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GOVERNMENT OF LESOTHO- PRIVATISATION PROGRAMME
POLICY GUIDELINES
A. INTRODUCTION
In accordance with the Privatisation Act, 1995 the Government of Lesotho
is undertaking a privatisation programme. The term Privatisation refers
to the transfer to the private sector of Government's equity stake in a
parastatal. This Document sets out the policy guidelines to be followed
in the conduct of the programme.
B. OBJECTIVES OF THE PRIVATISATION PROGRAMME
The objectives of the privatisation programme are as follows:
1. To reduce the budgetary burden on Government and release Government
funds for other essential expenditures
2. To broaden direct participation of the population in the control and
ownership of productive assets, thus improving their use; this will be
achieved by injecting capital, technology, and managerial skills through
private sector participation and by enhancing management and supervisory
structures in the case of retained enterprises
3. To eliminate the administrative burden of Government participation in
commercial activities and services which can best be undertaken by the
Private Sector.
4. To develop entrepreneurial skills among Lesotho citizens.
5. To provide adequate compensation and relevant retraining
opportunities for any retrenched workers.
6. To facilitate technical partnerships with foreign investors where
essential for the enhanced management and performance of formerly
state-owned or parastatal enterprises.
7. To increase productive efficiency and growth of the economy.
C. EFFICIENCY AND GROWTH OF THE ECONOMY
1. Increasing productive efficiency and growth of the economy: This is
the overall objective. Other objectives are important and will be
targeted, but without sacrificing the corporate governance of the
enterprise being privatised. Each enterprise will be privatised
according to a Privatisation Scheme which will select the optimum
ownership structure to enhance efficiency through operations and the
introduction of competition. The Privatisation Scheme for each
enterprise will address other objectives to differing degrees, depending
on the specific circumstance of the enterprise and its ability, through
privatisation or restructuring, to meet the objectives of wide share
ownership, participation by Basotho nationals, and raising capital for
investment.
2. Privatisation Process: The Privatisation Programme will be
facilitated by the Privatisation Unit under the guidance of the Ministry
of Finance. The Boards & Management of the Parastatals and the Line
Ministries will be actively involved at all steps of the process. The
privatisation Process for each enterprise will consist of three broad
stages:
- Preparation of Privatisation Scheme;
- Approval of Scheme by Cabinet;
- Implementation.
D. CLASSIFICATION OF ENTERPRISES
1. Policy
1.1 Classification: The Privatisation Scheme will classify each
individual enterprise according to the following criteria:
a. By Competitive Environment:
- large monopolies: e.g. electricity, water and telecommunications;
- market monopolies: commercial enterprises that are monopolies by
virtue of the size of the market or the product;
- strategic enterprises: enterprise which are strategic by virtue of
their size, impact on the economy, or type of product.
- commercial enterprises:
b. By size : (turnover and/or number of employees)
- large;
- medium
- small
c. By expected level of interest by investors:
- highly attractive: commercial operations with good market and profit
potential;
- attractive commercial operations with good market potential, but
requiring capital investment or improvements to technology or
management;
- unattractive: capital intensive with limited market potential;
b. Level of investment/subsidy needed: (for capital improvements &
working capital)
- high
- low
1.2. Prioritisation: In prioritizing SOE's, the Government is committed
to reform at least four parastatals a year according to the following
priorities:
- firms that offer scope for reducing the need for support from the
Treasury.
- firms that require major capital investment that the Government is
unlikely to raise without private sector participation;
- firms that offer scope for improved profitability but are constrained
by a lack of skills or of ready access to markets for their products;
- firms that are known to be attractive to private sector investors and
could therefore generate both revenue and momentum for the privatisation
effort;
These priorities will be considered within the overall objectives of the
privatisation programme.
2. Explanatory Notes:
2.1 The classification of enterprises is important because the
prioritisation of the enterprise and the selection of the method of sale
will be determined by the characteristics of the enterprise. The
operating environment peculiar to an enterprise dictates the legal and
regulatory structure which the Government must put in place prior to
privatisation. Some types of enterprise require more Government
regulation than others once privatised. In particular, large monopolies
such as water and electricity, that serve basic human needs, and
strategic enterprises, such as the airlines and telecommunications will
require more careful government supervision. This may take the form of
additional regulatory oversight or the retention, by the government, of
a "golden share" which can be exercised where defined actions by the
enterprise affect the economy or national interest.
E. OWNERSHIP
1 Policy:
1.1 General: The proposed private ownership structure for each
enterprise will be defined through the Privatisation Scheme. The
Privatisation Scheme for each enterprise will be designed in such a way
that the different and sometimes conflicting objectives of the
privatisation programme will be met to the greatest degree possible.
Owners will be selected primarily according to their ability to improve
the efficiency of the enterprise through contributions of capital,
technology and managerial skills.
1.2 Basotho Participation: As a number of the larger, private investors
may be foreign, the Government will promote Basotho participation and
economic empowerment by one or a combination of the following actions:
- the privatisation of companies which are large, well managed and, with
a sustainable capital base will include a degree of public
participation. The extent of public participation in these enterprises
will depend on negotiations between the government and the prospective
private investor. The objective of these negotiations will be to
maximise Basotho ownership without compromising the need to maintain
strong corporate leadership and capital investment, the benefits which
can best be obtained by having a single "strategic investor".
- where the entity being privatised is a natural monopoly or
strategically important and ownership by Basotho nationals is a
priority, the use of contracts to privatize management will be
investigated to meet the need for corporate leadership.
- enterprises which are small will be offered to nationals on a
competitive bid basis. The bidder most likely to improve and expand the
operations of the enterprise will be awarded the bid.
- financing for nationals to purchase equity in State Owned enterprises
will be addressed through credit creation or leveraged buyouts and
buyins.
- where appropriate, collective investment schemes will be set up in the
form of investment trusts and privatisation trust funds endowed with
government-held equity.
1.3 Retaining Government Ownership: In the case of parastatals that are
considered strategic enterprises, the Government will retain some
ownership. In other instances Government may retain a "Golden share"
which allows it a vote in major decisions.
2. Explanatory Notes
2.1 Collective Ownership Schemes: Collective investment schemes are
often the choice of policy-makers where there are severe constraints to
capital market development, little or no understanding of share
ownership, cultural barriers to individual accumulation of wealth, low
degrees of literacy, and logistical constraints, such as a highly
dispersed and difficult to reach population.
2.2 Privatisation Trust Funds: The main attraction of privatisation
trust funds stems from their usefulness as an institutional vehicle for
moving many public enterprises immediately out of government ownership
and under the supervision of profit-minded trustees until they can be
successfully privatised.
F. Method of Privatisation
1 Policy
1.1. Selection of Method: The method of privatisation will be selected
according to the
classification of the enterprise and defined through the Privatisation
Scheme approved
by Cabinet; The selected method of privatisation will be guided by the
principles of corporate governance to ensure that private ownership
results in efficiency improvements and, where required, additional
investment;
1.2. Payment: Enterprises will be sold for cash, except where debt for
equity swaps are appropriate, and where Basotho nationals are given
special terms to allow broadbased participation;
1.3. Transparency & Speed: Privatisation transactions will be completed
with transparency and speed.
Transparency means competitive bidding procedures, clear criteria for
evaluation of bids, disclosure of the purchase price and buyer,
well-defined institutional responsibilities and adequate monitoring of
the programme. Speed is also an important element. Privatisation creates
anxiety in management and workers. A lengthy process for transfer of
ownership may allow opportunity for worker unrest, asset stripping and
corrupt practices by management.
2. Explanatory Notes
The different methods that Government of Lesotho/Privatisation Unit will
use include:
2.1. Public offer of shares: In a public offer, the Government would
sell shares in a State owned enterprise at a specific price to whomever
has the cash to buy them. In order to meet different objectives, the
Government may restrict the offer in some way. For example, in order to
promote Basotho participation, the offer may be restricted to nationals.
To promote widespread interest, the number of shares offered may be
limited to a small number per bidder to maximise the number of investors
in a particular entity. To allow for the fact that Basotho nationals may
not be in a position to attract finance, the Government may allow
discounts on the offer of shares.
2.2 Private Placement: In a private placement, the Government would sell
shares to a single investor identified because that investor has unique
attributes. The price is determined through a process of negotiation.
Examples could be selling an enterprise whose commodity has a single
market to its customer.
2.3. Trade sale through competitive bid: In a trade sale, the government
sells the enterprise either as whole or in part (usually a majority
holding) to another company or individual (either foreign or domestic)
through a competitive process whereby interested purchasers submit bids
which the Government evaluates according to a pre-determined set of
criteria. Usually the purchaser will have industry expertise or
experience which will enhance the operations of the enterprise. A trade
sale may be done in conjunction with a management/employee buyout, a
public offering or may include some form of employee participation.
2.4. Sale of assets: In a sale of assets the Government sells either all
the assets or a part
or parts of the assets separately. This option may be considered when
the enterprise is no longer a going concern and would face bankruptcy in
a commercial environment. As the liabilities of the enterprise exceed
the assets, the assets may be sold in order to meet either part of the
liabilities, or the liabilities are discounted. A sale of assets may
also be considered where the enterprise is split in order to break up a
monopoly or to separate different types of operations which under State
ownership operate within the same corporate structure. In this instance,
the business may need to be incorporated as separate entities prior to
privatisation.
2.5. Management/employee buyouts: This method is similar to a trade
sale, except that the purchaser is the existing management and/or the
employees. The buyout proposal must show managerial ability and access
to capital and markets in order to be effective in managing the
enterprise. Management and employees may have difficulty in financing
the purchase of the enterprise. In this case, a discounted share price
or a leveraged buyout may be considered by the Government.
2.6. Management contracts, leases and concessions: Where the Government
does not wish to transfer ownership (particularly in the case of a
natural monopoly), the Government may either enter into a management
contract, a lease or a concession. In a management contract, the
Government would pay a private company to manage the enterprise. Fees
may be fixed or may incorporate a performance fee which reflects the
profit that may be attributed to the private company managing the
enterprise. In leases, the private party would pay the Government a fee
to use the assets but assumes the commercial risk of the operation and
the capital costs of maintaining the assets. Concessions are similar to
leases except that the private party also is required to bear the costs
of capital expenditures and investment. Concessions are usually used in
the privatisation of utilities.
2.7. Joint venture: In a joint venture the assets in the State owned
enterprise would be transferred to a separate company formed as a joint
venture between the Government and private owner. The Government would
contribute the assets of the State owned enterprise and the investor
would contribute his own assets (capital, technology, access to markets)
to the new company.
2.8. Capitalization: Capitalization is a form of trade sale whereby the
Government does not sell the assets, but rather would evaluate the need
for investment in a enterprise. The amount of the investment would be
sought from a private partner as equity in the enterprise. The relative
values are assessed to establish the ownership ratio. After the
enterprise is restructured, the shares held by the government may be
sold using several methods. For instance, in order to meet the objective
of wide share ownership, the shares may be sold to nationals when the
enterprise is operating profitably on a sustainable basis.
G. Treatment of Monopolies:
1. Policy
1.1 Competition: Government will use privatisation to introduce
competition in all areas of the economy and reduce monopolistic
behaviour. Competition will be created by separating monopoly producers
into competitive business units and selling these separately (when this
is possible) and by allowing market entry by substitutes, imports, or
similar (or same) products supplied by different producers.
1.2 Different options: Where it is not in the national interest to
create competition in the market by privatising the underlying assets
(e.g. mail delivery, telecommunications, water delivery and sewerage
systems, power generation facilities, etc.) the Government will pursue
other options to create competition for the market by contracting
certain aspects of the operation of the entity to the private sector or
by granting contracts to the private sector to build, operate and then
transfer to the Government new assets (such as power generation
stations).
1.3 Exceptions: Where the local market is not sufficiently large, some
monopolies (e.g. a cement company, which produces a non-transportable
commodity for which the market is too small to support more than one
producer) will be privatised as monopolies. After privatization, the
Government will perform a regulatory oversight role for the privatized
enterprise to ensure that the national interests of the Basotho
population are protected from unfair commercial measures.
2. Explanatory Notes:
2.1 Demonopolization of manufacturing and service industries is
important to the promotion of wide-spread Basotho economic development.
A monopoly, once privatized, can have such a significant economic
advantage (either of scale or of scope) that it crowds out new private
investment and potential competition. This has negative consequences for
the Basotho private sector as well as the Basotho consumer since the
lack of competitive market forces may lead to higher prices and lower
quality products from the monopoly. Demonopolization and competition
even in the traditional "natural monopolies" such as electric, water and
communications utilities is becoming more possible due to technological
change and innovation.
2.2 Even when an enterprise itself is not broken down into competitive
units and is sold as a monopoly producer in Lesotho, by creating a
favourable economic environment, the Government can create competition
in that monopoly's market. Such a favourable environment includes the
removal of any subsidies or other financial advantages, lowering
barriers to imported products, and allowing import and local production
of substitutes.
H. LABOUR ISSUES:
1. Policy
1.1 Link to efficiency: Where the efficiency of the enterprise will not
be sacrificed, employees will not be retrenched.
1.2 Retrenchment: Where the number of employees exceeds appropriate
levels of employment according to industry standards, labour may be
retrenched prior to offering the enterprises for sale, according to the
following guidelines:
a. Without prejudice to the workers’ rights to negotiate the terms and
conditions of retrenchment, the contracts of the employees affected and
the labour code will be honoured to ensure that retrenched employees
receive adequate retrenchment packages;
b. Before initiating the retrenchment scheme, the government will
provide a definition of retrenchment that will govern the scheme and
specify the methods that will be used to effect the retrenchment of
workers.
c. All retrenched employees, who have served with an enterprise for a
period of at least one year continuous service, will receive a minimum
of six months pay. Where the severance pay computed in terms of the
labour code and the terms and conditions of employment is less than six
months pay, employees will be paid a sum equivalent to six months pay.
Where the severance pay is in excess of six months pay, employees will
be paid according to the terms and conditions of employment and the
labour code.
d. The severance pay receivable will be subject to the maximum severance
amount specified by the Minister of Labour
e. Assistance will be given to redundees for entrepreneurship
development, retraining and re-skilling;
f. In an ideal situation unemployment benefits should be provided for
retrenched workers. This matter will be considered when a National
Unemployment Benefit Scheme is set up.
1.3 Severance Pay Computation
a. In computing the severance pay, a uniform retrenchment formula will
be applied. This formula may be based on payment of a maximum of two
weeks’ pay for each year of completed continuous years of service with
the parastatal, up to the maximum amount allowable as prescribed by the
Minister of Labour under the labour code.
b. Severance payments provided in connection with the privatisation
programme shall apply to workers affected by the privatisation
programme’s retrenchment scheme only.
c. Employees who initiate the termination of their employment outside of
the privatisation programme shall not qualify for a severance package of
the privatisation retrenchment scheme. They may be subject to the
provisions of the labour code section 79, subsection (5).
1.4 Private owner responsibility: Private owners will be encouraged to
promote job creation and, where this can be negotiated, the sale
agreement will require specific targets for increased employment.
1.5 Protection of employees not affected by the retrenchment scheme:
Where possible, the government will attempt to negotiate the protection
of the jobs of the remaining employees for a period of two years from
the time the new owners take over the company.
1.6 Employees’ share ownership scheme: Private owners will be encouraged
to set up employee share participation schemes where a minority portion
of the share is reserved for employees at reduced prices and favourable
credit terms.
2. Explanatory Notes:
2.1 Public enterprise workers are often wary of restructuring. They have
reason to be concerned for restructuring often provides the impetus for
making overdue employment reforms. The employment restructuring issue
generates much heated debate and workers and trade unions are the most
vocal opponents of the privatisation process. Yet several important
points are often overlooked:
- Layoffs may be necessary to improve the efficiency of public
enterprises, even where they remain in the public sector.
- Where restructuring provides the stimulus for expansion of a
particular sector, excess labour will be absorbed by new capital
investments and in some instances even lead to job creation.
- The private sector often provides higher remuneration for retained
employees as wages are tied to productivity.
I. TREATMENT OF LIABILITIES
1. Policy
1.1 Identification: The Government will identify and clearly present all
financial, labour, and environmental liabilities of Government debt and
inter-enterprise debt to prospective purchaser of SOEs.
1.2 Financial Liabilities: With respect to financial liabilities, the
Government will disaggregate them into Government debt, commercial debt,
and inter-enterprise debt.
1.3 Government Debt: The Government will absorb all Government debt
prior to the privatization transaction.
1.4 Commercial Debt: The Government will request that the purchaser
absorb commercial debt as part of the transaction, so long as the
business is a going concern and so long as this can be negotiated. If
not, the Government will consider other options such as:
a. A debt for equity swap whereby a purchaser is granted additional
equity in exchange for absorbing debt of the target enterprise;
b. A joint-venture, in which the government legally liquidates the SOE,
and contributes only the SOE's assets to the new joint venture with a
private purchaser. In this way the government absorbs responsibility for
the commercial debt;
c. Other negotiated solutions.
1.5 Inter-Enterprise debt: All existing inter-enterprise debt will be
settled at the time of the privatisation transaction (either through
immediate payment in full, or agreement on payment schedules and
interest rates).
1.6. Labour Liabilities: All labour liabilities such as contracts and
agreements with employees regarding compensation, pension contributions
and payment, and redundancy provisions and payments will be disclosed by
the Government prior to the sale.
1.7. Contracts: The Government will require the purchaser to honour all
such contracts
and be responsible for any future labour liabilities resulting from
post-privatization operations.
1.8 Environmental Assessment: The Government will, where appropriate in
terms of size, conduct an environmental assessment of each SOE to be
privatized and will fully disclose the results of this analysis to
prospective purchasers.
2. Explanatory Notes:
2.1 As discussed above, identifying and disclosing all known liabilities
is an important responsibility of the government. It lowers the
likelihood that the purchaser will face an unpleasant surprise during
final negotiation and it lays the groundwork for a successful
transaction. The government's policy is uniform at a general level with
flexibility for different solutions to different specific liability
issues in the course of negotiations with a purchaser. For all liability
provisions, the government will set a time limit after the sale for the
buyer to bring to the government's attention any pre-existing
liabilities that it discovers. After this "grace Period" the government
will not longer be required to be responsive to such claims.
2.2 With respect to financial liabilities, purchasers will require a
clear exposition of all financial liabilities including short and long
term debt, inter-enterprise debt, pension fund liabilities, any pending
litigation that may require financial settlement, accounts payable, and
others. In the preparing for privatisation, the SOE will need to
aggregate this information if it is not already available and present it
in an internationally recognized format.
2.3 With respect to labour liabilities, as discussed above, the
government must ensure that the purchaser is informed of all, labour
laws agreements, contracts and practices in force as well as the
financial implications of these on retirement compensation, redundancy
provisions, compensation for on-the-job injury and loss and the like.
Conversely, in order to protect the national interest, government will
ensure that purchasers agree to abide by these laws, practices
agreements and contracts and agree to be responsible for future labour
liabilities.
2.4 As with financial and labour liabilities, both purchaser and
government will be sensitive to environmental liabilities. The
government's environmental disclosure may be complemented by a
purchaser's own due diligence. Responsibility for and compensation for
environmental damages will be negotiated with a purchaser.
J. VALUATION AND PRICING
1. Policy
1.1. Methodology: The Government will use internationally accepted
methodologies as the main input in determining an initial offering price
for an SOE to be privatised.
1.2. Use: The valuation alone will not constitute a non-negotiable
"sales price" for any SOE, but will rather serve to guide decision
making.
1.3. Process: The valuation will be conducted by a certified,
experienced party using internationally acceptable standards and
procedures.
1.4. Fair market value: SOEs will be sold at a fair market value based
on the valuation, other economic factor, competitive bidding and
negotiation with the purchaser. Fair market value is defined as " the
price at which the property may change hands between a willing buyer and
a willing seller, each acting in their own self interest and neither
being under compulsion to buy or sell, each being aware of the relevant
facts, and with equity to both."
1.5. Inputs: In determining the valuation figure, the valuer will
consider a variety of information and valuation methods. The information
needed to conduct the valuation includes:
a. The nature and history of the business.
b. The economic outlook and condition of the industry (including the
market conditionize, pricing, demand, competition, etc).
c. The financial situation of the business.
d. The historic and future earnings as well as cash flow capacity of the
enterprise.
e. The net asset value including goodwill and other intangibles.
f. The interest in the enterprise expected to be sold by the Government
(for example, buying a controlling interest is worth proportionally more
than buying a non-controlling share).
1.6. Methods: Using the above information to perform the analysis the
following methods
may be used to arrive at a range of values:
a. - Earnings based methodology
- Discounted net cash flow
- Capitalized earnings
- Comparable market data.
b. - Asset based valuation
- Adjusted ......
- Replacement cost
- Comparable market data
2. Explanatory Notes:
2.1 Valuations in the context of privatisation are important to provide
the government with a reasonable estimate of value of an SOE which can
form a basis for discussions with potential purchasers. In undertaking a
valuation, it is important to analyze the available data according to
more than one method, both to develop mutually supporting evidence for a
range of values and to compensate for certain data that may not be
particularly robust.
2.2 The valuation range resulting from the valuation exercise is a
reasonable estimate of the price at which property may actually change
hands between two willing parties - all other things being equal. It is
not the "price" of the property. It should be understood that the actual
price paid in a transaction involving an SOE may differ from the
appraised fair market value due to factors such as the motivation of the
parties, the negotiating skills of the parties, the structure of the
transaction (financing, transition of control, etc), changes in the
political climate, or a number of other factors unique to the
transaction of its timing.
K. PROCEEDS FROM SALE:
1. Policy
1.1 Account: Proceeds from sale will be deposited in a separate account,
maintained by the Ministry of Finance;
1.2. Release of Funds: Cabinet authority is required for the release of
funds;
1.3. Use of Proceeds: Proceeds from privatisation may be used for the
following:
a. capital infrastructure for basic needs (e.g. health, education);
b. funding the cost of privatisation;
c. funding collective investment schemes to promote Basotho
participation;
d. supporting redundancy payments;
e. financing social safety net activities.
2. Explanatory Notes:
2.1 Proceeds from privatisation must be treated in such a way that they
are not inflationary and that they are not used for consumptive
expenditure. Proceeds from privatisation must not be used to finance
additional investment by the government in industry and commerce.
Rather, privatisation proceeds should be used to provide government with
the ability to provide essential services (health, education,
infrastructure) at a higher level and to cushion the impact of
structural adjustment by financing social safety net activities.
PRIVATISATION UNIT,
MINISTRY OF FINANCE
AUGUST 11, 1995
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