GETTING VALUE FOR MONEY IN PRIVATISATIONS
PART 1: KEY LESSONS
| ISSUE |
KEY LESSONS |
| 8.General | |
| Pre-sale Restructuring |
|
| - What factors should departments bear in mind in deciding on the nature and extent of pre-sale restructuring of the business?
| - As well as needing to put the business into a legal form in which it can be sold, departments face a range of choices as regards the extent to which the business should be restructured prior to sale. A major reorganisation to put the business on a sounder financial footing can be expensive and time consuming, but if carefully done should lead to higher net sale proceeds.
|
| - Departments need to ensure that those responsible for restructuring carry out a risk analysis of the likely costs and benefits to the taxpayer, and monitor the costs incurred against budget.
|
| - Departments should consider whether it is in the interests of the taxpayer for significant public resources to be committed to restructuring at all if such an exercise risks bringing benefits to the private owners without realising commensurate returns for the public.
|
| - Departments should allow sufficient time before the sale for the restructuring to be tested and found reliable, for example, through the production of dependable financial and other performance data.
|
| Sale Objectives | |
| - What key factors should departments bear in mind in setting sale objectives?
| - Departments should ensure that sale objectives encompass the main purposes of the sale and that their achievement can be measured. Objectives that cannot be measured can lead to confusion and risk bringing the sale process into disrepute.
|
| - Departments often need to pursue objectives which complete with on another, for example, maximising net proceeds, meeting a demanding timetable, maximising competition, and creating a perception of success to pave the way for future sales. So they need to plan carefully in advance how to resolve such conflicts, including where possible ranking objectives in order of priority.
|
| |
| Timing of the Sale |
|
| - What factors do departments need to bear in mind in deciding on the timing of the sale?
| - Departments are frequently under pressure to carry out sales by a target date. Targets can be a useful discipline but meeting a demanding timetable is no excuse for failing to get full value for money for the taxpayer.
|
| - Deciding on the timing of the sale can pose particular challenges. Major flotations or sales of shares need careful planning and preparation over an extended period, and there may be few windows of opportunity.
|
| - It is good practice to decide on a timetable which, so far as possible, minimises uncertainty to the business and maintains competitive tension among potential investors. In a number of instances a demanding timetable has resulted in departments taking decisions in haste or compressing the process so much that it has contributed to failure to maximise the outcome for the taxpayer.
|
| - It is important therefore to keep the planned timing of the sale under review in order to protect the taxpayer's interests.
|
| |
| Method of Sale | |
| - How should departments identify the most appropriate method of sale?
| - Departments should examine the applicability of all possible methods of sale, including flotation, trade sale, or management/employee buy-out. Failure to think carefully about the nature of the business, and its implications for the sale strategy, before taking a decision, can result in a loss of value to the taxpayer.
|
| - In the case of larger businesses departments may find it useful to keep open the alternative options of a trade sale or flotation for as long as possible. For instance, negotiations with a potential trade buyer would test that market and might also encourage the directors of the business to be privatised to be more positive than otherwise about its prospects; this could lead to pricing benefits in the event of a flotation.
|
| - Sometimes departments will be seeking to secure a continuing service: even so, they are likely to get a better price if they promote the service as a business opportunity by means of a competitive sale.
|
| - Departments should also consider whether the separate disposal of surplus assets, including property and stocks and shares in other companies, might yield a higher return for the taxpayer than selling them with the main business.
|
| |
| Pre-sale Valuation |
|
| - Why should departments carry out a valuation of the business before the sale?
| - We continue strongly to recommend that departments should carry out valuations in advance of sales negotiations.
|
| - Departments which have failed to put a value on the business they are selling have defended this on the grounds that what they are selling is unique, or that the range of potential values would be too wide to be useful, or that a realistic price can best be achieved by full competition.
|
| - These arguments are unconvincing. Bidders have to value the business and departments need their own valuation, or range of values, against which to measure the reasonableness of bids. The process of considering how a business should be valued enhances the vendor's understanding of its potential worth and can therefore be of considerable assistance in deciding sale strategy and in subsequent negotiations with bidders. And securing competitive bids for the business is a separate issue, not an alterative to getting a valuation.
|
| |
| The Appointment and Role of External Advisers
| |
| - What factors should departments bear in mind when appointing external advisers?
| - Departments should take appropriate professional advice in the sale process before taking important decisions and ensure they get good value for money for the taxpayer from their advisers.
|
| - Departments should appoint advisers using full and open competition, save in the most exceptional cases, specifying clearly what work is required from the adviser.
|
| - Departments should ensure that their advisers have no commercial interests which may potentially distort their pre-sale advice.
|
| |
| Completion and Success Fees |
|
| - How can departments ensure that completion and success fees are set at a reasonable level?
| - Advisers may seek, as part of their remuneration, a completion or success fee which is dependent on the completion of the sale or on meeting agreed criteria. Such criteria should be set early in the process, and the outcome clearly evidenced.
|
| - Where valuations are used as a reference point for success fee payments, and are carried out by those who will receive the payments, departments should have the valuation checked by a competent party, unconnected with the adviser, who is aware of the role that the valuation will play in determining what is to be paid to the adviser.
|
| Setting and Monitoring Budgets for External Advisers
| |
| - How should departments set and manage budgets for advisory costs.
| - Budgets should be carefully calculated at the outset and revised as necessary. Spend against budget should be monitored carefully as the project progresses.
|
| - Cost control is likely to be assisted by a carefully thought out budget, not least because this will provide a reference point for evaluating, as this work develops, any case for adjustment in the light of changed requirements.
|
| - It is good budget discipline to cap the level of fees.
|
| |
| Clawback | |
| - In what circumstances should departments consider including clawback provisions in the terms of sale?
| - Departments should always consider the case for clawback where high levels of uncertainty, whether business or political, threaten to depress the initial value of the sale.
|
| - Clawback can be appropriate in a number of situations, in particular
—where surplus assets are not disposed of ahead of the main sale, and gains are likely to arise within a reasonable period following privatisation;—to share in any higher than expected profits or gains in the period following privatisation;—where any increase in the value of a company's shares can be attributed to a failure or inability to meet undertakings given at the time of the sale; and—to cover the possibility that projected investments do not take place.
|
| - Clawback provisions can therefore protect the interests of the taxpayer by providing for a share in value not identified at the time of sale. In the past, departments often failed to include such arrangements with the result that purchasers have, in many cases, made substantial profits or gains soon after privatisation in which the taxpayer has not shared.
|
| - Although, as a result of pressure from our predecessors, departments now generally include property clawback provisions, they have only rarely extended clawback to apply to other profits or gains unidentified at the point of sale.
|
| - As a result, in a number of cases, investors have made much higher returns than they ever imagined. In these circumstances, high threshold clawback schemes would have had a minimal depressive effect on the initial price. Departments should carefully assess the balance of advantage to the taxpayer of clawback provisions before making any binding commitment either way. They should inform this assessment by inviting bids both with and without clawback provisions.
|
| |
| Skills Required by the Vendor Department
| |
| - What skills should departments secure in assembling a team to undertake a privatisation?
| - Departments need to ensure that the vendor team includes staff experienced in conducting privatisations, and that they have access to experienced advisers from within the public sector as well as the private sector.
|
| - Vendor departments should recognise and utilise the skills and experience that individuals across the public sector have built up through involvement in previous privatisations.
|
| The Role of the Treasury |
|
| - How do the Treasury assist the privatisation process?
| - The Treasury have developed two roles in relation to privatisations:
—as a source of advice and guidance for departments; and—as a seller of residual shareholdings of the Government and debt in privatised companies.
|
| - The Treasury should continue to ensure that their guidance and the lessons learned from past privatisations are shared with vendor departments.
|
| - We recognise in particular the positive role that the Treasury have played in the past in persuading their external advisers and institutional investors to accept a series of innovative sales techniques which have increased the yield for the taxpayer. We are concerned that, by contrast, in a number of recent sales departments have failed to get full value from their external advisers and we look to the Treasury to take a more active role in encouraging departments to ensure that their external advisers always act in the taxpayer's interests.
|
| Extracting Cash | |
| - What should departments consider in relation to cash in the company at the point of sale?
| - It is generally good practice for cash to be extracted from a business before a sale.
|
|
|
