Key Stages of Privatisation

2. Pre-sale Considerations

f) Defining bid criteria

Before the vendor announces the sale of the enterprise, they should decide what criteria they will use to judge the bids, and make at least some of these criteria known to the bidders once the sale is opened.

One obvious criterion will be a decent price (they will have a good idea of this after the valuation), but the vendors may consider many other issues to be important. Other financial questions include how much capital investment the bidder is prepared to commit to the enterprise apart from its sale price; and what is the financial strength and size of the bidders in relation to each other.

Another important factor may be the plans and objectives that bidders have for the enterprise in the future if they become its owner, and the vendor may look specifically for a bidder who envisages taking the enterprise in a particular direction.

Apart from these, the vendor may also require guarantees from the bidders with regard to the employees and/or the customers. The vendor has sometimes made the successful bidder guarantee that they will maintain all the current employees, or a certain proportion of them, and not move the enterprise from its current location.

Guarantees with regard to customers have largely been with regard to quality of service (ie. to keep it high), and, especially in utility industries, with regard to charges for customers (ie. to keep them lower than a certain amount, that is price capping). In some cases where utility bills have been held at artificially low levels by the state for many years, the vendor has set the amount by which charges were allowed to rise each year over a period of several years, in order to avoid a sudden soar in bills for customers after the enterprise is transformed from a state institution to a private company, which results in a change from social and political priorities to business priorities.

These various issues show up the fact that although, once the enterprise has been transferred into private hands, political considerations will likely be of less importance than business ones, in its sale on the other hand, political considerations may still be of great importance, creating difficult questions and trade-offs about the priorities and objectives of the privatisation.

The vendor may wish to present their most important criteria for judging the bids in the form of a list to the prospective bidders, so that they can have a clear idea of what the vendor is looking for in their bids. However, they should take care about making the criteria too rigid, as this might discourage innovative proposals.

It is also possible that the vendor may have other criteria which they consider important, but which they prefer not to disclose to the bidders for various reasons. So the vendor may have a list of public criteria which it makes generally known, and also a longer, private list of criteria which they will use in evaluating the bids but will keep confidential.

Next 3. Methods of Sale - Trade Sale

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