Chapter 4. Organising the process of privatisation

The actual process of privatising state-owned enterprises (or parts of them) involves both decision-making within the state and practical measures undertaken by state-owned enterprises themselves, in consultation with external advisors. This chapter covers the following aspects: effectively steering the process to see through the transaction; best practices for drawing upon external advice; determining company valuation and establishing sound pricing methods; determining potential buyers and handling bids; and, active and on-going communication with stakeholders and the public.


The actual process of privatising state-owned enterprises (SOEs) (or parts of them) involves both decision-making within the state and practical measures undertaken by SOEs themselves, in consultation with external advisors. This chapter will cover the following aspects: effectively steering the process to see through the transaction; best practices for drawing upon external advice; determining company valuation and establishing sound pricing methods; determining potential buyers and handling bids; and, active and on-going communication with stakeholders and the public.

Effectively steering the process to see through the transaction

The state-ownership entity or other assigned entity to oversee the transaction should establish an organ (typically a steering group and a project group) to oversee the privatisation transaction, organisation and planning. This body will be responsible for the actual implementation of the transaction and will be the main body responsible for the selection of transaction advisors, communication strategy, consultation process (if required), and making decisions as to the staging and sequencing of the privatisation process. It will interact with the external advisors as well as directly with the SOE. Finally, the role of the steering group will be to interact with ministers to facilitate quick decision-making (See also Chapter 2).

The roles and responsibilities of various stakeholders involved in the privatisation process should be clearly defined at all stages of the process, and especially during the process to see through the transaction. These stakeholders may include the ownership entity, in a steering role, the company (board and management) if the transaction is of a wholly-owned entity, external advisors hired by the ownership entity, and if relevant, those hired by the SOE.

Importantly, for individual transactions involving wholly-owned SOEs the steering group should also involve the external advisors and key members of the board and management in the steering group (see also Box 2.6 with case example from Norway), as the company board and management of wholly-owned SOEs will play a key role in ensuring the company’s “readiness” for privatisation. This includes getting the company’s affairs “in order”. Key decisions will need to be made in terms of the company’s strategy, capital structure; corporate governance frameworks, etc. (see also Chapter 3 for more in-depth coverage of “readiness”).

Regular meetings of the steering group should take place and depending on the topic at hand will involve the input of different stakeholders more. For example, where the discussion may be focused on the current dividend policy, the ownership may take a more active role in the steering group; whereas if the discussion is focused on restructuring the company, for example what assets will be included in the sale, then the management will work closely with the advisors to “work through” those issues and develop and equity story and clear strategy to go to the market (see Box 4.1 for case example from Norway).

Care should be taken from the outset that the various roles and competencies of each stakeholder involved in the transaction are carefully considered. Where other parts of government are involved, or if Parliamentary consultation is required, potential for micro-management of an individual transaction should be avoided, which can potentially undermine the sale parameters or divulge information that would otherwise need to be kept confidential.

Box 4.1. Sales of Entra: Case example from Norway

In 2014, the Norwegian authorities undertook a privatisation (IPO) of the real estate company Entra ASA. Leading up to stock listing of the company, the government spent three to four years discussing the company’s portfolio before pursuing a dual-track offering (M&A and IPO). The discussions took place within the Government and between the ownership entity and the company. The government had as an objective to get the maximum value for the company and it was important to develop a clear equity story and strategy before going to the market. As such it was important to decide what part of the portfolio of real estate assets would be in included in the sale. This process was lengthy and involved many discussions to work through a strategy.

Ultimately, in 2014 the reals estate company was listed on the stock exchange through an IPO, including 50.4% of the company’s shares. This transaction brought the state around USD 450 million in revenue. In September 2016, the Norwegian state, represented by the Ministry of Trade, Industry and Fisheries completed a secondary placement of 30 million shares in Entra ASA, representing 16.3% of the share capital and voting rights in the company. Following completion of the placement, the government will own 33.4% of the share capital and voting rights in the company. Proceeds from the share placement amounted to around USD 319 million.

Source: Submission by the Norwegian authorities.

Best practices for drawing upon external advice

Privatisation is a resource intensive activity, often demanding skills and expertise that require outside expertise. As experience from the OECD countries shows, most privatisation transactions have included some degree of involvement of external advisors (Figure 4.1). Typically, the hiring of advisors is one of the tasks carried out during the very early stages of the programme. Depending on the size of the SOE, and the complexity of the transaction (e.g. IPO), the SOE may hire its own advisors, including financial advisors and management consultants. The government owner, too, will have its own advisors to provide legal counsel, accounting and financial advice, strategic and transactional advice provided by investment banks, and advertising and PR firms for what concerns communication, market research and the public relations campaign. In this regard, the government and the SOE need to ensure that they are not hiring the same advisory firms to avoid conflicts of interest. This is especially important if the company already has outside shareholders, and the transaction represents a secondary or tertiary offering, for example.

Developing the expertise in selecting and monitoring the performance of advisors has proven to be an important consideration in preparing for privatisation. Given that privatisation often entails a large degree of interface with advisors, it is important to ensure that in-house expertise in the ownership/privatisation unit/agency is cultivated. This also underscores the benefit of a centralised approach to managing privatisation in that this approach tends to lower costs and improves the chances of developing such capability.

The planning and implementation of privatisation involve a significant amount of interaction, which requires a great deal of planning and effective coordination of a large number of critical and interdependent policy and transactional tasks in order for transactions to be carried out under favourable market conditions and at the optimal time. Three distinct phases can be distinguished: (i) the pre-sale phase; (ii) the sale preparation phase; and (iii) the sale process phases. Each phase necessitates a different level of advisory services, and the mode of sale will also determine exactly which advisory services will be necessary.

Pre-sale phase

One of the first steps in privatisation of a SOE is corporatisation whereby the SOE is typically converted to a joint stock company whose shares are held by the government. Legal and financial advisors are hired to advise on corporatisation and on preparation of enabling legislation where this is required.

During the early stages of the sale where the asset is valued and method of sale is being discussed, a number of external advisors are hired (e.g. financial advisors, accounting firms, lawyers, communication firms, etc.). They advise on a wide range of issues. For example, they might advise on how best to position the asset; the timing of the privatisation; valuation of the firm using different valuation methodologies; feasibility of the sale and the most appropriate method of the sale and the possible markets; research on possible buyers. The advisors will also determine the “readiness” of the company to be privatised.

Often based on this type of advice, and depending on their approach to selling, the government makes a decision in principle regarding the key parameters of the transaction and whether or not the process moves on to the implementation aspects of the sale. However caution should be exercised during this stage, as advisors should fully understand the objectives of the government at the time of privatisation. These objectives will vary according to the company, market conditions and the method of sale (see also Chapter 2 on rationales for privatisation). Caution should also be exercised to ensure that advisory services are not driven by perverse incentives.

Sale preparation phase

During the sale preparation phase financial advisors are hired to review the SOE’s business and finances, its accounting practices and to advise on matters such as preparation of the company books (which should have already been subject to audit), valuation and financial restructuring. While most transactions require the services of financial advisors, the range and the sophistication of advisory services required is determined by the size and complexity of the transaction. The method of sale matters as a trade sale requires less preparation and restructuring than a public share offering. The sale of larger assets and especially those operating in non-competitive sectors of the economy generally involves company-specific restructuring, and in the case of the latter, sector restructuring as well. In this context, management consultants and industry experts are hired to advise on restructuring.

Sale process

During the sale process the financial advisors such as investment banks are hired as part of the book building process, and to solicit interest from potential buyers, preparing the transaction documents and helping market the company to the potential investors. A number of countries also rely on more specialised outside advice, such as vendor due diligence and in some cases even public relations services. In preparing the prospectus the government needs to work closely with its legal, financial and sale advisors, as well as with the company and its financial and legal advisors. Most governments hire separate advisors for advisory and sale mandates to ensure there is no conflict of interest between the two (although for secondary offerings this is less of a problem).

Figure 4.1. Role of external advisors for government and SOE
Aspects of the privatisation process are informed by or assigned to external advisors. Often the SOE and the ownership entity will be advised separately depending on the method of sale.

Source: Adapted from OECD (2003).

Selection of advisors and avoiding conflicts of interest

Transparency around the selection of advisors

Transparency of the process helps ensure that decisions are not arbitrary and have been based according to certain rules and criteria, and are applied in a fair and open manner. For this reason, a precise and clear set of rules and procedures are defined and followed. Establishment of clear rules and processes for auctions, specific criteria for the evaluation process in the context of competitive bidding, use of open procedures in the selection of private sector advisors, and rigorous publicity requirements contribute to the acceptability of the process by making sure that the choices have not been driven by vested interests and that they have been arrived at in the context of a level playing field.

In order to ensure best value and to protect the transparency of the privatisation process, governments should hire advisors through a competitive bidding process. Given the importance of technical/specialised skills, the competitive processes should give sufficient weight to the quality, competence, and experience of advisors as the key criteria in the selection. In this regard, it would be useful to develop a list of qualified bidders instead of focusing exclusively on cost. Moreover, this should be worked into the public procurement process to ensure that the government can hire the best advisors and not those which pitch the lowest price and possibly with conflicted interests.

There are exceptions from procurement law when procuring investment banks. For example, in Sweden the Swedish Procurement Act provides for exceptions, inter alia when procuring financial advisors in connection with share divestments, although the EU principles of equal treatment and non-discrimination still apply. The ownership entity has a public list of all interested banks from which a few advisors are selected through objective criteria and invited to compete for the assignment. Final evaluation is performed on price and quality. For other types of services EU procurement law applies and specific framework agreements apply (for legal, communication, strategy consultants etc.).1

Conflicts of interest

Conflict of interest provisions for government officials, SOE insiders, and private agents, are measures that can help ensure that the rules are applied uniformly and thus enhance transparency. This can assure investors and the public that the decisions are based on the established criteria, and through maximum disclosure the government can contribute to the process integrity and stem public criticism of the process. Often the potential for conflicts of interest is very real and therefore measures aimed at mitigating against them are needed to ensure the integrity of the process. In this respect, the rules should focus on intra-corporate relationships, especially regarding SOEs, activities of government officials and the behaviour of sub-contractors.

Advisors will also be subject to a confidentiality/non-disclosure agreement to ensure that their involvement in the privatisation transaction does not compromise the sale nor the bargaining position of the seller (Box 4.2).

Box 4.2. Hiring external advisors: Case example from Italy

In preparing and executing privatization deals, the Italian Ministry of Economy and Finance is authorised by the law to select a group of advisors with proven national or international experience in kind of activities like: economic research, consultancy, evaluation, operational assistance and management of placement transactions. Furthermore, such process must always take into account the restrictions coming from conflicts of interest or incompatibility for previous or current mandates.

For instance, in operations carried out through global offers, a primary role is played by the experience of consultants who are requested to support the seller in the placement procedure on international financial markets.

In this context, the first phase is focused on the search of financial and/or legal advisors who will take part in all the preliminary and preparatory steps to carry out the operation. The selection is made on the basis of the criteria established to determine the most favourable tender taking into consideration, in addition to the price offered, the wide credentials of entity. Therefore, the experience gained by the financial institution/law firm, the quality and experience of the working group and the fees required are all carefully measured, with different degrees related to the complexity and the size of the privatization.

The selection for choosing the advisors starts with the letter containing an official invitation to present the formal offers. Usually, such letter is addressed to up to 10-15 entities, which are identified starting from their track records proven by international league tables. For answers arrived before the deadline (generally ten working days after the invitation letter), a first screening is made with respect to the absence of conflicts of interest, even only potential.

In the offer submitted to the Ministry of Economy and Finance, the bidders have to:

  • declare the absence of any conflict of interest

  • list actual consultancy appointments with subsidiaries of the Ministry of Economy and Finance, which may present incompatibility profiles with the perspective mandate

  • undersign a commitment to accept the main contractual clauses, including the confidentiality agreement.

The offers are then carefully evaluated and the overall assessment is expressed with ranking from 1 to 10, which will result from the sum of the following specific features, variously weighted:

  • experience gained by the financial institution/law firm for each operation, with special focus on: a) the most recent transactions (from 3 up to 5 years); b) deals involving companies operating in the same sector of activity in which the company operates; c) general IPO/privatization

  • quality and expertise of the team, (i.e. for each team member an assessment of 1 to 10 is assigned, with regard mainly to the role held, the seniority and the experience)

  • competitiveness of the tender, where the evaluation derives from a comparison of the fees requested by all the bidders involved.

However, the remuneration of the advisors will depend on the general role played through different phases of the deal and, in the past, the compensation structure has been linked to the size of transaction or to the specific activity of the advisory. At the end, the Ministry of Economy and Finance communicates to the market the winner of the selection by a press release. Costs of the advisor services are usually paid by the proceeds coming from the divestment.

Source: Submission from Italian authorities


Accountability of privatisation institutions helps enhance the integrity of the privatisation process. The mechanism for ensuring accountability is largely shaped by the existing arrangements and institutions that are in place in each country, and whether they are deemed to be adequate for addressing privatisation transactions, and the need to balance accountability requirements (to the executive branch and/or legislature) against the potential for rendering the process excessively vulnerable to short-term political consideration. In most countries, and according to best practices, the national audit institution will perform an ex-post audit to privatisation transactions.

Often the selling price is one of the main sources of criticism. The approach to ensuring proper pricing has varied among different OECD countries, but some countries have used "reservation prices" as a bottom limit to the amount of a sale. As for perverse incentives for the transaction not to be overpriced, the government should be aware of the incentive structure of advisors and market conditions.

Determining adequate fee structures for advisors

Typically, the compensation structure has been linked to the size of transaction. The remuneration of the advisors will depend on the nature and extent of the advisory task. A fixed fee is commonplace as well as a percentage of the value of the shares sold, for what concerns financial advisors. Fees have can also be structured based on performance of advisors (e.g. in share allocation or if privatisation proceeds exceed certain predefined minima). Other advisors such as legal and auditing firms are normally paid either their standard fees (often hourly) or a specially negotiated one-off remuneration for their services.

Of particular controversy is the advisory fee for investment banking which can be based on a percentage of the transaction. For an auction the investment bank may charge a fee lower than 1 per cent. For IPOs the "floor price" can range between 1.5 to 2 per cent of the total amount sold, but that is often because banks will underwrite the transaction and need to be compensated for risk. However, caution should be exercised to avoid excessive fees. This underscores the importance of a reliable valuation of the SOE to be privatised, because if the fee structure is designed to reward a “successful” sale even at a comparably low price then the financial advisor's incentives may become misaligned with those of the government. It also raises specific challenges regarding the structuring in incentives in the case where the government's privatisation objectives may not be solely based on maximising the proceeds.

Often fees are negotiable and it is reported that advisors may accept lower fees when working with the government as it apparently helps to build their credibility with other clients.

Box 4.3. Special section on dealing with external advisors

Separation of strategic from transaction-specific advisory mandates

The separation of advisory and sale mandates helps reduce the likelihood of conflicts of interest. The advisory mandate can help to determine the best sales strategy and timeline; and the sales mandate can execute the transaction. By ensuring a separation between the two the government can enhance the independence of the advice and the best outcome for the sale based on the objectives it has set out.

Separation of government shareholder's advisors from the SOE's advisors

When the government and the SOEs have the same company advising them on legal or financial issues the likelihood of the advice being compromised is increased. In such cases it is best if the company and the government have separate advisors. However, common advice in areas such as presentational or marketing strategy might be beneficial.

Open and transparent competitive processes should be used for hiring advisors

In order to ensure best value and to protect the transparency of the privatisation process governments should hire advisors through a competitive bidding process. But in light of the importance of technical specialised skills, it is important to ensure that competitive processes assign sufficient weight to the quality, competence, and experience of advisors as the key criteria in the selection. In this regard it would be useful to develop a list of qualified bidders (by establishing lists or framework agreements) instead of focusing exclusively on cost.

Ensure that the advisor is only representing the government or its selling agent’s interests

The government needs to ensure that the advisor is not working for (or is not indirectly related to the potential bidders, and that the information obtained by the advisor does not make its way to potential bidders.

Ensure that the pay structure does not create incentives for working against the government interests

Commissions should be carefully calibrated to avoid any bias in favour of options that are against government objectives, e.g. granting monopoly rights in order to generate bigger commissions from the sale. As noted above, acquiring the best advice plays a very important part in ensuring the success of privatisation.

Source: Adaptation from OECD (2009).

Figure 4.2. Integrity of the privatisation process: dealing with external advisors
A few areas deserve particular attention to ensure that working with external advisors does not compromise the integrity of the privatisation process.

Determining company valuation and establishing sound pricing methods

Even if the key objective of privatisation is not solely revenue maximisation, one of the measures of success post-privatisation will be the value of the transaction and ensuring that the asset was sold for "fair market value". An appropriate valuation method will ensure that the state can justify its pricing of shares, to assure both a fair price, value for money and to attract sufficient interest from investors. Ultimately, the government has a fiduciary duty towards citizens to ensure to sell assets at a fair market value2. However, sometimes the government may decide to sell at below market value for policy reasons - for example selling shares to employees at a discount; or attracting foreign direct investment which may result in technology transfers, spill overs and other backward linkages which may be part of policy objectives. Where these specific reasons exist, they should be clearly identified and made transparent to avoid viewing the sale as favouring a certain buyer. The valuation process is also an important aspect to determine the choice of sales methods – or in the case of public offerings, sequencing – may depend on the valuation of the company in alternative scenarios, as may the ultimate decision whether to privatise now or postpone the transaction. Moreover, specific decisions in the privatisation process such as share allocations (in the case of public offerings), incentive fee structures to external advisors, ex-post evaluations of the outcome of privatisation as well as, ultimately, the propriety of the process itself may all hinge on a benchmark established up front. Even in the case of listed SOEs where a market valuation already exists many governments wish to consider the likely impact of further privatisation on corporate value. In a small number of countries (including France, Italy, Poland, Spain and Turkey) valuation prior to privatisation is even mandated by law. It can be considered best practice that valuation is conducted on a regular (possibly annual) basis, especially in the few years leading up to the sale. This is especially important in wholly-owned companies to ensure that the ownership entity is confident in advising decision-makers on the potential value of assets that are slated for privatisation (and in general for determining the value of the state portfolio). In a large majority of OECD countries valuation is undertaken by independent external advisors. Conversely, a few countries have followed a different road, leaving the valuation task to a specialist commission within the government (e.g. France, Korea, and Turkey). This method is intended to shield the valuation process from conflicts of interests. In other cases, the ownership entity may have developed the skill set and tools to conduct the valuations in-house.

The issue of valuation is rather controversial in that it requires a certain degree of subjectivity, not only in terms of the method chosen (see non-exhaustive overview below), but also in terms of the political decision making that must accompany it. In an auction, the potential buyer will also conduct its own valuation, based on a different set of criteria and assumptions, for example based on its assessment of developing synergies between its business and the potential acquisition. According to the German privatisation experience, the valuation should be reasonable and fair in terms of the status of the asset and market realities; and if it does meet the objectives for the sale, the shareholder may consider further restructuring, other sales options, or postponing the sale.

The valuation process will build upon a financial audit and determining the method of sale (see Chapter 3 for more on methods of sale). The financial audit of the company's accounts is necessary to complete the valuation methodology, and it will play a key factor in determine the method of sale. For conglomerates, there should be an analysis of the valuation for each business segment or division.

In parallel to the audit, due diligence will need to be conducted, which consists of gathering and verifying information on the financing of the company, its balance sheet, international standing (as applicable), and other information relevant to the valuation, such as changes in taxation or regulation (e.g. legal, accounting, strategic, environmental, tax, etc.). Past financial performance and projections on future earnings and investments are examined. All this information is essential to determine the valuation (see also Chapter 3 on pre-privatisation company restructuring). It is also worth pointing out that some businesses are valued according to their absolute value and others according to their relative value (e.g. financial institutions or utilities are commonly valued in a particular way). The below table provides a non-exhaustive overview of methods, but it should be noted that the choice of methodology will be asset-dependent.

Table 4.1. Examples of valuation methodologies
Valuation methods are based on an estimate of market value, but require some level of interpretation and subjectivity. The below table provides a non-exhaustive overview of methods, but it should be noted that the choice of methodology will often be asset-dependent.

Valuation method




Privatisation method

Discounted cash-flow

Estimation of the company's free cash flows over a medium to long-term horizon, taking into account variations in working capital and future capital expenditures. A discount rate is applied to future cash flow to represent present value. Discount value is based on the weighted average cost of capital and political risk. Debt is subtracted to arrive at net present value of company's equity.

Comparable with other companies; complex model can help to anticipate arguments or concerns raised by potential buyers.

Requires an extensive model, with a number of variables of varying degree of sensitivity.

Strategic investor, public offering

Comparable companies or "trading multiples analysis"

Apply derived valuation multiples to latest financial results and compare them across companies/transactions.

Multiples include: turnover, operating income (EBITA or EBIT), net earnings (price-earnings ratio).

Useful estimate of market value based on public information

Valuation multiples require interpretation, subjectivity, small number of comparable peer firms

Public offering

Comparable transactions or " "precedent transactions analysis"

Determines the multiples paid in the past for acquisitions of similar companies. Places value of in a change of control situation.

Based on public information, gauge of investor appetite and market demand, range of plausible premiums

Valuation multiples require interpretation, no transaction is alike, public data limited, sensitive to market fluctuations

Adjusted net assets

Estimates the market value of assets (fixed and current) and then subtracts its balance sheet and off balance sheet liabilities.

Seller can prefer to determine selling price to "get money back" after depreciation

Does not take into account to future cash flows. Buyers do not like.

Strategic investor

Replacement value method

Estimate of cost to replace company's assets if destroyed. Includes fixed assets, start-up costs and current assets.

Useful to anticipate arguments or concerns raised if critics claim an asset is undersold.

Higher valuation than other methods, Buyers do not like. Does not take into account expected return

Combination of methods

When company groups are complex, different lines of business can be estimated separately based on price earnings multiples, discounted cash flows or other methods.

Source: World Bank and Author.

Another important consideration is whether the government should set a "reservation price" or a "minimum price". Although systematic processes are not very common some jurisdictions have established a special commission or other special bodies responsible to oversee this process. For example, in France an independent commission named the Shareholdings and Transfers Commission (see also reference to this body in earlier sections) can be seized under particular circumstances. This Commission must give an assent to the privatization operations, particularly on the sale price and, if applicable, on the privatization procedure implemented. An evaluation of the privatized enterprise is carried out by the Commission and the transfer price cannot be less than the one suggested by the assessment (see Box 4.4). In other cases, budget laws may set out clear objectives for the government to see for the “best price.”

All valuation methods are established based on an estimate of market value. No one method is infallible, and will depend on the method of privatisation; it is further complicated by the fact that there is often no comparable entity operating in the same market to allow for a peer-based evaluation. As such different methods can be used for company valuation and depending on the jurisdiction may also be prescribed by the enacting privatisation legislation. The method employed will also be asset-dependent. The most common methods are the discounted cash flow method, and the comparable transaction or companies methods. Other methods also exist, including the adjusted net assets method or replacement value method. These are further described in Table 4.1.

No matter the method established, the valuation process is considered to be an important factor in evaluating the success of the transaction, and in determining ex-post whether the objectives and rationales set (and ideally communicated) at the outset of the process have been met (see also Chapter 5). As mentioned, the government should have clearly stated sales objectives at the outset of the process. In most cases these will be “financial objectives” with value maximisation and obtaining the “best price” being key factors. It is worth noting that some cases “non-financial” objectives, such as attracting foreign direct investment or capital markets development, may be considered equally as important as value maximisation and should also factor into the government’s decision-making process. Should this be the case, these objectives should be rationalised and transparently communicated at the start of the process.

Box 4.4. Valuation methods: Case example from France

The French Shareholdings and Transfers Commission’s most important task is to value SOEs with a view to ensuring that publicly-owned assets are sold at a fair price in accordance with legal provisions.

The Commission conduct an analysis using "commonly employed” methods based on “multiple criteria” including existing the market capitalisation, revalued consolidated net assets, profitability and “future prospects”.

The Commission has valuation reports drawn up by the government’s advising banks and the advising bank(s) for the company to be sold (or the report from the independent expert appointed by the seller in the case of secondary sales of subsidiaries belonging to public entities). These reports provide valuation brackets derived from the different applicable methods. They generally propose estimates based on:

  • the market capitalisation (spot price on a given date or average over a certain period deemed significant)

  • revalued consolidated net assets

  • a peer-based comparison, or comparison with similar transactions: the price earnings multiples observed in the sector are applied to the forecasts for the company’s key multiples (mainly EBITDA and price/earnings ratio and more rarely turnover)

  • discounted cash flows or dividends.

When the group is complex, its different lines of business can be estimated separately based on price earnings multiples, discounted cash flows or more sophisticated methods.

For listed companies, the operation carried out by the government must comply with market integrity rules. The opinion of financial analysts employed by major institutions that follow the stock, particularly if it is listed, may also be taken into account along with the target price, if there is one.

The Commission assesses the results of the different approaches and discusses them at hearings with the Government Shareholdings Agency (APE), the company whose shares are sold and the advising banks. It requests any additional information required to examine the dossier (extent and duration of guarantees, any remaining public sector expenses and tax and labour legislation concerns). If necessary, the Commission may ask for other business case scenarios to be assessed. After deliberation, it sets the value of the company as required by law, or, where applicable, issues an opinion on the exchange parity.

Source: Commission des Participations et des Transferts (2016).

Determining potential buyers and handling bids

Establishing criteria and conducting due diligence for potential buyers

It is fairly common for countries to establish criteria for potential buyers and conducting due diligence. This may apply only to specific types of transactions (i.e. private sale). In general most countries impose criteria on potential bidders to ensure that the buyers/management possess the financial and technical capacity to run the business successfully; to ensure their credibility; and, future solvency.

In some cases, restrictions may apply to the nationality or type of company involved in the acquisition if there are specific restrictions related to national security or public interest where these assets are deemed to be "strategic". For example in Poland, the 2016 on the principles of state property management (article 13) introduces a total ban on selling shares of 24 pre-identified companies which are mainly of a strategic nature. As laid out in the 2009 OECD Guidelines for Recipient Country Investment Policies Relating to National Security (OECD, 2009a), these practices should be made transparent and limited to ensure that they are not used as disguised protectionism.3 Moreover, as highlighted in the OECD Guidelines on Corporate Governance of State-Owned Enterprises (“OECD SOE Guidelines”) such types of control mechanisms should only be used when they are strictly necessary to protect certain essential public interests such as those relating to the protection of public security and proportionate to the pursuit of these objectives.

In other cases, and as consisted with the stated “immaterial” goals that are defined as part of the sales objectives domestic (retail) investors may be among targeted buyers. In these cases, such objectives should be clearly defined upfront, and perhaps subject to quotas to ensure they are not unduly restrictive. For example, in New Zealand, for companies privatised under its "mixed ownership" programme, the government had placed a quota on the total per cent shares reserved for domestic investors in an energy company offering.

Authorities need to consider carefully alternative legal or regulatory measures that may be more appropriate to directly targeting investors. It is often more efficient to work through pre-qualification following by bidding among the selected candidates than allowing the targeting to interfere with the selection of individual buyers. Full disclosure should be made, to minority shareholders as well as the general public, of the criteria according to which a preference for certain shareholders is developed and the objectives they are expected to pursue following privatisation. Care should also be taken to ensure that the pricing of trade sales is not so conservative as to raise concerns – especially where this is subject to specific laws or EU regulation – about state subsidisation of the buyers. Throughout the process, the entity steering the transaction should carefully manage confidentiality and transparency requirements of the sale.

Table 4.2. Determining criteria for buyers: Using due diligence or other appropriate mechanisms

National security Public interest

  • Maintaining majority ownership, golden shares, high-vote shares

  • Separating out sensitive assets prior to sale

  • Establishing restrictions through bylaws or charters

  • Specifying non-pecuniary objectives beforehand

  • Transparent investment policy if restrictions on foreign ownership

Ethics track record of buyer

  • Due diligence

  • Requirement to adhere to international agreements

Solvency of buyer, technical capacity

  • Due diligence

  • Requirement for bank guarantees by buyer

Targeting investors

  • Quotas on % of shares reserved for domestic investors

  • Clawback clauses to increase quantity of shares offered to retail investors

  • Offering shares to retail investors at a discount

  • Quotas on % of shares reserved for employees

Above and beyond the criteria described above, relatively few countries have established procedures to carry out due diligence on potential buyers based on their ethics track record. In Sweden, for example, bidders have to fill out a Corporate Conduct and Compliance Questionnaire. The assessment criteria relate to tax structures, corruption, money laundering, and other illegal asset transfers, environmental and labour practices and more serious violations of international law including in the area of terrorism and human rights violations aiming at identifying any history of corporate law breaking. The questionnaire not only considers the buyer’s track record, but also those of associated companies, as well as members of the board and senior management (Box 4.5).

Box 4.5. Due diligence on potential buyers based on their ethics track record: Case example from Sweden

The Swedish government has set high expectations that state-owned companies act as role models in the area of “sustainable business” (as defined according to UN and OECD backed standards of corporate ethics) and, moreover, acts in a way that they ensure public confidence. In addition, due to Swedish obligations under international treaties the government has set some basic requirements for purchasers of state assets as far as ethical conduct is concerned.

These requirements are reflected in a “Conduct and Compliance Questionnaire”, which contain assessment criteria intended to be applied to the sale of shares in non-listed companies with state ownership. The assessment criteria relate to tax structures, corruption, money laundering, and other illegal asset transfers, environmental and labour practices and more serious violations of international law including in the area of terrorism and human rights violations. The questionnaire not only considers the buyer’s track record, but also those of associated companies, as well as members of the board and senior management. It covers some of the following areas:

  • Violation, or previous violations of Swedish tax law or transfer of tax base of company to a jurisdiction with a low tax base (i.e. tax base of less than 10%)

  • Tax fraud or tax evasion of members of the board of directors or senior management

  • Buyer or any associated companies, members of the board of directors or senior management committed violations against the law and regulations against foreign bribery; terrorist financing; or any other form of illegal transfers

  • Buyer or any associated companies, members of the board of directors or senior management violations of international law (incl. genocide, war crimes, crimes against humanity; or serious or systematic violations against human rights:

  • Buyer or any associated companies’ violations of labour legislation, international labour standards and the OECD MNE Guidelines; and,

  • Buyer or any associated companies’ violations of environmental legislation.

The questionnaire allows the government to consider the response provided by the bidders to the criteria set out above when evaluating the bids provided in a sale process within the framework of the budget law's business requirements.

Source: Submission by Swedish authorities.

Handling bids transparently

It is important to establish adequate and transparent procedures for bid handling, which don’t violate the confidentiality terms of the sale, to avoid irregular practices and ensure that bidders that consider that their rights have been violated have access to recourse. In general, where specific qualifications for bidders are being sought this must be made transparent in advance (see also above). The main options available to governments include specifying non-pecuniary objectives beforehand and conducting the bidding with these as a sub-condition; and relying on a formal or informal prequalification of bidders (Figure 4.3).

Figure 4.3. Process involved with buyers in a trade sale
An auction and negotiated sale involve different levels of interaction with the potential buyer(s).

Source: World Bank.


External financial advisors of the sales agent will draft the prospectus in cooperation with government officials as well as the SOE executive management. The prospectus must address information on the business, and detailed information on the financials and risks of the company. It will also cover the dividend policy, environmental issues, regulatory regime, employee and management participation to the sale (if applicable), management or other government residual shareholders (if applicable) and the government intentions towards the company and industry. What goes into the prospectus will differ across jurisdictions as per legal requirements and listing requirements of different exchanges.4

Figure 4.4. Public offering process
The public offering process will involve various levels of interaction between the investment bank executing the offer and the government/SOE.

Source: Adapted from PwC (2013).

Confidential exchange of information with buyers

For a trade sale the standard procedure first includes establishing a long-list of buyers, who are then subject to a confidentiality agreement. The seller will then share partial information about the sale in the form of a “sales book” or “information memorandum”. Based on this information, potential buyers make an indicative offer on the basis of which the shortlist is drawn up. The shortlisted bidders gain access to the data room (virtual data rooms are more common today) where they can consult very detailed information about the company and, on the basis of this and other information, perform due diligence (See Box 4.6). Following this, binding offers are submitted to the bank for eventual review by the ownership unit and, if this is mandated by national rules, shared with the higher levels of government. During this phase, careful balance is needed to respect strict confidentiality requirements required by the sale, with the need for high transparency.

The trade sales process does in some countries involve setting a minimum price, the existence of which will in this case be communicated to the bidders beforehand. The seller will balance the need to be transparent but also ensure that the sale is subject to confidentiality to avoid any risks to the transaction. For this reason, in a negotiated sale the exchange of confidential information can occur through either an information memorandum or through a secure data room.

Box 4.6. Value of the data room

The government shareholder needs to work with the company management to ensure that the preparation of the sale goes smoothly. This ensures compiling a full set of information that needs to go into the data room. A lack of documentation or incomplete information can lead to a sale falling through, or that buyers set forth certain conditions on the sale.

The data room is an important place to share information with potential buyers concerning the contracts, intellectual property information, employee information, financial statements, capitalisation, and more. The seller can allow for access to key information that a potential buyer might need to follow-through with a bid, while ensuring that information remains confidential. More recently privatisation transactions have moved towards online data rooms, as opposed to physical data rooms, and this has helped to speed up transactions.

The online data room can be established to allow access to all documents or only to a subset of documents, and only to pre-approved individuals. A number of online data rooms allow the seller or its investment bankers to review who has been in the data room, how often that party has been in the data room, and the dates of entry into the data room.

A compete online data room is key to ensuring a successful transaction. The number of documents that need to be provided on the company and its subsidiaries is rather extensive. As such, adequate time should be put into compiling the list of required documentation.

The online data room should be prepared in conjunction with preparation of the selling company’s disclosure schedules attached to the acquisition agreement, as complete and accurate disclosure schedules are key to getting an acquisition completed.

Source: Harroch (2016).

Active and on-going communication

To ensure the smooth execution of the transaction, active and on-going communication with stakeholders and the public is important. Of course the government communication's strategy will differ according to the asset and mode of sale. A communication plan can cover: communication with other parts of government and parliament; as well as communication with the board, management and employees’ representatives during the privatisation process. Where stakeholders or particular communities are affected by the transaction, it is suggested to have a proactive communication plan as well as risk mitigation strategy - especially if the transaction is not popular. Finally, an on-going public communication strategy will be necessary to inform the general public on progress and in the event of the finalisation of the transaction.

Importantly a communication strategy will be important to develop an appetite for potential buyers - the latter is often developed with an external advisor. This means developing professional management presentations that can be delivered as part of the roadshow before a sale.


European Commission (2017), “Prospectus - Regulation (EU) 2017/1129”.

Harroch R. (2016), “The Importance of Online Data Rooms in Mergers and Acquisitions”,

OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition,

OECD (2010), Privatisation in the 21st Century: Summary of Recent Experiences,

OECD (2009a), OECD Guidelines for Recipient Country Investment Policies Relating to National Security, Paris,

OECD (2009b), Privatisation in the 21st Century: Recent Experiences of OECD Countries: Report on Good Practices, January 2009,

OECD (2003), Privatising State-Owned Enterprises: An Overview of Policies and Practices in OECD Countries, OECD Publishing, Paris,

PriceWaterhouseCoopers (PwC) (2013),” A beginner's guide to privatisations”, PriceWaterhouseCoopers in Cyprus.

World Bank (1997), “The Privatisation Challenge: A strategic, legal, and institutional analysis of international experience”, World Bank Publishing.

World Bank (1998), “The Case-bv-Case Approach to Privatization: Techniques and Examples”, World Bank Publishing.


← 1. Further information regarding this point and exemptions in public procurement rules will be requested.

← 2. In the case of an IPO, one could go a step further with this logic to say that there is also a duty to ensure fair market value for small retail investors.

← 3. It should be observed that some governments retain golden shares which provide them with special powers and veto rights in fully or partially privatised companies. In some cases these mechanisms have served governments as a means of protecting the newly privatised company from hostile takeovers on national security or on public policy grounds, where this has been deemed to be necessary. According to OECD SOE Guideline IV.A.1, the use of golden shares should be limited to cases where they are strictly necessary to protect certain essential public interests such as those relating to the protection of public security and proportionate to the pursuit of these objectives. Further, governments should disclose the existence of any shareholders’ agreements and capital structures that allow a shareholder to exercise a degree of control over the corporation disproportionate to the shareholders’ equity ownership in the enterprise. This is covered in more detail in Chapter 5.

← 4. It is noteworthy to mention that the EU Prospectus Regulation, which will apply from July 2019 (with some limited exceptions) and will be directly effective in Member State aims to harmonise disclosure across the EU and allows for the establishment of a cross-border passport mechanism which facilitates the effective functioning of the internal market in a wide variety of securities. It has provisions directly imposing obligations on persons involved in offers of securities to the public and in admissions of securities to trading on a regulated market which are applied in a uniform manner throughout the Union (European Commission, 2017).

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