by Mr. Mauro Baldissoni- Studio Legale Tonucci, Tirana
As long as a simple definition is possible, privatisation is the process that leads the Government to sell its stocks of a state-owned company or industry to private owners. Since the first wide program of privatisation was launched by the British Government in the early 80’s, privatisation has become one of the main items in the economic program of any Government, particularly in those countries where the growth of private enterprise, as well as the development of the capital market, had to be encouraged. This is true also in Albania, as Minister of Privatisation Ylli Bufi and Prime Minister Pandelj Majko confirmed when they declared that "making privatisation economically feasible (…) is one of the most important moments of the whole development, of the country’s transition and of the consolidation of the market economy as well".
Therefore, we can perfect the initial definition saying that privatisation is an economic operation, which is considered to benefit the national economy. In particular, Government expects that privatisation of state-owned companies or industries is likely to improve enterprise efficiency and performance, to develop competitive industry which serves consumers well, to access the capital, know-how and markets which permit growth, to achieving effective corporate governance, to broaden and deepen capital markets and, last but not least, to secure the best price possible for the sale.
At the same time, we can perfect the initial definition saying that privatisation is also a political operation, or better, that Government’s aims in the privatisation process are non-economic. These can involve, for example, achieving a wide shareholder distribution, targeting certain classes of investors (and, among the others, particularly foreigners), ensuring that enterprises do not close after the privatisation, reducing budget deficits/raising money, and maintaining employment and other social obligations. There are also political impediments to overcome primarily the conservative or sometimes obstructive attitudes of existing managers and employees of state-owned businesses, who may be fearful of the challenges of the market place.
If these are, in a few words, the economic and political results that privatisation is expected to achieve, how can a legal advisor contribute to the success of a privatisation process? Which role does he play? In which stages of the privatisation timetable? In this speech we will try to suggest a brief answer to these questions, with a look to the privatisation program in Albania.
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First of all, it is easy to understand that no privatisation is possible without a proper law package, ensuring the proper fair, transparent and legal conditions for selecting the investors and the legal framework where the investors will act after the privatisation. To a legal advisor, this means that he is required to compile the draft legislation for the procedure of privatisation, and, in particular: a) to structure the divestiture of the company’s assets; b) to prepare the sale legal documents; c) to manage the sale and the previous negotiations.
It goes without saying that compiling the draft legislation for the procedure of privatisation is a work with an undeniable political impact. In this stage it is essential for the advisor and the Government to promote and insist on the transparency of the procedure of privatisation; if the public perceives that the whole privatisation is being done in accordance with strict legal procedures and that everything is transparent, then the popular support for privatisation of state-owned companies will be strengthened.
Besides, when compiling the draft legislation, an advisor often fears that the Government’s strength and commitment to the privatisation process is not sufficient; different government officials may hold different views, and the sublegal acts are not always clear. But we may probably exclude that this will be the case of the Albanian Government, because it is our understanding that it is Government’s firm conviction that privatisation in Albania is an irreversible process.
It is often said that for a privatisation program to gain momentum, early sales have to succeed, which suggests privatising the easy candidates first. Unfortunately, it happens very often that the Government is tempted to pass on the headaches first: the loss-makers, the indebted, the already closed-down companies, and so on. In this stage the advisor, with a knowledge of the marketplace and an ability to judge the enterprise, has to help the government to take the choice, and once the choice is made, has to assist the Government in the sale.
However, the strategy followed by the Albanian Government is based on the idea that privatisation should start from the successful sectors so as to increase confidence, attract foreign strategic investors and then go step by step in those sectors which currently have problems and which need to be transformed, restructured to become more efficient. Privatisation in strategic sectors will not be done based on the principle "let’s get rid of what is inefficient at the beginning to milk what is still efficient". On the contrary, the Government should turn over production in the strategic sectors with efficient structures because a strategic investor will not come to spend his money in failed sectors. That is why telecommunications and mobile phones will be first.
Political pressures are not restricted to strategic design; they often make themselves felt most acutely when the deal is being structured. The Government may wish to retain strategic control. This need not always be anathema to the buyer, though the sales price will almost certainly suffer.
The quality of the company’s future corporate governance is also affected by the deal structure, though even when this appears to have been sacrificed, market institutions sometimes find unexpected ways of working. Promoting competition is also desirable, but there are different ways of ensuring competition. Finally, capital markets need not be viewed as insuperable constraints - privatisation is often the ideal vehicle to achieve capital market broadening and deepening, and the advisor should be able to assist with this.
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A variety of steps can be taken in preparing the legal documents for the sale, as there are rules suggested by experience, but the advisor is also required to waive them when this is opportune.
For example, experience suggests that, before selling a state-owned company, Government should absorb its debts, or should otherwise restore positive value to the company; but this can provide the wrong signal to the state-owned company managers; if managers know that Government is to absorb the company’s debts, they may, for example, be tempted to lax management, or, in general, to leave critical matters unattended because they assume a new owner will take them in hand.
Another rule of experience is that Government should almost never invest in the company before the sale – except to complete ongoing programs and keep enterprises open. In fact, one of the objectives of privatisation is to induce the purchaser to invest in the company, and that is why it is quite common that the purchaser is required to sign up to an investment program after sale. Finally, experience suggests that it is better to leave the reorganisation of the company’s structure to the purchaser, but, before the sale is concluded, it is wise of Government to grasp any opportunity to maintain the company’s value.
However, during the sale preparation stage, the most important performance that is required to a legal advisor – and certainly, the most scrutinised by the public opinion – is probably the valuation of the company’s assets and liabilities.
One may think that it is better to leave such a valuation exclusively to the market, but this is not always possible. A typical problem arises when governments are concerned to demonstrate to the public that they have not undersold the "crown jewels"; therefore, they may insist on selling the company’s assets according to their book value, which could be unacceptable to the purchaser, whose valuation may be based - more realistically - on the profits that the company will probably generate after the privatisation.
Anyway, the valuation of the company’s assets and liabilities is not only an accountancy operation; on the contrary, the advisor is also required, for example, to advise the Government about the legal consequences that the privatisation will have for the company’s personnel, or about the role that the Government will play as a shareholder of the company after the privatisation.
It is clear, for example, that the legal status of the company’s personnel will change after the privatisation, since they will be assimilated to private employees, and will probably lose some of the privileges that they enjoyed when the company was state-owned; therefore, the legal advisor should advise the Government on this point, so that the passage of the personnel’s members to the status of private employees is as smooth as possible.
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In the end, a legal advisor is required to manage the sale process, which is also one of the most politically charged stages of a privatisation procedure.
At first, it is important to underline that there is no golden rule about how Government should conduct a sale, since this business depends largely on the size of the state-owned company, the complexity of its structure and assets and, last but not least, its attractiveness to potential buyers. But conducting the sale is undoubtedly a delicate operation, since it is known that in this stage the pressure that foreign and local investors exercise on the Government is particularly strong. Also, in this stage we may probably find that the Government itself is anxious to persuade the public opinion that the country has got a good deal, and that the "crown jewels" have not been undersold. Finally, in this ultimate stage of the privatisation it is essential for the advisor and the Government to promote and insist on the transparency of the procedure; the more competitive and open a sale can be, the more the public can observe and comment on how politicians have balanced their goals, and be reassured that the price is reasonable, and that the process has been fair.
However, there are basically three alternative processes by which the sale of a state-owned company may be conducted: the open tender, the limited tender, or (in rarer cases) the targeted negotiation with a single purchaser.
The open tender consists in the public offering of the company’s shares for a fixed price or for a price determined in the tender. This technique is advisable when there are many bidders interested in the sale, who are separated only by the price offered, and no one of the bidders is particularly favoured by the Government. This is probably the most transparent procedure, but actually it works well only for small enterprises and real estate, which usually comprise the majority of assets to be privatised in a transition economy.
The limited tender consists in a private negotiation between the Government and a limited number of potential purchasers, who are selected by virtue of their particular entrepreneurial skills, and are expected to satisfy specific financing, economic and managerial requirements. This procedure is most appropriate when potential purchasers must make substantial business investigations ("due diligence") in order to evaluate the company’s assets, and the number of bidders is likely to be limited. In such case, the Government often requires that the potential purchasers submit their qualifications, including their background and financial capability, then, after the "due diligence", selects the trustworthiest among the potential purchasers’ "short list". Excluding open tenders, most major corporate sales and privatisation proceed in this manner.
The targeted negotiation with a single buyer is opportune when there is only one potential purchaser, whose bid is deemed congruent with the Government’s aim for the privatisation. This is probably the cheapest and speediest procedure of sale, but it is also the least transparent, and, therefore, the most unpleasant to the public.
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This general overview on the privatisation process may be completed with some considerations about the specific consequences that privatisation may have in the telecommunication sector, particularly concerning the competitive scenario. For example, will it be possible for the privatised telecommunication companies to maintain the position of monopoly that they have enjoyed in the market up to now? If the Government decide to give way to the liberalisation of the telecommunication market, what could be the role of their legal advisors?
Talking about the competitive scenario, it can be argued that a protected market helps to boost the value of initial sell-off; therefore, by privatising as soon as possible, the Government will achieve major benefits. In fact, on one hand, an investor could be less likely to invest in the privatising companies if they operate in a market that is not competitive, since a privatised monopoly assures safer revenues. Thus, it should appear clear that the more the privatisation process takes place close to the monopoly expiration, the more the stock value could be likely to decrease.
However, the experience of privatisation of telecommunication companies in the countries of Western Europe demonstrates that the privatisation is rapidly followed by the liberalisation of the telecommunication market, and, at the same time, by the end of the monopoly of the former State-owned companies. Therefore, one of the main concerns of a legal advisor after the privatisation is to advise the Government on how to manage the deregulation of the telecommunication market. This means, for example, that the legal advisor should assist the Government in implementing legislation that will prevent the formation of trusts or dominant positions, contemporarily assuring the supply of telecommunication services which are socially important, such as services to rural areas or disabled people.
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At the beginning of this speech, we said that, first of all, a legal advisor is required to compile the draft legislation for the procedure of privatisation, which means, to structure the divestiture of the company’s assets, to prepare the sale legal documents, to manage the sale and the previous negotiations.
There is no doubt that the performance of such a work is a severe test for the legal advisor: he is required not only to prepare a legal framework for the privatisation, which has to be sound and technically advanced (especially in those countries where privatisation is expected to promote the growth of the market economy), but also to mediate among the players of the game and their conflicting interests. The potential purchasers want to win the cheapest possible price in the sale, and, in any case, urge the Government to preserve the financial health of the company during the privatisation process, while the Government wants to win the most convenient price in the sale, and is worried to persuade the public opinion that the country has got a good deal, and that the "crown jewels" have not been undersold. The public opinion shares the preoccupation of the Government and, in any case, scrutinises the whole process of privatisation that the other players – including the legal advisor – must conduct as transparently as possible.
If these are, in a few words, the different objectives and parties of the privatisation process, then the legal advisor is required to achieve all the objectives and to please all the parties, knowing that there are no fixed rules, or better, that the rules suggested to the advisor by its previous experience must be adapted to the different scenarios of any privatisation: this is particularly true for the sale process, where the advisor has to consider the alternative among the open tender, the limited tender, or, the targeted negotiation with a single purchaser.
Anyway, despite the different alternatives and rules that a legal advisor is required to consider or to apply, we may say that the basic principle of his activity in the privatisation is that privatisation has to be encouraged as strongly as possible in each of its stages, particularly when it is likely to benefit the national economy.
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