Annex B. Key questions for policy makers

The OECD has developed this guide as a tool support the implementation of the Guidelines on Corporate Governance of State-Owned Enterprises (“OECD SOE Guidelines”). The Guide is organised in the form of a manual on the step-by-step process of conducting a privatisation from start to finish. It is primarily addressed to the entities responsible for the state-ownership function or entities or which are responsible for orchestrating the privatisation process. These key questions should be answered by policy makers for each stage of the privatisation process before embarking on an individual transaction or full-scale privatisation programme.1

Stage 1: Guiding principles that should inform policy makers considering undertaking a privatisation process

Step 1.1 Identify and articulate policy objectives

  • Is there a clear rationale for embarking on the privatisation process? Have the concerned policy makers weighed the various trade-offs, considered value-for-money, conducted a cost-benefit analysis, and evaluated potential impact on public service delivery (if applicable)?

  • Is there adequate competition and market regulation in place prior to the privatisation? If not, has the government devised a plan to undertake market restructuring before the privatisation?

  • Is the rationale for privatisation consistent with the state ownership policy?

  • Has the government clearly identified how privatisation proceeds will be used?

Step 1.2: Establish a transparent and credible institutional framework with high-level political support

  • Does the privatisation programme/transaction benefit from high-level political support?

  • Is there a clear institutional framework in place that ensures a whole-of-government dialogue?

  • Has the ownership entity (or other competent authority) been assigned as “project manager” and to steer the process?

  • Is the ownership entity independent, competent, well resourced, and subject to high standards of accountability and transparency?

  • For individual transactions, has a steering group or equivalent coordination group been set up involving the owner, key members of the SOE management team and ideally a couple members of the board of the company?

  • Has the ownership entity identified key stakeholders to the process?

Step 1.3: Sequencing the process to build credibility and support

  • Does the ownership entity have a clear idea as to the sequencing for the transaction? For example, is the concerned enterprise merely a candidate for privatisation? Will the state retain shares in the company? If so, does it plan to remain a long-term investor or does it plan to exit the company? Is this consistent with the stated rationales and sale objectives?

  • Are there specific policy objectives that must be taken into consideration? For example, does the SOE operate in a strategic industry, or in an area relevant to national security that should be taken into account when sequencing the process?

Stage 2: Measures to be undertaking prior to divestment by both the company and public authorities to ensure success of the transaction

Step 2.1: Going from privatisation candidate to triggering the sell-off

  • Is a specific legal act required to trigger the sell-off? If so, does this require going to parliament?

  • If a larger privatisation programme is envisaged, is there a broader framework legislation that needs to be enacted?

  • Have the appropriate stakeholders been adequately consulted and communicated with prior to enacting any legal acts?

  • Is there a framework in place to simplify the decision-making, which might help to speed-up transactions when there is sufficient rationale, transparency and consensus around the government's privatisation priorities?

Step 2.2: Appropriately staging the privatisation process

  • At the request of the ownership entity, has the management conducted a “readiness” test to ensure that the company has its “house in order”? This will include: ensuring that it has the appropriate corporate governance structures, strategy, reporting framework, transparency, capital structure and non-commercial objectives.

  • Have transaction-related factors such as the size of the asset, the absorptive capacity of the market, market structure and the existence of an adequate regulatory capacity been adequately assessed?

Step 2.3: Pre-privatisation industry restructuring

  • Is there anti-trust regulation to ensure competition where feasible, and specialised regulation to oversee activities where an element of monopoly is likely to persist?

  • If monopoly activities necessarily remain has the government decided whether to structurally separate the monopoly into various commercial and non-commercial components?

  • If the company is to remain vertically integrated during and after privatisation, is there independent and well-resourced regulation in place?

  • Has a means of assuring universal policy obligations post privatisation been established?

  • Has pre-privatisation restructuring been done in line with relevant rules or regulations concerning state aid (where applicable)?

Step 2.4. Pre-privatisation company restructuring, legal changes and other factors

  • Has a “readiness” review been conducted to ensure that the company is fit for privatisation? Has it taken into consideration the key areas including is corporate performance, strategy, operations; management and employee questions; financial, legal and regulatory issues?

  • Has the ownership entity consulted with the company board and management on its readiness for privatisation?

  • Has an external advisor been appointed to work with the company should any restructuring be required?

  • Have key issues relating to the scope and role of the state-owner been considered? For example regarding the rate-of-return requirements; dividend policy; and future liabilities, which might affect decisions taken by the board and management with, regard to the company’s capital structure.

Step 2.5. Addressing employee and stakeholder relationships and concerns

  • Have the situation of SOEs employees post-privatisation been considered? Are these in line with national labour laws and civil service codes (where applicable)?

  • Have the appropriate steps been taken to dialogue with labour representation? This includes information at an early stage; consultation with through existing institutional arrangements; and if necessitated, negotiation on potential measures to be taken.

  • Has the board and management developed a consultation and communication plan in consultation with a communications advisor to ensure that stakeholders are adequately informed of the process, at the right stages?

  • Should specific measures be warranted have they been analysed and any financial liabilities or other residual liabilities been accounted for in advance?

Step 2.6: Deciding on the appropriate method of sale

  • Has the privatisation method taken into account the size of the enterprise to be sold, market conditions and the objectives of the process?

  • Have the merits and demerits of various privatisation methods been considered, including the relative costs and benefits?

  • Has the government revisited its sequencing and staging decisions to ensure that it is coherent with the chosen privatisation method?

Stage 3: Organisation of the privatisation process

Step 3.1 Effectively steering the process to see through the transaction

  • Has the state-ownership entity or other assigned entity to oversee the transaction established an organ (typically a steering group and a project group) to oversee the privatisation transaction? Does this involve the appropriate set of stakeholders?

  • Has the relative roles and responsibilities of various stakeholders involved been clearly defined for each stage of the process?

Step 3.2 Best practices for drawing up on external advice

  • Have external advisors been hired at a very early stage in the process? Has special care been taken to ensure that the firms were selected based on a competitive process and evaluated for potential conflicts of interest and selected according to their quality, competence, and experience?

  • Has the separation of advisory and sale mandates been ensured to reduce the likelihood of conflicts of interest?

  • Has special care been taken to ensure that the advisors and the SOE have not hired the same firm? Has the ownership entity received assurances that the advisor is only representing the government or its selling agent’s interests?

  • Has the in-house expertise in the ownership/privatisation unit/agency been cultivated to be able to have an informed dialogue with external advisors on key questions related to the transaction (e.g. valuation or staging, etc.)?

  • Has the fee and incentives structures of advisors been carefully considered?

Step 3.3 Determining company valuation

  • Has the ownership entity established a valuation based on the principle of “fair market value”?

  • Has the valuation fed into the decision-making on the sales method, or sequencing of the sale?

  • Who is responsible for establishing the valuation? If an external advisor is involved has the role of valuation been separated from the sales mandate to ensure there is no conflict of interest? If a special commission has been established in the government has care been taken to ensure that members are sufficiently independent and qualified to make an informed opinion?

  • Has the government set a “reservation price” for the sale?

  • Has the selected valuation methodology reflect the qualities and characteristics of the asset?

  • Has the company provided enough information to make an informed decision on its valuation?

Step 3.4 Determining potential buyers and handling bids

    • Has a set of pre-qualification criteria been established to select a future buyer should multiple bidders be considered for the sale?

    • Have appropriate safeguards been established to ensure that bids are handled transparently, while respecting confidentiality, and selected according to the sales objectives set at the start of the process?

  • If specific national security or public interest considerations are at hand, has the government thought through the means through which it wishes to protect those interests? Has its strategic interests been made transparent and disclosed, and the means through which it protects them proportionate?

    • Has the government carried out due diligence of the potential buyer’s track record in ethics, tax, human rights, labour practices and other areas of concern?

    • Have bids been handled transparently, while respecting confidentiality, to avoid irregular practices? Do potential bidders have right to recourse in case their rights have been violated?

    • Has information exchange with potential bidders been subject to confidentiality agreements?

Step 3.5 Active and on-going communication

  • Has the ownership entity devised a pro-active communication plan for all stages of the privatisation process? This includes communication with various stakeholders both internal to the government, with parliament; with the company and its management and employees and with stakeholders and the general public.

  • Has a risk mitigation strategy been put in place should the transaction lack some public support?

Stage 4: Issues to consider post-privatisation

Step 4.1 Handling residual guarantees or liabilities

  • Has the framework or privatisation legislation specified how the public authority involved in executing the transaction should defray costs, including debt write-offs resulting from balance sheet adjustments?

  • Have these been handled appropriately and according to the stated process following the sale?

Step 4.2 Accountability and transparency in handling privatisation proceeds

  • Has the legal decision triggering the sell off identified the use for privatisation proceeds?

  • Have the proceeds been handled to ensure a high level of accountability and transparency?

Step 4.3 Systematically conducting post-privatisation evaluation

  • Has a competent body been assigned with evaluating the transaction ex-post? This should evaluate assessment of corporate efficiency, effects on markets and stakeholders, as well as the impact on consumers, especially where public service delivery is concerned.

Step 4.4 Subjecting the transaction to an ex-post audit process

  • Is there an entity responsible for carrying out an ex-post audit of the transaction? The audit should take into account propriety and value for money, and the achievement of other goals and objectives set out as part of the sales objectives.

  • Have results of the audit been communicated to the public?

Step 4.5 Good governance practices in the case of partial privatisation

  • If golden share are retained, are they limited to cases where they are strictly necessary (and in line with applicable legislation) to protect certain essential public interests such as those relating to the protection of public security and proportionate to the pursuit of these objectives?

  • Are protections for minority shareholders laid down in the relevant legislation and/or listing requirements?


← 1. The focus is on transactions that result in the full or partial privatisation of enterprises involved in economic activities, and where the privatisation results in a significant change in the degree of control exercised by the state if it remains shareholder.

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