This chapter introduces readers to the purpose of the Guide and provides an overview of its structure, coverage, applicability and definitions. Notably, the Guide draws on the OECD Guidelines on Corporate Governance of State-Owned Enterprises as a point of departure. The chapter provides a brief overview of trends in privatisation activity over the past three decades, indicating that privatisation paradigms have shifted over time. Drawing on data from recent privatisation trends, it projects future privatisation activity will continue to rise and situates the purpose of the Guide in this context.
A Policy Maker's Guide to Privatisation
Corporate Governance
Chapter 1. Introduction
Abstract
Purpose of this document
The rationale for developing A Policy Maker’s Guide to Privatisation is to support the implementation of the 2015 OECD Guidelines on Corporate Governance of State-Owned Enterprises (“OECD SOE Guidelines”) and provide accompanying guidance specifically addressing best practices in privatisation. The Guide primarily addresses the role of the state as the enterprise owner and is targeted to policy makers who are “newcomers” to privatisation or who wish to have a “refresher” on the process, key pitfalls and questions to take into consideration before embarking on a transaction or full-scale privatisation programme.
The Guide is organised in the form of an operational manual on the step-by-step process of conducting a privatisation from start to finish. It is divided into five chapters covering the key components of the privatisation process:
Chapter 1 offers a definition of privatisation and sets the context for the Guide.
Chapter 2 covers the guiding principles that should inform policy makers considering undertaking a privatisation process.
Chapter 3 covers measures to be undertaken by both the company and public authorities prior to divestment to ensure success of the transaction.
Chapter 4 covers the organisation of the privatisation process from start to finish.
Chapter 5 covers issues that need to be considered post-privatisation.
The Guide provides case examples based on national practices. A number of “special sections” are included focusing on thematic topics such as: the timeline and process for different sales methods; privatisation through public share offerings; dealing with external advisors; and ensuring integrity of the privatisation process.
Trends in privatisation and changing paradigms
Privatisation activity today is characteristically different from privatisation activity during the so-called “golden age of privatisation”, which lasted from the end of the 1980s through the early 2000s, and from the privatisations that took place between the mid-2000s and immediately following the financial and economic crisis of 2008-09. This section will briefly discuss how privatisation activity has changed throughout these periods, drawing on recent trends, as well some of the changing conditions for privatisation.
The “golden age of privatisation”
The bulk of OECD privatisation activity took place during the 1990s, which some observers call the “golden age of privatisation” (Megginson, 2016). By the middle of the 1990s, privatisation had gained momentum in most OECD member countries. In Europe, privatisation activity accelerated, especially among countries that had joined the Economic and Monetary Union (EMU), as they embarked on ambitious economic reform programmes in order to fulfil the convergence criteria of the Maastricht Treaty. OECD privatisation activities during this period were mainly through share offerings as the predominant method of sale, with a domestic retail-investor base representing a significant source of proceeds. OECD privatisations typically began with smaller assets operating in competitive sectors and then evolved to larger scale privatisations such as in telecommunications. In transition economies, governments actively pursued privatisation programmes, lasting through the early- to mid-2000s. In the latter cases, privatisation activity was seen as an opportunity to shed assets in a large state sectors, develop local capital markets and attract foreign direct investment (OECD, 2003).
According to evidence gathered on privatisation outcomes from 1989 to 2003 in both developed and developing economies, privatisation has had a generally positive overall impact in terms of increasing competition, efficiency and consumer outcomes. However, the lessons learnt from these accumulated experiences, including both successes and failures, demonstrate that economic institutions matter. This means strong rule-of-law, robust competition and enforcement, hard budget constraints, and sound governance and regulation (Guriev and Megginson, 2005).
Privatisation of the mid-2000s and through the financial crisis
Privatisation from the mid-2000s through the 2008-09 economic and financial crisis marked a different phase in privatisation activity. Following the privatisation push of the late ’90s and early 2000s, many OECD governments had listed large state-owned enterprises (SOEs) on stock exchanges through public offerings; whereas others were sold to strategic investors. In both cases most of the privatisation activity was characterised by the state remaining a majority or significant minority owner of shares. These partially state-owned enterprises benefited from performance and efficiency improvements through the disciplines of stock market listing or private ownership. On the other hand, mixed ownership allowed the state to maintain strategic participation in companies for which there remained a rationale for continued state ownership.
During this period, privatisation activity in the OECD area was mainly dominated by the partial or tranche-wise sell-off of large SOEs in the utilities and/or network industries, where state ownership remained. The sequential approach was justified mostly by the size of the enterprises but also market conditions. Despite a dip in privatisation activity among OECD countries, this period was also characterised by a marked rise in privatisation transactions outside of the OECD area, with partial privatisation transactions carried out in large emerging economies, including China and Russia. For this reason, some observers have characterised this period as giving rise to a “new privatisation landscape” (OECD, 2009; 2010) in which a large number of enterprises were subject to privatisation processes but were not transferred to private ownership in their entirety.
With the benefit of hindsight, most of the remaining secondary or tertiary offerings were delayed when markets stabilised and the enterprises in question established a financial track record. Consequently, many of these transactions have taken many years – and in a number of OECD countries are still ongoing.
Privatisation of today and the near future
The privatisation activity of today and the near future is likely to be different from the previous period. A 2018 OECD report indicates that global privatisation activity is trending upwards following an initial drop in the wake of the international financial crisis. From 2008 through 2016, privatisation revenues have more than doubled from around USD 110 billion in 2008 to USD 266 billion in 2016 (OECD, 2018). This development was accompanied by a marked regional shift from privatisation activity mainly originating in European economies to emerging economies. Most of the shift is due to the growing magnitude of privatisation within China. But it also reflects the fact that governments, already under pressure to raise fiscal revenues, have also reassessed the role of the state in the commercial economy and have increasingly chosen to make the best use of the opportunities for privatisation that have emerged with internationalisation, market de-regulation and technological progress.
In terms of sectorial distribution, privatisation within the OECD area (representing mainly European economies) has, in recent years, been tilted toward the financial and real estate sectors. This mostly reflects governments’ efforts to disengage from financial institutions that had been partly nationalised and/or recapitalised (including through the issuance of non-voting shares) with a continued government stake as a result of the economic and financial crisis. A number of governments have privatised real estate management firms and/or unincorporated real estate portfolios. Other important sectors include public utilities, reflecting a completion of privatisation transactions initiated in earlier phases (see above), thanks to: increased competition from the private sector; market-based regulation which, in the eyes of many governments, gradually eroded the rationale for state ownership; and improved market conditions.
This period also marks a change in the preferred privatisation method among many OECD economies. The privatisation activity of today, apart from a few notable initial public offering (IPOs) or secondary public offering (SPOs), is mainly centred on private sales. This largely reflects an increased preference for equity capital observed for private companies as well.
This period is also notable in that a decade after the adoption of the OECD SOE Guidelines, the professionalisation of state ownership across the OECD area has, arguably, had an impact on the dynamics of privatisation. For example, increasingly professionalised ownership entities are more involved in an advisory capacity to the government and have served to inform the privatisation process. This has also helped to balance out the role and influence of external advisors in the privatisation process.
Privatisation dynamics have also changed through the digitalisation of the economy more generally. Digitalisation has allowed the state as owner to share information more broadly on privatisation programmes and arguably attract interest from a broader, more international, group of buyers beyond the “traditional” domestic retail buyers. Digitalisation allows for more complete exchanges of information, such as through virtual data rooms, and greater transparency on the privatisation process towards stakeholders and the public.
As for emerging economies, many with large state sectors, which are expected to grow briskly, divestment activity is likely to grow in the coming years. This upward trend will be further supported by significant (but not massive) privatisation activity in a number of OECD economies. It is yet to be seen whether the emergence of the “green” economy will have an impact on public utilities and gas/energy companies that remain in public ownership. For these reasons and continuing fiscal challenges in both industrialised and emerging market countries, some observers (Megginson, 2017) posit that continuing privatisation programmes will remain a central issue for policy makers for many years to come.
Figure 1.1. Changing paradigms for privatisation
OECD Guidelines on Corporate Governance of State-Owned Enterprises as a point of departure
This Guide is addressed to governments that are committed to implement the OECD SOE Guidelines, and that have undertaken the foundational structural reforms necessary to implement their main policy tenants. This means that regulation has been separated from ownership, independent regulatory authorities are in place and a certain degree of market liberalisation has occurred. It is likely that the Guide will also be a useful reference point for those who are undergoing SOE reform in parallel with structural reforms.
The OECD SOE Guidelines do not pronounce themselves on the merits or demerits of privatisation and they do not place judgement as to whether certain activities are better placed within public or private ownership. However, the OECD SOE Guidelines serve as an important guidepost for the state acting as an owner to manage more effectively their responsibilities as company owners, thus helping to make state-owned enterprises more competitive, efficient and transparent. Moreover, ensuring the good corporate governance of SOEs will be an important factor in ensuring success of an eventual privatisation, as it is a prerequisite for economically effective privatisation, enhancing SOE valuation and hence bolstering the fiscal proceeds from the privatisation process (Box 1.1).
Box 1.1. OECD Guidelines on Corporate Governance of State-Owned Enterprises
Chapter I. Rationales for ownership: The state exercises the ownership of SOEs in the interest of the general public. It should carefully evaluate and disclose the objectives that justify state ownership and subject these to a recurrent review.
Chapter II. The state’s role as an owner: The state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness.
Chapter III. State-owned enterprises in the marketplace: Consistent with the rationale for state ownership, the legal and regulatory framework for SOEs should ensure a level playing field and fair competition in the marketplace when SOEs undertake economic activities.
Chapter IV. Equitable treatment of shareholders and other investors: Where SOEs are listed or otherwise include non-state investors among their owners, the state and the enterprises should recognise the rights of all shareholders and ensure shareholders’ equitable treatment and equal access to corporate information.
Chapter V. Stakeholder relations and responsible business: The state ownership policy should fully recognise SOEs’ responsibilities towards stakeholders and request that SOEs report on their relations with stakeholders. It should make clear any expectations the state has in respect of responsible business conduct by SOEs.
Chapter VI. Disclosure and transparency: State-owned enterprises should observe high standards of transparency and be subject to the same high quality accounting, disclosure, compliance and auditing standards as listed companies.
Chapter VII. The responsibilities of the boards of state-owned enterprises: The boards of SOEs should have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions.
Source: OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264244160-en.
A number of countries are in the process of reforming the way in which they organise and manage their SOEs; they have in many cases taken international best practices such as the OECD SOE Guidelines as points of departure or even benchmarks. This Guide assumes that as a point of departure the government must already work towards:
professionalising the state as an owner
making SOEs operate with similar efficiency, transparency and accountability as good practice private enterprises
ensuring that competition between SOEs and private enterprises, where such occurs, is conducted on a level playing field.
Applicability and definitions
The Guide is applicable to the privatisation of entities that are already pursuing economic activities or are expected to do so after privatisation. Moreover, to limit the scope of issues to be addressed, it only applies to privatisation of corporate assets in which there is a significant change in government ownership or control. The term “privatisation” covers full or partial divestment of incorporated assets by governments. This may take numerous forms, including listing in stock markets (through IPOs); trade sales to private firms; management buy-outs; and the issuance of stocks or convertible bonds by the SOEs themselves. Conversely, the sale of physical assets by SOEs or the transfer of activities to the private sector through instruments such as concessions and public-private partnerships would normally not be considered privatisation.1 Moreover, the privatisation or liquidation of assets which take the form of state property but would not be subject to corporatisation are not included in the scope of this report.
References
Guriev S. and Megginson W. L. (2005), Privatization: What Have We Learned?, ABCDE conference, St Petersberg, January 2005.
Megginson, W. L. (2017), Privatization Trends and Major Deals in 2015 and 2016, in Privatisation Barometer.
Megginson W. L. (2016), Privatization, State Capitalism, and State Ownership of Business in the 21st Century. Foundations and Trends in Finance, vol. 11, no. 1–2, pp. 1–153, 2017.
OECD (2018), Privatisation and the Broadening of Ownership of SOEs: Stocktaking of National Practices, https://www.oecd.org/daf/ca/Privatisation-and-the-Broadening-of-Ownership-of-SOEs-Stocktaking-of-National-Practices.pdf.
OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition, http://dx.doi.org/10.1787/9789264244160-en.
OECD (2010), Privatisation in the 21st Century: Summary of Recent Experiences, https://www.oecd.org/daf/ca/corporategovernanceofstate-ownedenterprises/43449100.pdf.
OECD (2009), Privatisation in the 21st Century: Recent Experiences of OECD Countries: Report on Good Practices, January 2009, https://www.oecd.org/daf/ca/corporategovernanceofstate-ownedenterprises/48476423.pdf.
OECD (2003), Privatising State-Owned Enterprises: An Overview of Policies and Practices in OECD Countries, OECD Publishing, Paris, https://doi.org/10.1787/9789264104099-en.
Note
← 1. For good practice guidance related to the transfer of activities to the private sector through instruments such as concessions and public-private partnerships, further guidance can be found in the OECD Recommendation on Principles for Public Governance of Public-Private Partnerships and accompanying best practice guides including the “PPP Reference Guide”.