Key Stages of Privatisation

2. Pre-sale Considerations

c) Reforms and restructuring

It is often necessary for the vendor and/or the Government to carry through certain reforms and restructuring of the enterprise which is to be privatized, in order to make it suitable for sale.

This might include putting the enterprise into a legal form in which in can be sold, introducing new legislation in Parliament which makes its sale possible, increasing the size of the management team, introducing new working practices for the management and/or the other employees, or fundamentally reorganizing the enterprise and its finances to better fit the long term objectives of privatisation. It might even involve breaking down the enterprise into several units to be sold and managed separately. This has been done in some cases in order to encourage competition in the market.

If the enterprise owes large debts to the Government or other state-owned enterprises, sometimes the Government has considered it necessary to write off these debts in order to make the enterprise marketable to potential investors. When considering financial concessions to the enterprise, the Government will generally want to leave it with enough capital to meet its business requirements, but not with too much free capital, as this might lead to poor investment decisions and reduce government proceeds.

Quite often the vendor themselves has only carried out enough restructuring to make the enterprise marketable and has left it to the new owners to carry out any fundamental reorganization of the enterprise after the sale if they wish. This type of reorganization sometimes significantly reduces the number of employees. Such reductions, sometimes involving compulsory redundancies, are known as downsizing, and may have social costs (unemployment in particular) which may later have to be paid by the state. In order to avoid such social costs, some countries have made securing specified levels of employment and investment stated objectives of the privatisation.

The vendor may wish to take external specialist advice about potential restructuring which might need to be done, and it is also worth remembering that the reforms might have some effect on the value of the enterprise if the valuation is carried about before they are. In such cases the vendor should revise the valuation after reforms in order to take the changes into account.

Next: Establishing a timetable

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