Financial Magazine

Transparency in Privatization

Building transparency into the privatization process should be a top priority for all policymakers undertaking the effort. Transparency is the requirement that all investors have access to the same information during the privatization process. Most governments try to ensure transparency to a greater or lesser degree in order to maintain public support for their programs. However, complete transparency is not easy to achieve, nor do most governments always regard it as desirable. For example, a transparency requirement is clearly not compatible with management buyouts.
Similarly, most governments retain the right to reject bids without explanation. They may turn down the highest bidder because he is inexperienced or suspect, preferring to take a smaller cash offer from someone with more industrial experience or who has long-term investment plans for the enterprise. Here the government is acting in the consumers' and workers' best interest, and has forgone some of the sales revenue. Less transparency in such a case can stop unfair or politically-motivated criticisms which could threaten the entire privatization process for years to come.
Moreover, attempts at defining transparency are usually inadequate because it means something different to everyone. Nonetheless, transparency is important and cannot be ignored. A government that shows utter disregard for transparency will appear dishonest and untrustworthy.
The quest for transparency is a difficult balancing act. Government must maintain enough access to information to satisfy investors and observers, while retaining enough flexibility and privileged information to allow it to conduct privatizations quickly, fairly and well.

In comparing other privatization methods for transparency, some say that a public share offer is more transparent than competitive bidding by tender. This might be true in the highly regulated and policed capital markets of developed economies. In those countries everyone has access to announcements of public offers in newspapers and by tens of thousands of stockbrokers. But it is not true in less developed countries, particularly where there is no formal stock market or effective capital market regulation. In these cases, the most transparent method may be a well-publicized and well-run tender process.

The main components of a transparent tender process are:
competitive bidding
equal access to information
clear evaluation criteria and documented procedures
disclosure of the purchase price
adequate monitoring
compliance with the law

Competitive bidding is highly desirable for several key reasons. Bidding usually brings in more money from the sale, which inspires voter confidence in the government's stewardship of national assets. Bidding also resolves the problem of difficult valuations, and makes charges of favoritism harder to sustain.

Equal access to equal information is important because investors can submit their bids with a sound understanding of the enterprise. If management is bidding as well, it may try to withhold data from other bidders, thus giving it a greater advantage than it already has.

Clear evaluation criteria and documented procedures are necessary to reassure potential investors that all will be fair and accessible. However, not every country sets out the evaluation criteria for each enterprise because there are many enterprises that are all slightly different. Thus it is often safer to give investors a general indication of evaluation criteria, which allows the government some flexibility in the later process of evaluation. This can be done in the tender rules which also document the privatization procedures.

Disclosure of the purchase price after the sale is a common practice. There should be an explanation when the winning bid pays less than the highest offer—especially if the highest offer was publicized after the bids were opened, a common publicity practice. Some countries publish full details of bidders and their bids along with the valuation of the enterprise being sold, giving the public and other investors a fairly complete picture of the government's decision-making process.

Sometimes bids are not readily comparable. For example, a bidder once decided to subdivide an enterprise on offer. He indicated that a major asset of the overall enterprise he wished to buy was not required—and his bid assumed that it could be sold separately by the government. Likewise, some adjustments may be needed to compare bids requiring different credit periods. These problems can make it difficult for the government to declare the various bids because some investors bid on different packages and different terms. If none is a winning bid, the government may avoid the entire problem by declaring them invalid and outside the limits of what was put to tender. Or they can explain the problems in appendices or footnotes to their declaration.

Generally speaking, it is better to design the procedures of any tender so that bids are easily comparable. Bidders should not be allowed to offer a range of prices, prices in different currencies, or offer to buy only certain assets, etc.
Adequate monitoring and auditing are important because most privatization programs are closely observed by the press and opposition politicians. Even so, few developing countries conduct independent audits and publish the results. Privatization, like any activity in life, encounters occasional failures. If these problems are exposed by damning criticism, the entire program can be adversely affected. This is another case where full transparency can create more problems than it solves. However, a sensitive audit carried out by persons who understand the subject can often yield valuable insights.

Independent audits are often the only way senior government officials can learn and improve their programs. One positive approach is to regard the audit in a similar manner to that of public companies. The auditors assess whether or not the privatization broadly achieved its objectives and then—similar to company auditors—provide the government privatization agency with a list of essentially minor shortcomings. Public confidence is not eroded, and officials get the expert and independent opinions they need to improve the process.
Compliance with the law keeps the government honest and keeps it out of courts defending past privatizations when it should be busy promoting new ones.
Compliance is more easily observed in developed countries than developing ones where the law is often uncertain or contradictory. For example, in one country lacking a stock exchange, it was unclear whether a public offer required a prospectus, which involved much more stringent conditions than an offer document. Likewise, vague laws on establishing proper title to privatized assets often lead to post-privatization litigation.
Obviously, if a country has not developed a modern legal framework, privatization should still continue. In the interim, skilled people can be hired to provide legal advice, and every attempt should be made to comply with the nation's laws.

Back to Financial Magazine