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II. Privatization Process: Making Privatization Work - Key Issues & Approaches |
With all the factors discussed above in mind, certain specific steps have emerged as most likely to achieve success. This section discusses what these steps are, why they are taken, and how they are advanced.
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H. Selecting and Negotiating with the Winner |
If done properly, choosing the winning bidder should only take a short time. Because bidders will have demonstrated they meet the financial, technical and experiential requirements in the pre-qualification stage, a properly prepared tender can rely on a single criterion for selecting the winner: price.
Sometimes some weight is given to purchasers' willingness to buy more than one asset. For example, if all generation is being sold, while one bidder may offer more for hydro-facilities only, another bidder may be willing to buy a package of both hydro-facilities and less valuable generation resources. The latter offer may be more attractive to the selling country, viewing the sector situation as a whole. In weighing this type of "good asset-bad asset" packaging, however, the country should understand that tying the less attractive asset to the more attractive asset could lead to severe downward adjustments in any price offered. It may make sense, therefore, for the country to allow multiple package offers, giving bidders the choice to bid on both single and combined asset packages. While this makes comparison among the bids more complicated, it allows the country to identify better the impact tying assets together has on the overall price.
Requiring a minimum number of bids in high-risk countries may be inadvisable and runs the risk of rejecting a competent reasonable single bid. A limited number of bidders may reflect the high degree of risk. The chances of getting few bids can be minimized by strong Government measures in advance of the privatization to establish a sound regulatory framework, clear electricity market arrangements, enforcement of cutoff policies, sound treatment of debt obligations, etc. If the initial tender is unsuccessful it is common practice to learn from the experience, make adjustments to attract investors and re-bid the assets.
Depending upon the process employed and the degree of preparation, negotiation with the winner can be complicated. Difficulties will arise particularly when the legal and regulatory framework is not clear. The draft purchase and sale agreement is a critical and complicated document that will be the focus of negotiation. Often when the law is not clear, the investor will have to seek clarity through the terms of the purchase and sale agreement, which can lead to lengthy negotiation. The purchaser knows that the government may lose interest in the purchaser's concerns after the sale completion and payment. Consequently investors want their concerns resolved before the sale is completed.
Often a key issue in these negotiations is tariffs. A purchaser must recover its investment as well as ongoing expenses. An investor may want long-term agreements to assure that it has a guaranteed income for a substantial period of time. Experience to date indicates that limited periods of agreements may succeed but may result in a lower bid price. The Hungarian experience indicates that long-term contracts can have unforeseen consequences, such as forgoing future options that might result in lower electricity costs. Such arrangements may delay the introduction of competition and can interfere with the ability to meet EU requirements.
Finally, no matter how experienced the negotiators and clear the legal and regulatory framework, contract interpretation and other issues will inevitably arise after the sale. Hence, a dispute resolution mechanism should be included in the legal/regulatory/contractual/tariff framework to address these questions. As noted throughout this paper, investor interest and the price offered are tied to the risks of the investment as perceived by the investor. On the one hand, in a country with well functioning judiciary, an investor will welcome a limited judicial appeal process for most regulatory decisions, in order to assure a check on the regulator's discretion. On the other hand, given the inevitable added costs and time delays, the investor will not want to have to resort to the courts to obtain relief. Hence, with respect to disputes with the government, an investor will prefer arbitration in accordance with international norms to a judicial remedy. With respect to disputes with consumers, e.g., the right to cut-off a non-paying customer, the buyer will also prefer a pragmatic, effective avenue for relief. Hence, the buyer will greatly prefer a legal framework that allows the utility to cut-off the non-paying consumer without having to go to court first, with an appeal route for the customer for mistaken utility behavior. This preference, as with every other risk and cost, will be reflected in the price bid for the asset.
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Table
of contents |
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I. Power Sector Privatization |
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II. Privatization Process |
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Conclusion |
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