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Global Development Finance 1998 Appendix
4 East Asia and the
Pacific Privatization is the transfer of productive assets from the state to private investors through such methods as auctions, stock offers, stock distributions, negotiated sales, management-employee buyouts, and voucher or coupon exchanges. Other methods include leasing, joint ventures, management contracts, and concessions, including build-own-operate (BOO), build-operate-transfer (BOT), and build-own-operate-transfer (BOOT) arrangements. In 1996 global proceeds from privatization exceeded $25 billion, mainly from sales of large-scale infrastructure (figure A4.1). Brazil was the most active privatizer, accounting for more than $5 billion in sales, largely from the sale of energy utilities and railway concessions. Europe and Central Asia saw privatization receipts fall in 1996, following a major selloff program by Hungary in 1995. Privatization activity also slowed in South Asia and East Asia and the Pacific, in part because of a lull in primary issuing activity. The Middle East and North Africa saw sales revenues jump because of an active program in Egypt, while Sub-Saharan Africa continued to privatize on a smaller scale.
With the exception of China, privatization activity in East Asia and the Pacific slowed considerably during 1996, with total revenues estimated at nearly $2.7 billion, about half the level in 1995 (table A4.1). The mixed performance of the region’s stock markets was partly responsible for the absence of privatization-related equity deals. Although China does not have an official privatization program, it sells stakes in state-owned enterprises in the form of B and H shares. B shares are issued to foreigners through the domestic market and are denominated in U.S. dollars on the Shanghai exchange and Hong Kong dollars on the Shenzhen exchange. H shares are Chinese corporate shares issued on the Hong Kong market. Buoyed by a surge of activity on the Hong Kong exchange, Chinese state-owned companies issuing H shares fared well in 1996, raising more than $900 million. This compares favorably with 1995, when new issues were constrained by poor market conditions and only three new H share issues were completed. The Guangshen Railway share offering in 1996 raised nearly $544 million, making it one of China’s largest deals and accounting for about 15 percent of the H share market. Also of interest was the Anhui Expressway offer, which raised more than $112 million and was the first state-owned toll road to be listed outside China. To raise the quality of listings on the H share market, the China Securities Regulatory Commission established new criteria in 1996 for selecting companies, including a minimum issue size, a minimum annual profit, and a three-year earnings record. Indonesia, which has played a sizable role in the region’s privatization activities in recent years, got off to a late start in 1996. Primary issues, the country’s main mode of privatization sales, slowed considerably. Only two sales were concluded in 1996, and one was a secondary offering, for PT Telekom. The company, which was partly privatized through an initial offering in 1995, raised nearly $611 million for a 4.2 percent stake in its second offering. Combined proceeds from both deals were close to the originally estimated sales price of $3 billion. The second sale in 1996, of Bank Negara Indonesia, was the first offer of a state-owned bank and was judged a huge success based on investor response to the domestic tranche, which raised nearly half of the total sales price of $400 million. The Philippine privatization program, which had made a significant contribution to the government’s budgetary surplus in recent years, slowed considerably in 1996. State selloffs raised a fraction of the revenue generated in previous years, due in part to delays in the completion of some deals and the postponement of others. Bidding for the Manila Waterworks and Sewerage System commenced in 1996 but was not completed until 1997 and sparked controversy over the selection of two concessionaires. Thailand’s stalled privatization program received a much-needed boost when the Electricity Generating Authority sold off the Khanom Electricity Generating Company. The transaction included a public offering for $240 million. And Papua New Guinea marked its first privatization public offer with a 49 percent sale of Orogen Minerals for nearly $224 million Latin America and the Caribbean Latin America raised more than $14 billion from sales of state enterprises in 1996 (table A4.2). Sales by federal governments continued to wind down in many of the region’s larger economies, while sales by state and provincial authorities began to pick up speed. Brazil raised more than $5.7 billion in 1996, mainly from the sale of Rio de Janeiro–based electricity distribution company Light, which was sold for $2.4 billion. Proceeds from the sale of Light accounted more than half of the targeted privatization revenue for 1996. Relative to Argentina and Chile, Brazil has only recently embarked on full-scale privatization of its state and federal utilities, which are estimated to be worth several billion dollars. The first state telephone company selloff occurred in 1996 with the highly successful sale of a $660 million minority stake (35 percent) in CRT, a utility operated by the state of Rio Grande do Sul. Restructuring of the Brazilian railway system was nearly completed in 1996, with concessions worth more than $1 billion awarded for five of the six networks. The sale of mining giant Companhia Vale Rio Doce was delayed numerous times, but the company was eventually sold in 1997. The sale raised more than $3 billion, making it the largest deal in Latin America to date. Chile resumed its privatization program in 1996 after a pause of several years with the sale of a railway company, Ferronor, and an electricity generating company, Tocopilla-Codelco. The government plans to unload remaining shares in 2 other energy firms and 14 water companies over the next few years. Privatization programs in Colombia and Venezuela, which had been moving slowly in recent years, were boosted by several noteworthy sales. As part of an overall restructuring of its energy sector, Colombia offered several key electric power plants for sale and raised more than $1 billion through the selloff of two large hydropower plants. Foreign participation in Colombia’s economy, including sales of public utilities, has been facilitated by changes in the foreign investment law that were introduced in 1996. Prior authorization is no longer required for foreign investment in sectors such as energy, transport, and communications. In Venezuela the government’s 49 percent stake in television station CANTV was sold for more than $1 billion. The government also reprivatized several banks that had been taken over during the banking crisis of 1994. But other deals, including the sales of aluminum and steel companies, were postponed. Mexico continued to promote private participation in infrastructure. In 1996 the first railway concession was awarded for $1.4 billion. Mexico also continued to privatize its ports and storage facilities. Peru’s government sold its remaining 26.6 percent stake in Telefonica del Peru through a placement of domestic and international shares. The deal raised $1.2 billion, 74 percent of it through an international tranche of American depository shares (ADSs), making it the largest offering (in terms of size and investor response) in Peru and the most successful equity deal in Latin America since the Mexican peso crisis in December 1994. The sale was also a showcase for the government’s citizen participation program, whereby stakes in state-owned enterprises are offered to foreign as well as domestic institutional investors and domestic retail investors. EGENOR, one of three units of Electroperu, was sold for $228 million to a strategic foreign investor. The sale of Petroperu, postponed several times, was initiated in 1996. The government decided to split the company into units to be sold separately. La Pampilla refinery was the first unit to be sold, raising $180 million. Countries in Europe and Central Asia raised more than $5 billion from privatization in 1996 (table A4.3). Although privatization programs in some countries in the region (the Czech Republic, Hungary) wound down, the process continued apace in others. Privatization proceeds in Hungary dropped significantly following a record year of sales in 1995. Hungary has nearly completed its bank privatization program, begun in 1995, with the sale of five of its six largest banks, two of which were sold in 1996. The government also sold its largest petrochemical firm, TVK, raising more than $162 million from a placement of global depository receipts (GDRs). One of the remaining power plants, Tiszai Power Co., also found a buyer in 1996, raising $149 million. While Hungary and the Czech Republic were nearly finished with their privatization programs, other countries in the region, including Russia, were just beginning to sell off state shares in large enterprises. Following the controversial loans-for-shares program initiated in 1995—which enabled the government to secure loans from Russian banks by entrusting shares in large companies to the banks—the banks were allowed to sell these shares if the government had not repaid the loans by September 1996. Several of these stakes were put up for sale in 1996 and were bought by affiliates of the banks. In 1996 Lukoil became the first Russian corporate to issue American depository receipts (ADRs), giving international investors access to Russian stocks for the first time. The deal raised nearly $131 million, equivalent to a 3.3 percent stake in the company. In another offering Gazprom, Russia’s largest corporate and the world’s biggest producer of natural gas, raised $429 million through an ADR issue. The sale, representing 1.2 percent of the company, was the largest international equity offering by a Russian company at the time. Poland’s privatization program slowed in 1996, held up in part by the delay in the listing of national investment funds. The funds, through which the government plans to sell 513 small manufacturing, construction, and trading companies, represent Poland’s version of mass privatization. Polish citizens willing to pay the equivalent of $7 per voucher were awarded privatization certificates that are exchangeable into shares in the funds once they are listed on the Warsaw Stock Exchange. Bulgaria’s mass privatization got under way in 1996, with voucher books distributed to citizens in January. The government also announced an accelerated program of cash sales to meet budgetary targets. The only significant sale in 1996 was the Sheraton Sofia, which was sold for $22.3 million to a foreign investor. Partly because of its slow progress on privatization, Bulgaria has one of the lowest levels of foreign investment in the region. Kazakhstan continued to actively pursue privatization during 1996. As in Hungary, the program is targeted at strategic investors, who receive a majority stake in the privatized company in exchange for transferring management and technological know-how. The first international listing from Croatia was a success by any measure. The GDR issue by pharmaceutical group Pliva raised $161 million, of which about $90 million came from foreign investors. The Pliva deal also marked the first London Stock Exchange listing for an Eastern European industrial corporate. Proceeds from privatization in the Middle East and North Africa was estimated at nearly $1.5 billion in 1996, largely due to a successful selloff program in Egypt (table A4.4). The government of Egypt accelerated its privatization program by aggressively selling off a long list of public enterprises that generated more than $1 billion in 1996. In 1993–95, by contrast, proceeds totaled just $773 million. One significant development in 1996 was the resumption in the sale of majority stakes in state enterprises. Except for three companies sold outright in 1994, only minority stakes (10–20 percent) had been offered to investors in recent years. The government offered equity in 12 companies through stock offers and direct sales to investors, several of which were for majority ownership. Among the first to be sold under the new policy was a 75 percent stake in Medinet Nasr Housing and Construction, which raised $172 million through a stock flotation. In 1996, to introduce competition into the domestic banking system, the government allowed foreign minority shareholders to increase their shareholdings above 49 percent. The government also instructed all state-owned banks to sell their minority stakes in joint venture banks by the end of 1996. Only one such sale took place in 1996, however. The National Bank of Egypt, one of the “big four” public banks, reduced its stake in Commercial International Bank, which it owns jointly with a U.S. bank. Commercial International Bank became the first Egyptian issuer of GDRs with a deal worth $120 million, reducing the National Bank of Egypt’s stake to 22.62 percent. The pace of privatization in Morocco, which had slowed in 1995, recovered in 1996. Of interest was the largest privatization sale in Morocco, a public offering of shares in petroleum refinery Societe Marocaine des Industries du Raffinage (SAMIR), which raised nearly $173 million for a 30 percent stake. It was the country’s first deal involving privatization bonds. In 1996 the government issued about $308 million of these bonds to raise revenue for the treasury in advance of sales of state-owned enterprises. To encourage participation in the issue, bondholders were given the option of converting the bonds into privatization-related stock offerings. Two previously postponed sales, for steelmaker SONASID and fertilizer company FERTIMA, were concluded in 1996. In Tunisia Societe des Produits Chimiques Detergents became the first company to sell shares to foreigners after the introduction of new legislation allowing foreign investors to purchase up to 10 percent of a Tunisian company. As in East Asia and the Pacific, privatization activity in South Asia slowed considerably during 1996. In the absence of major sales, revenues totaled less than $900 million (table A4.5). In India, where privatization has focused on the sale of minority equity shares in public companies, there were two quasi-divestments during 1996. The first, a $125 million GDR issue by the Steel Authority of India, the largest listed company on the Bombay Stock Exchange, met with a muted response from investors. It was the first time a state-owned Indian enterprise had been listed on the London Stock Exchange. The government still controls about 85 percent of the company’s equity. The second, the State Bank of India’s $370 million deal through a rule 144A placement, was the largest equity offering ever from India and the first Indian listing on the New York Stock Exchange. The sale of VSNL, the state-owned telecommunications company, had been postponed several times but finally came to the market in the first quarter of 1997. The issue raised $527 million, making it India’s largest deal to date. Pakistan saw many large deals postponed or cancelled, including the sale of its telephone company, Pakistan Telecom, and United Bank, the second largest commercial bank. The sale of the Kot Addu Power Station was concluded, however, bringing $215 million from a foreign investor. African countries continued to pursue privatization, raising $745 million in 1996 (table A4.6). Ghana led the way with revenues totaling more than $180 million. The government sold a 5 percent stake in Ashanthi Goldfields worth $112 million through an international placement of shares. In South Africa the government sold 6 of its 23 radio stations as part of its plan to increase competition in the news media. Local investors paid $122 million for the stations. The highlight of Kenya’s privatization program was the sale of a 26 percent stake in Kenya Airways to a strategic investor, KLM, for $26 million. Another 54 percent of shares were sold through the stock market for $46.3 million, making it the largest domestic offer ever. Zambia continued to make progress on sales of state-owned enterprises. But the sale of Zambia Consolidated Copper Mines, which accounts for nearly 90 percent of the country’s foreign exchange earnings, was delayed once again. The government had prequalified companies and consortiums for bidding on the 10 separate units through which the company would be sold. Infrastructure-related selloffs continued to dominate the world’s privatization programs in 1996, capturing 60 percent of proceeds as governments continued to unload their stakes in power, telecommunications, and transport companies (table A4.7). Latin American countries, particularly Brazil, were especially active in power and transport. Power accounted for more than 40 percent of infrastructure sales and nearly 25 percent of proceeds from privatization in 1996. Selloffs of electricity distribution assets were particularly popular with investors, as returns are typically higher from distribution than from generation. Telecommunications generated more than a quarter of the proceeds from infrastructure sales in 1996, mostly due to two large deals from Peru and Venezuela that raised more than $1 billion apiece. In transport, sales of railway networks accounted for more than 13 percent of privatization revenues in 1996, concentrated mainly in Latin American countries such as Brazil and Mexico. Another important source of revenue was the financial sector, as governments in all regions sought to shed their holdings in banking institutions. Hungary moved closer to its objective of privatizing its six largest banks, which account for nearly 60 percent of the domestic market. After selling three in 1995, it sold two more to foreign investors in 1996, together with several smaller banks. In Egypt state-owned banks began divesting shares in joint venture banks as part of the government’s strategy to withdraw from the banking sector. Venezuela continued to reprivatize banks taken over by the government in the wake of the 1994 banking crisis. In Slovenia an amendment to the law on privatization of strategic enterprises was passed in 1996 that precluded the direct privatization of the country’s four biggest banks. Direct sales continue to be the preferred method of divesting state-owned shares, accounting for more than 60 percent of privatization revenues in 1996. Public offers, which tend to be large and highly liquid investments, were the second most preferred method, raising more than $8.1 billion in 1996. International public offers in the form of GDRs were also popular in 1996, with three countries (Croatia, Egypt, Morocco) becoming first-time issuers in order to sell stakes in state-owned companies. GDRs are popular because they offer a wider investor base, particularly if there are domestic ceilings on foreign ownership of shares. Several Russian companies established level 1 depository receipt programs in 1996 in preparation for selling stakes to international investors.1 Sales methods have varied across regions for various reasons, including privatization strategy and market conditions. The most preferred method in East Asia and the Pacific, where stock markets are relatively developed, has been public offers. In Latin America and Europe and Central Asia direct sales to strategic investors have been widely used to attract management and technological know-how. In the Middle East and particularly Egypt, the flood of liquidity resulting from the large number of privatization offers has been the primary reason for increased activity on the region’s stock markets. In Africa, even though direct sales have been popular in the past, maturing stock markets have helped boost the number of privatization-related equity offers. Leases and concessions are commonly used for infrastructure-related projects, particularly in transport. Foreign investors provided nearly 44 percent of the proceeds from privatization sales in 1996. Of the estimated $11.3 million raised in foreign exchange (table A4.8), equity investors accounted for $5.6 million—twice as much as in 1995, when equity issues plunged in the wake of the Mexican peso crisis (table A4.9). Foreign direct investment accounted for another $5.6 million, including foreign concessionaires, who provided $686 million. Latin American countries were the main recipients of foreign direct investment, attracting more than $4 billion. East Asia led in portfolio investment, with nearly $2 billion, followed closely by Latin America, with almost $1.9 billion. Central and Eastern European countries attracted more than $1 billion in equity investment in 1996. Sources of data for the World Bank’s Privatization Database The data contained in the World Bank’s Privatization Database is drawn from various sources, including reports from official privatization agencies and other internal World Bank Group databases, and is supplemented with data contained in publications such as Privatization International, International Financing Review, Latin Finance, Middle East Economic Digest, and Euromoney. All data are in U.S. dollars as reported or are converted from local currencies into U.S. dollars at the annual average exchange rate. For direct sales, if a buyer’s identity is unknown, it is assumed that the buyer is domestic. For public offers, the foreign exchange component is not estimated if the number of shares purchased by foreign investors is unknown. Note 1. A level 1 depository program offers new issuers an entry into the U.S. market by allowing over the counter trading through pinksheets of existing shares. Level 1 programs are popular with non-U.S. companies that are unable to meet the more stringent requirements of level 2 or level 3 programs. A level 2 program involves the listing of a company’s shares on the New York Stock Exchange or other major exchange, which requires compliance with U.S. stock exchange requirements, including Securities and Exchange Commission (SEC) filing requirements and generally accepted accounting principals. With a level 3 program, a company is allowed to issue new shares in a public offering after meeting level 2 requirements and additional requirements involving underwriters and the like. Level 3 programs can also be established as private placements under the SEC’s rule 144A. |
