Five companies earmarked by government for privatisation
by David Kelleher
The first phase of privatisation is expected to be completed by the end of next year and will bring in around Lm50m in revenue for the government. The much-awaited White Paper on Privatisation was presented to Parliament by the Finance Minister John Dalli along with the Budget Speech.
The names of those companies listed for privatisation was, on the whole expected, however many were expecting Mr Dalli to announce which foreign entities were interested in the local companies.
Mr Dalli said on Monday the Malta International Airport, the Malta Freeport Terminal, the Public Lotto, Bank of Valletta and the Libyan Arab Maltese Holding Company would be the five government entities to be privatised next year.
The government holds 100 per cent of the shares in MIA and the Malta Freeport, 51 per cent in the Libyan Arab Maltese Holding Company and 25.2 per cent of Bank of Valletta. The Public Lotto is a government department.
In the White Paper, although the government is committed to privatise public enterprises, it is aware there are particular features and characteristics of Malta's society and economy that need to be factored into a privatisation programme and that common concerns over competition, concentration of ownership and employment had to be addressed.
The privatisation programme has been in place since 1988. To date over 40 companies have been liquidated, 22 (Mid-Med Bank and a group of mostly small companies) fully privatised and shares sold in Lombard Bank, the Bank of Valletta and Maltacom.
The programme now moves to a more complicated phase, and includes some major industrial activities, enterprises in the infrastructure sector and government services.
The objectives of the programme are:
to raise public enterprise effic-
iency;
to improve the service to the public;
to redeploy national resources more efficiently;
to strengthen the local private sector by encouraging competition and modernisation;
to allow the government to concentrate on core activities by limiting its economic role and encourage an "enterprise culture";
to increase foreign and domestic private investment in infrastructure enhancing technology transfer through strategic partnerships; and
to consolidate the public finances.
Revenue from the privatisation has a two-fold use: proceeds can be used to directly bring down the public debt and, in turn, transfers to public enterprises from the budget can be reduced.
On the other hand capital expenditure requirements of the public enterprises will become the responsibility of the private sector following privatisation. In addition to this, privatisation will send strong signals locally and internationally that Malta is serious about reforming its economy.
The present situation
The key features of public enterprises (enterprises where the government holds over 50 per cent of the shares) are:
public enterprises in Malta provide employment for over 11,000 Maltese, about 10 per cent of the total workforce;
over 80 per cent of the workforce is engaged in the infrastructure sector, the remaining 20 per cent are employed in what can be classified as the tradable sector;
the majority of public enterprise debt, which is quite large at Lm531m, or over Lm14,000 per person, is in the infrastructure sector; and
annual transfers from government to public enterprises total over Lm16m and when capital contributions are added, these transfers amount to approximately five per cent of GDP. The transfers account for the majority of the government deficit.
The inefficiencies within public enterprises emanate from four main standpoints:
labour over-staffing is commonplace;
resources are used inefficiently and there is also significant wastage;
controls need to be tightened up; and
outdated practices hinder management from achieving efficiency gains.
The only public entity not included in the list of companies is ports. The government has not yet decided which methods of privatisation will be used, however the preferred method will depend on the objectives of the privatisation.
In some cases, a number of methods will probably be used in combination with each other, for example a proc- ess that includes a strategic sale, a public offering and an employee share ownership.
The following is a list of a number of privatisation methods, which may be used in the programme:
Flotation is the sale through the stock market(s) usually known as an Initial Public Offering - of up to 100 per cent of the share capital of a company. A number of privatisations have taken place using this method.
Strategic or trade sale refers to the sale of up to 100 per cent of the shares in a company to other parties by negotiation, following a public tender through direct negotiation.
Management buyout is the purchase of a majority of shares by a consortium organised and led by the existing management. This can also take the form of workers cooperatives.
Asset sale is a method of separating the assets of a company from its problems, for example, legal difficulties. It also can be used to deal with assets surplus to the company's requirements, for example, land.
Private participation in infrastructure arrangements include Build Own Transfer, concession, lease and management contracts. Some of these arrangements may also be relevant for non-infrastructure sectors. One particular advantage of these arrangements is that if competition in the market place is not possible then competition for the market place can be introduced.
Contracting out is mainly found in the government services areas where there are already commercial providers. These include cleaning, computer services, maintenance and securities.
Employee share ownership plans are mechanisms to help fund the participation of workers in the ownership of the company. They have already been successfully applied in Gozo, when a clothing company was privatised to employees and in the privatisation of Bank of Valletta, Maltacom and Mid-Med Bank. The dividends of the company were held in trust and used to pay for the employees' shareholding.
Choosing the best method or combination of methods, based on a preliminary privatisation strategy is a crucial first step in privatisation. The choice requires a pragmatic judgment based on Maltese and international experience. The factors that will be taken into account are the following:
national privatisation objectives and policies as set out above, for example, broadening ownership;
company strategy, performance and needs for investment resources, strengthened management, technology, market access and so on. A company with first-class management, for example, operating in a competitive market, might well be suited to an IPO. A company seeking a shift into exports might benefit from sale of a sizeable stake to strategic partner;
consumers' need for better value, more choices and higher safety and other standards, especially for products of industries in monopoly positions; and
company viability.
With the strong appetite in the domestic market for privatisation shares, the government is considering the issue of a privatisation bond. The bond would have the following features:
it would give investors first priority on new privatisation issues, with the bond converting to shares in the privatised companies at the market price;
it would carry a discounted interest rate; and
it would, at the investors choice, be redeemable for cash.
Restructuring is another issue that is discussed in the White Paper, and the government is faced with the decision as to whether it should restructure or not prior to privatisation. The following types of restructuring will have to be considered:
labour;
operational;
financial; and
organisational.
In the event, restructuring is required to complete the sale, this will be built into the process of sale.
The White Paper states that the government's broad objective is to expand the enterprises regional market share - so that it can make a greater contribution to the country's economic growth.
The basic options in each case are to privatise the existing entity as one unit or unbundle it and sell off the constituent parts. Another option, which may be appropriate, would be to structure the sale as a concession.
The Freeport has already moved in this direction with the creation of a port operating company that leases the port from the government.
In each case, the core strategy is to identify a strategic partner or partners who can provide:
managerial and technical support
the ability to exploit market synergies; and
investment resources.
Where possible the local stock market will be invited to participate in the privatisation.
The next step with these transactions will be to commission consultants to prepare a detailed study on the privatisation strategy for each enterprise. Once the strategy is determined then advisors can be appointed to handle the sale.
The government is hopeful that it will be able to complete the first tranche of transactions by the end of 2000 and completion scheduled for December 2005.
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