The Right Road to Successful Privatisation




The Executive Committee of the EPRDF has taken a bold step to privatise some of its most profitable enterprises: Ethiopian Airlines, Ethio-telecom, Ethiopian Electric Power, Ethiopian Shipping & Logistics Services Enterprise (ESLSE).

The announcement was good news from the perspective of the international community, particularly the World Bank and the International Monetary Fund (IMF), who have been putting pressure on the Ethiopian government to privatise its state-owned enterprises. If the privatisation is carried out, Ethiopian citizens will have the opportunity to own shares of some premium enterprises in the not-too-distant future.

Privatisation will provide most needed cash to finance development activities, reduce government monopoly of the enterprises, promote competition and efficiency, create better customer service and lower prices. Privatisation could also be a way to attract foreign investors with foreign currency, which will alleviate the current forex crunch.

Divestiture of the enterprises, as has been the case before, will likely take place through the Ministry of Public Enterprises (MoPE). The process of privatisation, however, has appeared rudimentary in the past and valuation of the enterprises has not been sophisticated enough to maximize the government income.

And with the partial privatisation of these state enterprises, divestiture is bound to get more complicated. This time, what is being sold are financial instruments, or shares, to interested parties.

The government will own at least 51pc, while Ethiopians and non-nationals of Ethiopian origin will own up to five percent of the shares. The rest will likely go to overseas investors that can come up with foreign currencies. Dissimilar from the past, such a composition of owners shall demand frequent financial reporting and disclosures, at least on a quarterly basis, to ensure shareholders are informed about the performance of the enterprise. Valuation of the enterprises, too will be different. There must be frequent liquidity for shareholders in the public enterprises.

Such an undertaking requires a carefully crafted blueprint to accomplish optimal results. This blueprint ought to be prepared by experienced professionals in public offerings, financial reporting, valuation, stock exchange, commercial law, joint ventures, license and royalty agreements, and the nation’s policies.

Professionals with impeccable experience ought to come from backgrounds in certified or chartered public accounting and financial reporting with at least fifteen years of experience in public companies. It is imperative that the government understands the gravity of the undertaking and spends time with knowledgeable individuals in selecting the team members and defines their responsibilities clearly. The team functions as a department within the Ministry.

The mandate of the team shall be to prepare the enterprises for public offerings, which is not a trivial task. Before marketing the shares of the enterprises, the team will evaluate the audited financials of the enterprises, oversee the audit, work with each enterprise in the preparation of its projection and oversee the assumptions used, pick valuation experts in determining the value of each enterprise and develop a timeline to accomplish its mandate.

The team shall be the lead advisor in selecting an underwriter or underwriters, evaluating experts, and outside legal teams and auditors who will be involved in the stock offerings.

Since it is a security offering, the team shall prepare a document for public offerings. Such a document contains vital information about the enterprise, at least three years of audited financial statements, minutes and an analysis section, which talks about the operation of the business including products, services, operation, competition landscape, labour obligations, customers, and a risk assessment.

It will also discuss the future business condition of the enterprise. Such information, if made public, is crucial for millions of potential investors. The team will supervise the management of the enterprises to assist in preparing the document and review it before the document is disseminated to anyone. It is a cardinal rule to keep everything confidential during the preparation of the public offering.

The team not only prepares the document but should be involved in the selection of the operating entity, which will be the foreign entity with specific expertise in the industry. There should be a screening team to select the technical competency of the operating company with the best arrangement. It shall scrutinize the proposed management agreement, management fees paid for managing the company, senior managers compensations for those who would be brought from abroad by the operating entity, what are allowed expenses and what are not, terms of operating contract and its option to extend the agreement, composition of the board seats and pricing.

The team not only examines the technical capability of the potential underwriters but should also inquires about its reputation, ability to execute on a timely basis, and check references to ensure that the claims of underwriters are verified before selecting the final winner.

The team should be involved in each enterprises’ preparation for a public offering from beginning to end. The task is time-consuming, requires tenacity, passion, positive attitude, negotiation experience, extensive experience in managing stress, and the ability to complete the project on time and on budget.

The team’s responsibilities go beyond preparing the document for a public offering, selecting the operating partner and selling the shares to the public. It will be responsible for the designing and monitoring mechanism of the enterprises.

The team will also be the right group to study the establishment of a stock market in Ethiopia and what it takes to make it happen.

If a stock market is indeed to be established, the government needs to have an independent entity responsible to supervise the stock market and require frequent filings from those public entities. The government may open the floodgate for public offerings for private companies once the stock market is perfected and the requirement to go public are defined and institutionalised.

We need to bear in mind that going public will allow shareholders to trade their stock whenever they need to get liquid just like getting cash from a savings account. The only difference is that the shareholders shall take a risk in the market value. A training and education campaign ought to be conducted before the establishment of a stock market.

An active stock market will accelerate the growth of the capital market, encourage savings and investments and provide access to cost-effective capital markets for local and international companies.



By TESFAYE HAILEMICHAEL
Tesfaye Hailemichael is a certified public accountant who has worked in the United States and Europe as a senior executive and is the author of “Love’s Flight.” He can be reached at thailemichael@gmail.com.

Published on Jul 21,2018 [ Vol 19 ,No 951]


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