its productivity and efficiency, which is usually an important objective of voucher schemes.

A timetable will begin with a date on which to announce the scheme to the public. This date should be some reasonable time before the scheme actually begins, because in order for the scheme to work it is essential that the Government explains it properly to the public and educates them about the process, the quality and type of equity being offered, and the meaning of share ownership and shareholder rights. The public may have little or no knowledge of private ownership, as in many of the countries which have implemented vouchers schemes they will have had no experience of it, and so the government needs to decide how best to inform the public about the nature of the scheme. At some point (either at the same time as the general information or after) it will also need to provide some basic level of information about the enterprises which are included in the programme, including reliable information about financial performance, employment, management structure and a description of key products and markets for each enterprise.

The Government also needs to decide at this stage whether it wishes to sell everything in one stage or in more than one (for instance the Czech Republic carried out the privatisation in two main stages) and plan for the management of the several rounds of bidding that each stage will comprise (these processes will be explained in full later). It is in fact unlikely that the Government can predict at the beginning exactly how many rounds will be necessary to complete each stage, but they should consider how to manage the succession of stages and how they intend to close the bidding for good. Some governments have deliberately tried to ensure that there would be no unsatisfied demand by creating a supply of shares or share points which was greater than the number of vouchers or voucher points available to purchase them. While this strategy which leaves some shares unclaimed at the end of the process may be politically attractive (as it should mean that no one is disappointed), it seems that on no occasion has it been possible in practice to eliminate all excess demand.

At the planning stage the Government also needs to consider what rules and regulations it will implement to make the process as fair, transparent and respectable as possible. Voucher sales have met with various problems in the past and the Government should do their best to avoid repeats of these, if possible. More will be said later about potential problems in the process and how to redress them, but it is perhaps worth saying now that voucher sales were an experimental process and probably in no case have they been successful enough for a standard procedure to develop as every time they have been implemented the Government has tried to avoid the mistakes of previous sales in other countries.

iii) Valuation and pricing

The precise valuation of all the enterprises to be privatized in a voucher scheme would be a huge undertaking, but seeing as the government is not selling them for real money and does not need to negotiate their price with anyone then it is not so important to have a precise valuation of the enterprises as it is for a trade sale, for example.

This was especially the case on the occasions in which the government set the same price for all shares in all enterprises, which meant that the actual value of the shares had no importance in the pricing. This naturally led to some shares being hugely oversubscribed and some barely shown any interest at all, and so the Government undertook to set different prices in later rounds of bidding. However, these prices were also not set according to actual value, but above all on the basis of the ratio of demand to supply in the previous round.

However, if the vendor wishes to have vaguely representative prices for different shares then they must have some idea of the value of the different enterprises. The most consistent way of doing this is probably to value all the enterprises according to the same criteria and with as much detail and accuracy as resources allow, and then setting the share prices on the basis of their values with respect to each other.

The fact that the enterprises are to be paid for by vouchers rather than money (at least the proportion of the enterprises which are assigned to be sold in such a scheme, and hence the ones that concern us here) means that the absolute prices of the enterprises for sale are of no importance, but only their prices in relation to each other.

If the Government intends to privatize the remaining percentage of each enterprise which has not been disposed of in the voucher scheme then an accurate valuation of enterprise is indeed necessary, as these sales will involve real money and perhaps real negotiations over price.

iv) Process and methods

Once the scheme has been announced and a sufficient amount of time has elapsed for the public to be able to thoroughly inform themselves about the process and the enterprises which are available then the public are issued with their vouchers. Everyone participating is issued with the same number of voucher points (say 1,000). Every adult citizen in the country is eligible to acquire their share of voucher points, though there may be a nominal charge to cover administration costs (however this charge will be much smaller than the value each person is able to acquire with their vouchers).

Participants are able to bid for shares themselves or assign their voucher points to an investment privatisation fund (IPF) which is the type of intermediary organization more often known as a holding company. These organizations collect many people’s vouchers and pool them, investing them across a range of companies. They are usually subject to certain regulations, such as quotas of the maximum percentage of shares they can hold of any one company, or the maximum percentage of their voucher points they can put into any one company. These organizations typically come to control a large percentage of the total voucher points and play a large role in the process as a whole. These will be discussed shortly.

There are various ways in which the Government could organize the bidding process, but as an example here we will consider the method which was used in the Czech Republic.

In the first round individuals and IPFs bid for the shares that they wanted. If the bids for a particular enterprise did not exceed its supply of available shares then these demands were satisfied and the remainder of the shares deferred until the next round. If the demand for shares in a particular enterprise exceeded supply by less than 25% and the market could be cleared by prorating the IPFs’ demand, then the demands of individual investors were met and those of IPFs were allocated in proportion to their bids. In these cases, all the shares were sold and the enterprise did not field shares in the later rounds. If demand exceeded supply by more than 25% then no bids were accepted and all shares were deferred to the next round.

In the Czech Republic there were two waves of selling, and everyone was allowed to participate with 1,000 points in each wave. The first wave had 5 rounds and the second wave had 6 rounds. Though the prices for all shares were set as equal in the first round, in later rounds the price committee adjusted the prices, largely on the basis of the ratio of supply to demand in the previous round.

Once everyone’s voucher points have all been used up then there are no more rounds, and after this the process is deemed to be complete. The plan is that by this time all supply and demand have been satisfied, though in practice often it doesn’t work so smoothly.

v) Safeguards and regulation

Voucher schemes have generally been implemented at a very specific time in a country’s history, that is shortly after the form of government has changed from one system to another very different one (communism to capitalism), and experience now shows that these schemes, though idealistic and born of a genuine desire to modernize the economic structure of the country, often lacked the legal and institutional framework to support them.

In order for such schemes to work the country must have clear and protected property rights; consistent, up-to-date laws relating to issues such as bankruptcy and regulation of intermediaries (that is holding companies and IPFs); enforceable contracts that are supported by a generally respected and respectable law and judiciary which are not tainted by accusations of favouritism or corruption; regulatory agencies which are independent of any government, investor or consumer agenda and provide reasonable, objective assessments of the institutions and processes involved; and a stable government which will act in a consistent, reasonably predictable manner to see the process through.

With hindsight it is possible to point out mistakes that contributed to the problems of various programmes, but as every country only has one go at implementing a mass privatisation through vouchers then it is hard to get everything right the first time. Deciding exactly what the rules of the process relating to individual investors and intermediaries should be is especially difficult, but matters such as trustworthy laws, judiciary, regulatory agencies and government are essential pre-requisites for a successful process, and without these, no matter what the rules of the voucher scheme may be, they will be disregarded and abused.

With regard to intermediaries, there should be strict registration requirements, in which they have to prove they have the knowledge, technology and staff to manage their investments, and also in which they sign up to rules about how they are allowed to manage the voucher points and company equity which comes under their control. Experience shows that they should be open-ended so that investors can leave them if they are performing badly.

There should be a limit to the number of different companies of which one person is allowed to be manager. This can prevent the situation in which one person sits on the boards of several companies, collecting the salary from all of them but not providing their true attention to any.

The Government may also wish to consider limiting the amount of companies in which an IPF is allowed to invest, in order to stop them from spreading themselves too thinly as has happened in some instances. In some cases there have also been limits on the percentage of a company’s equity that was allowed to be held by one IPF. These were no doubt intended to prevent them from dominating the market and rightly so, but they also gave them little incentive to take an active role in managing the companies in which they bought shares.

The fact that both managers and shareholders were often spread very thinly across companies meant that in many cases no one was prepared to take an active role in the management of the companies, especially with regard to restructuring them to make them more efficient and productive. If they are intending to carry out a mass privatisation by voucher scheme the government should consider taking steps such as those mentioned above in order to prevent this.

Next: Generic Auditing Frameworks

Back to top ^^