Session 7: Role of Privatisation Learning Objective - Explain to the learner the objectives of privatisation.
- Introducing to the learners to the different forms of privatisation.
- Outlining to the learners the scope of privatisation in Malawi.
- Explaining to the learners the legal aspect of privatisation.
Important Terms - Privatisation
- Divesture sequence plan
- Commercialisation
- Concession
Definition of Privatisation According to the World Bank, privatisation “is the transfer of ownership of State Owned Enterprises (SOEs) to the private sector by sale (full or partial) of going concerns or by sale of assets following their liquidation.”
Some of the important definitions under the Privatisation Act 1996 include the following: - Privatisation: the transferring to the private sector of part or the whole of equity or other interests held by the government, directly or indirectly, in a public enterprise.
- Commercialisation: the re-organisation of specified government departments into enterprises so that they may operate as profit making commercial ventures.
- Divestiture sequence plan: a list, as approved by the cabinet, of public enterprises categorized according to the sequence in which the whole or part of their shares will be disposed of over the period of the privatisation programme.
Background The concept of privatisation has emerged and found emphasis through out the world because of the failure of the State owned enterprises, much as they were created for very noble reasons.
State owned enterprises have existed in the world including Malawi for quite some time. Local examples include; - ADMARC
- Air Malawi
- Bata shoe enterprise
- Central Government Stores
- ESCOM
- Grain and Milling
- MDC
- Dzalanyama Lodge
- Premier Mining
It should be noted SOEs cut across a wide range of economic sectors. There are several reasons which can be advanced for the existence of SOEs but those that stand out are: - To ensure that citizens have access to goods and services which the private sector might not be willing or be able to provide.
- To produce higher investment ratios and extract a capital surplus for investment in the economy.
- To transfer technology to strategic sectors.
Much as the reasons for creating the SOEs are noble, many of them have not lived to expectation. There is evidence to the effect that many have been operating inefficiently and have incurred losses on many occasions. This means tax payers money and government borrowings used on them have not been efficiently employed. The enterprises have been a strain on the National Budget in that Government has had to bail them out.
From another angle, it can be said that Government has used funds which could have been used on development projects to subsidise SOEs where they have not performed successfully.
The advent of privatisation and well developed objectives has offered a solution in that where it has been implemented there has been evidence of success or improvement in performance. Some indicators of success which are easily noted are: - Employment: many of them have not retrenched but increased employment.
- Production: production and provision of services have gone up.
Objectives of Privatisation The objectives of privatisation in Malawi are; - To foster increased efficiency in the economy.
- To increase competition and reduce monopoly.
- To promote participation by the Malawian public.
- To raise revenue for government.
Role of Privatisation The role of privatisation is multifaceted but its major aspects are: - Improving the living standards and welfare of the people through the benefits of privatisation.
- Enhancing growth in the economy as privatised enterprises grow.
The Mandate of Privatisation Commission Privatisation Commission was established under the Public Enterprises (Privatisation) Act 1996. The Commission is mandated to be the sole authority in Malawi to implement the privatisation programme for state owned entities.
According to section 8 of the Privatisation Act the functions and authority of the Commission include the following; - To formulate and recommend to Cabinet for approval, privatisation policy guidelines.
- To implement the privatisation programme in accordance with the policy guidelines approved by the Cabinet.
- To implement all aspects of the implementation of the privatisation programme in Malawi.
- To monitor the progress of privatisation in Malawi.
- To prepare the long-term divesture sequence plan and submit reports of privatisation transactions to the Cabinet, specifying the method of sale used and the reasons why such method was considered appropriate, the proceeds realized and other particulars.
- Ensure that privatisation is carried out according to the following principles:
- Each transaction is transparent to the public at large.
- Participation is competitive by making it open to all investors.
- The process is fair and efficient.
- The transaction is such as to reduce concentration of ownership and marketing.
- To set pre-qualification criteria for the selection of the bidders with regard to:
- The ability and commitment of the buyers to develop the enterprise and
- The track record of the buyers and their expertise in the type of enterprise on offer, and
- The price.
- To prepare or cause to be prepared the relevant documentation necessary to effect the privatisation of any public enterprise.
- To seek potential investors in public enterprises.
- To maintain records, safeguard information and establish such administrative procedures as shall ensure confidentiality of information
- To publicise the activities of the privatisation programme.
Methods of Privatisation Sale of shares This is where the Government has shares (equity) in the enterprise and then it offers those shares to the public. In most cases management of the enterprise has stayed the same. Concession In this case Government owns the land and most assets. The concessionaire can make capital expenditure and investment with the permission of the government. The concessionaire pays government a fee for the right to operate the business. Government reserves the right to cancel the concession where the concessionaire fails to perform. The concessionaire may be allowed to purchase the enterprise at a later date. Sale of assets Here Government can sell the assets (buildings, vehicles, stock, and fixtures) piece meal. This is when the business is unprofitable. Liquidation/Dissolution This method is used when an enterprise only exists on paper and has no value. Examples are Midcor and Charcoal Production Fund
Liquidation can also mean the process by which the enterprise’s property and assets are identified and realized to pay off its debts and the surplus, if any, distributed among the enterprise members in accordance with their entitlement under the articles and memorandum of association. Sale of Enterprise Here the business is sold as a going concern. It is expected that the enterprise will continue to operate. Management Buy Out This is where the existing management buys a controlling share of the business. Management contract/ service contract It is an arrangement where a team of experts or enterprise is identified to run the state owned enterprise on behalf of the government. The government pay a fee to the expert or enterprise involved.
Documents Provided by the Privatisation Commision
There are standard documents which are available at Privatisation commission to assist bidders in the preparation of their bids. The bidders in most cases are outsiders and might not have full details on the financial position of an enterprise so the documents are intended to facilitate the preparation of bid documents.
Information Memorandum This contains a profile of every public enterprise to be privatised whose purpose is to provide interested persons with comprehensive, accurate and update information on the public enterprise and assist them to decide whether they should bid for it and determine the terms of their bids. It contains information such as: - Full name, address and contact details of the public enterprise.
- The enterprise’s legal status.(whether it is a limited or unlimited enterprise)
- The enterprise’s bankers, auditors and legal practitioners.
- The enterprise’s brief history.
- The enterprise’s type of business, markets, suppliers, turnover levels capacity and utilization.
- The enterprise’s latest accounts.
vii) The enterprise’s constitutional documents (Memorandum and Articles of Association)
Draft Sale and Purchase Agreement This document states the terms of the sale and purchase agreement and they are signed by the buyer and the Commission. There are two types of forms which have to be filled representing whether the sale is by shares or sale of assets.
Bid procedures These are documents issued by the Privatisation Commission to persons interested in bidding for the public enterprise following advertising of that entity by the Commission.
The documents include the letter which informs the first and second letters to interested persons and a confidential undertaking that the information obtained from the Commission on the public enterprise to be privatised shall be kept secret and will only be used for making a bid.
The bid documents are given at a fee. Documents Produced by the Bidders These are produced by the bidders for the purpose of buying the entity being privatised.
They include; - Qualification statements i.e. technical proposals, normally business plans.
- Price bids or financial proposals, normally the price offered for the entity being privatised.
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