Privatization: A New Approach to Private Ownership
Privatization: A New Approach to Private Ownership
The privatization process started in Morocco with the Royal Speech of April 8th 1988. (Privatization) Conducted by King Hassan II, father of current King Mohamed VI, this speech provided a political signal and wake up call that marked the beginning of a new approach to modern day entrepreneurship. This privatization plan included a list of about 114 entities earmarked for divestiture, however the privatization plan wasn’t approved until 1990. (Kaufmann,2007,p.25) It defined the social and economic objectives of privatization and stimulated the emergence of alternative methods of investments.
While privatization law was officially acknowledged by Parliament in 1989, it took four years to proceed in the first operation. Based on French privatization procedures, the Moroccan privatization plan experienced a steep learning curve. While it produced modest results in its earliest days, it soon proved to be a very successful approach to private ownership.(Hussain) Initially, fifteen companies and hotels were sold in whole or in part to foreign buyers. These included some of the world’s largest industrial operators and most prominent financial investors and accounted for 30 % of privatization revenue.(Privatization) In the 1990s the main activity was concentrated in the manufacturing and services sector and Morocco was in the lead along with Egypt in the MENA(Middle East and North Africa) region.(Hussain) According to the Moroccan National Institute of Statistics and Applied Economics (Institut National de Statistique et d’Economie Appliquee), there were 707 entities with majority government ownership in 1996 across all sectors.(Kauffmann,2007,p.25) The value-added of these entities contributed 13 % of total GDP(compared with 18.6 % reported by the World Bank Bureaucrats in Business for 1978-1985) and investments amounted to 23 % of gross fixed capital formation. (Kauffmann,2007,p.25)More than half of the total receipts came from the divestitures from only two companies: Maroc Telecom and “Regie des Tabacs”, the tobacco manufacturer. (Kauffmann,2007,p.25) Besides these two companies, the government action focused mainly on industry, the financial sector, tourism, and the energy sector. (Kauffmann,2007,p.25) In fact, in the World Bank’s Top 10 revenue-generating countries statistic for the period 2000-2003 Morocco was included as the only representative of the MENA region.(Hussain)
In late 2004, 67 firms from the 114 entities registered on the initial list were partly transferred to foreign strategic investors, generating $6.3 billion in revenue.(Serhane) From its initiation to 2006, the contribution of privatization proceeds to total revenue was about 5 %, with peaks of 24.5 % in 2001 and 13.8 % in 2003, corresponding to the sale of 35 % of Maroc Telecom to Vivendi Universal for $ 2.7 billion and the sale of Regie des Tabacs to Altadis for $1.2 billion.(Kauffmann,2007,p.31) One can observe the significance of privatization in various prominent industries:
In January 1996, the Ministry of Finance launched a new product – convertible bonds. (Privatization) These so-called privatization bonds allow the holder to convert it into shares of common stock in the issuing company if he so chooses. Although they have a low coupon rate, they provide the benefit of earning potential growth of a company and the security of earning cash payments. This flexibility creates popularity for these bonds, and compensates for the risks associated to a company’s restructuring or change of ownership. From the issuer’s perspective, the real benefit of convertible bonds is low cash interest payments. With regards to Moroccan privatization bonds, they granted an absolute priority in buying shares privatized on the Casablanca Stock Exchange (CSE) before December 31, 1998. The bonds were introduced towards two main objectives: sustaining CSE growth and separating sales from revenue. These instruments have proved very successful as they raised $314 million in the fully subscribed January and May offerings alone. (Privatization)
One can see the true value of such bonds through the divestiture of the Samir IPO. This IPO gave them the first opportunity for conversion, and investors converted 76.2 % of their bonds to stocks. This number exceeded the Ministry predictions of 50-60 % conversion. (Privatization) This mechanism remains one of preference because the bonds maintain high conversion rate and pay 2 % less than comparable treasury bonds. These should be considered a prepayment for privatization shares because while they are often used to hold and earn interest, they are a better investment opportunity if one chooses to convert them after a company is privatized and benefit from the company’s capital growth.
Privatization: Strategy & Objectives
The privatization process follows a complex procedure in order to bring about true economic value. An assessment of past experiences is very useful, as the lessons learnt from the past fifteen years of privatization can be used to improve divestiture methods for the companies that remain to be privatized. (Kauffmann,2007,p.29) Moroccan authorities opted for an open and transparent sales process, carried out by a tripartite organizational structure made up of a Minister, a Commission of high government officials, and a price setting board. (Privatization) This transparency approach was carried by favoring stock market listings or tenders, which together have accounted for 75 % of revenue. Worker shares, trade sales, and rights of first refusal account for the rest (Privatization)
As a member of the MEDA countries, Morocco had four main motivations for undertaking privatization programs. Firstly, it is aimed at short-term fiscal benefits brought by privatization proceeds and reduction of significant subsidies granted to loss-making state-owned enterprises. (Kauffmann,2007,p.29) By extracting the government from company’s ownership, the government is converting potential losses into potential gains as it leads to an enlargement of the tax base as firms become profitable, and protects the government from company failure. Secondly, privatization brings about positive economic and social impact on competition brought by increased corporate efficiency, lower prices and improved access to services. Private companies are subject to market competition, and it is through this competition that efficiency and price cutting occurs, as company success is based on company performance. Thirdly, the development of financial markets and the broadening of local participation in order to attract foreign direct investment and stimulate private-sector development is one of the MEDA countries’ primary initiatives. (Kauffmann,p.29) Finally, while not the case specifically for Morocco, the World Bank and the IMF will make arrangements for financial assistance conditional upon the execution of market reforms and especially privatization. (Kauffmann,p.29) A good example reflecting the involvement of the IMF is with Egypt, as its access to concessional financing was conditional upon a privatization program under its 1991 program. (Kauffmann,p.29) While these motivations applied to Morocco in its participation in the MEDA region, the Moroccan authorities had very specific objectives with respect to privatization. These objectives were as follows (Serhane)(BILAN,p.4):
- Modernize the national economy and to favor its opening to the international exchanges.
- Reduce the burden of the State’s budget especially the subsidies to public businesses.
- Enhance the competitiveness and productivity of privatized entities.
- Support regionalization by strengthening the role of the Hassan II Fund for national development.
- Promote the creation of employment opportunities
- Attract private foreign and local investments.
- Encourage new human resources by giving them high responsibility positions (CEOs)
The privatization process was carried in a three step process: the pre-transfer process, the transfer process, and the post-transfer process. The pre-transfer process consists of the evaluation and auditing of the company to be privatized, as well as the determination of the minimum price for the sale. The independent auditing party has the responsibility to conduct in depth research of the company’s current financial situation and as well give an expert opinion on the company’s future operating activities and performance. This information is collected and submitted to the deciding party, as it will serve as the basis for negotiation between the buyer and the seller. (BILAN,p.5) Depending on the economic role and importance of the company, the evaluation process will be conducted either by the company in charge of the auditing or by an investment bank in collaboration with a Moroccan bank.
The transfer phase is conducted based on the selected form of cession: through an invitation to bid, through direct granting, or through the financial market. Invitation to bid is often the method of choice when the Moroccan authorities choose to sell a fraction of a company’s capital structure. The method is the most common approach, 77 % of privatization records, because it guarantees the best transparence and the best financial returns as the buyer will be the one offering the highest price. (Serhane) The second approach is through direct granting: this method represents 17 % of privatization records and is employed for the following three reasons. First, it is exercised if the bidding proved unsuccessful. The sale is reevaluated and propositions are made to specific entities along with an incentives’ plan for the potential buyer. Second, this method is used to allow the right of preemption between shareholders. Third, it is employed for regional development or labor preservation considerations. The last method for cession of a company is through financial markets (6 % of privatization records). For this type of divestiture, three options are available: introducing the company in the Casablanca Stock Exchange or a foreign stock market, a public offer with a fixed price, or a combination of the first two. This method stimulates the local financial market and promotes individual ownership. (BILAN,p.6)
Finally, there is the post-transfer step of the privatization process. This step is characterized by a collaboration between the buyer and the seller to ensure that the buyer respects the specifications of the contract and the investment initiatives stipulated in the contract. This implies a continuous update of the company’s performance under its new ownership and visits of the company site. (BILAN,p.7) (Serhane)
Privatization: “Maroc Telecom” Divestiture
Several important transactions have occurred within the past ten years which have generated significant proceeds and served as models for Moroccan privatization procedures. More than half of the total receipts came from the divestitures from Maroc Telecom and Regie des Tabacs, the tobacco manufacturer.(Kauffmann,p.25) These sales have allowed for an increase in international cooperation as well as a greater global awareness of Morocco’s investment opportunities. Maroc Telecom had a monopoly in the sector until 1999. Competition was introduced into the mobile-phone market that year with the sale of a second mobile-phone concession to Meditelecom (Meditel), a joint venture led by Telefonica (Spain) and Portugal Telecom. Since then, the mobile-phone market has been stimulated by competition between Maroc Telecom and Meditel, which has driven down prices and increased the range of services. At the end of 2005, Maroc Telecom had around 6.7 million mobile-phone subscribers and Meditel around 3.3 million. (Kauffmann,p.35) Two licences to operate third-generation (3G) mobile-services were awarded in 2006. Maroc Telecom remains Morocco’s leading telephony operator and its divestiture is an important event in Morocco’s privatization practice.
Maroc Telecom’s privatization can be characterized by five major events. In 2001, the first wave of private ownership took place as Vivendi Universal acquired 35 % of its capital for a record price of 23.35 billion MAD (Moroccan dirhams). The divestiture from Maroc Telecom continued in 2004, when the government raised additional DH 9 billion ($1 billion) from the flotation of a 14.9 % stake on the Casablanca and Paris stock exchanges. (Kauffmann,p.25) This IPO placed more than 130 million shares on the market, leading to more than 133,000 individual shareholders. In addition, 98 % of the company employees purchased company shares. Internationally renowned investment firms made 124 billion dirhams demands for Maroc Telecom stock; stock price was fixed at a high 68.25 dirhams per share. In 2005, authorities sold another 16 % of capital to strategic partner Vivendi Universal for a price of 12.4 billion dirhams. This transaction marked the beginning of the liberalization of the telephony sector and encouraged competition between various telephony operators. The Agence Nationale de Regulation des Telecommunications (ANRT) oversaw the liberalization of the sector, and its independence from government gave confidence to foreign investors. (Kauffmann,p.35) In 2006, 0.1 % of capital was sold over the Casablanca Stock Exchange for a price of 98.5 million dirhams. Finally, in 2007, 0.4 % of capital was sold over the Casablanca Stock Exchange for approximately 4.6 billion dirhams.
As in the Tunisia, the privatization of Maroc Telecom provides another relevant example of how privatization in the Telecom sector can lead to broader access and lower prices when accompanied by the simultaneous introduction of competition and proper regulation. (Kauffmann,p.35) The success of the privatization of Maroc Telecom was due to the proper sequencing of the process, including the appointment of a regulatory body prior to the divestiture, and the introduction of competition in mobile communication. Maroc Telecom’s fixed-line monopoly was broken in 2005, when licences were awarded to Meditel and a local firm, Maroc Connect. The fixed-line market contracted in 2000 and 2001 as customers moved over to mobile phones but is now expanding, driven by growing interest in the Internet, broadband, cable television and data services. The introduction of competition in the fixed sector is expected to encourage further expansion. Maroc Telecom had 1.4 million fixed-line customers at end of 2005. (Kauffmann,p.35)
Privatization: “Regies des Tabacs” Divestiture
Following the request for proposal issued February 25th 2003, the Commission of Transfers declared Altadis Maroc, a Franco-Spanish tobacco company, acquiring a 80 % stake for DH 14.08 billion ($1.5 billion). This important transaction was carried successfully due to the comprehensive preparation following law # 46-02 regarding the liberalization of the tobacco sector as well as the externalization of pension fund. The privatization process continued in 2006 with a sale of the government’s ownership of 20 % of the Regie des Tabacs to the group Altadis for an amount of DH 4.02 billion. This process was accompanied by law # 46-02 extending the government’s monopoly of imports and exports of manufactured tabaccos.
Since the acquisition of the Regie des Tabacs, the tobacco sector has experienced an significant growth as it is currently owned by a company with strong growth and development perspectives. This establishes a firm platform for international competition and a controlled liberalization of the tobacco sector.
Privatization: “Samir Oil Refinery” Divestiture
The Samir Oil Refinery, at Sidi Kacem, Morocco, is a complex refinery with a with a distillation capacity of 1200 tons per annum. The refinery was originally built in 1940. The Samir Oil Refinery originally planed to come to market in at least three tranches: 30 % in a CSE IPO, 30-51 % through a tender to a strategic investor, and 1.7 % to workers. (MABC) As a result of its recent privatization, the Swedish Saudi Corrol bought 73.88 % stake in the refinery together with a 67.7 % stake in the Samir Refinery for $ US 468 million. The company experienced a CSE IPO of 30 % and almost 60,000 bought in the Samir Oil Refinery in January 1996 alone. Investors converted 76.2 % of their bonds to stocks. The IPO gave them the first opportunity for conversion. This number exceeds the Ministry officials’ forecast of 50-60 % conversion.(MABC) The company has undertaken to improve environmental emissions at both refineries in exchange for protection from imports. The tariffs imposed on imported refined petroleum products were meant to give Samir preferential treatment and a competitive edge for the following decade.
Samir was the first oil refinery business to be established in Morocco. Its privatization in 1997 revealed all the troubles the company was suffering from: a cumbersome hierarchy, lack of clarity and an obsolete corporate structure. This prevented the company from adapting to its newly privatized role as old ways of working, established whilst the company was owned by the state, prevented it from modernizing and becoming more competitive.
Privatization: Casablanca Stock Exchange
In 2006, the Casablanca Stock Exchange was privatized. Initially its ownership was comprised of stockbrokers, including foreign companies, having a seat on the exchange.(MABC) However it is not only foreign buyers who brought funds to the program. Moroccans who work abroad have been major participants as well. They invested steadily in all CSE offerings, accounting for an average of 20 % of sales. More importantly, they are strengthening the traditional family and emotional ties that bind them to Morocco with economic ties based on modern financial instruments – privatization stocks and bonds. (Kauffmann,p.40) These privatization bonds were created in 1998, and had a maturity of three years and guaranteed bondholders preferential participation in future privatization transactions. The bond proved extremely popular, raising nearly $1 billion in revenue and was converted into shares at the earliest possible opportunity in the context of the 1999 refinery privatization. The government issued a second round of bonds in 2000. (Kaufmann,p.42)
Privatization has been essential to the continuous CSE growth. The review of case studies show that privatization process has helped to develop capital markets in the MEDA region, either by “launching” them or by diversifying their activities and products through initial public offerings (IPOs) aimed at encouraging savings and increasing the investment awareness of both individuals and companies. (Kauffmann,p.40) According to the evaluation of the impact of privatization carried out by the Moroccan Cour des Comptes (Court of Accounts), since the inception of privatization in 1993, the stock market capitalization has multiplied by 48, growing from DH 5 billion to DH 240 billion in September 2005. (Kauffmann,p.42) In addition the capitalization of privatized corporations in September 2005 represented 53 % of the whole capitalization of the Stock Market. Since the beginning of the process in 1990, the number of privatization through public flotation has amounted to 97 out of a total of 911 transactions. (Kauffmann,p.41) One can see Morocco’s position as a country privatizing through flotation in the MEDA region:
One can observe a strong correlation between the improvement of the stock exchange indicators and the path of privatization. The response of the public was particularly dynamic: the stock exchange experienced between 10,000 to 20,000 subscribers for the first operations, then 50,000 subscribers for the BMCE, the SNI and the SAMIR. The culmination was achieved with the 130,000 subscribers of Maroc Telecom.
Privatization: Economic Aftermath
The relatively new approach to private ownership brought about a series of significant reforms in how companies positioned themselves economically. Eleven years after the first privatization operation in 1993, 67 firms from the 114 entities registered on the initial list were transferred, generating takings of about $ 6.3 billion. (Serhane) The privatization process demonstrated several advantages and positive effects on companies undergoing that process. The strategic investors allowed the privatized firms to benefit from their international influence and access to foreign financial markets, as well as better their know-hows as well as their productivity by focusing on restructuring while removing themselves from the competitive world they used to be in as an independent company. Not only did privatization present micro economic reforms, but also demonstrated strong macroeconomic changes.
Foreign direct investment is one of the major achievements of the privatization process. Since its earliest stages in 1993, FDI has bumped Morocco from 3rd place to 1st place among Arab countries with respect to FDI, and to 3rd place among African countries after South Africa and Nigeria. . In Morocco privatization helped to liberalize and reinforce key sectors exposed to the process. It achieved the biggest, out of the MENA region countries, privatization related investment growth. Its privatization program allowed to stimulate FDI flows and become the biggest FDI recipient in the MENA region.(arabia) It is clear that privatization has made Morocco of particular interest to foreign investors as FDI amounted to DH 70 billion up until end of 2007. The following table reflects the distribution of foreign direct investment based on nationality:
One can observe 60.9 % of Moroccan FDI originated from France. Such a big percentage in mostly due to the acquisition of Maroc Telecom Vivendi Universal, and the “Regie des Tabacs” by Altadis. Spain comes in second with 13.5 % with its contribution to the Meditelecom acquisition through its major telephone operator Telefonica. One can also observe an interesting sectoral distribution as investments in telecommunications and industry represented the vast majority of FDI since 1993. Investments in telecommunications alone accounted for 55 % of all Moroccan FDI, and investments in industry represented 75 % of FDI from 1999 to 2003. As part of overall help to promote development of MENA private sector the World Bank supported the process of telecom privatization. Most investments were located in the telecommunication sector, the privatization of which seems to be one of the most successful in the region and is considered to pave for general regional privatization of the telecom sector.(arabia)
Other sectors like the financial sector, the services sector, and the energy sector have experienced notable expansions and subsidies(really?).
The second major impact on a macroeconomic level is the stimulation and contribution to the expansion of the Moroccan financial market. Since the first privatization through financial market in 1989, stock capitalization increased by a factor of 117.3, from DH 5 billion to DH 586.3 billion in end of 2007. (BILAN) The capitalization of the privatized corporations, at the end of December 2003, represented 26 % of the whole capitalization of the stock market and 6.6 % of the takings of privatization were realized by transfer operations in the stock market. (Serhane) Today privatized companies represent close to half of the companies on the CSE, considering a significant portion of capital earned from privatization is a result of IPO transactions. These transactions have increased money liquidity, thus creating a more attractive market for investors, and encouraging the development of financial structures such as investment banks, hedge funds, mutual funds, etc. In addition, the CSE has experienced a significant rise in participation from the Moroccan population. For the first operations, 10,000 to 20,000 subscribers became shareholders, followed by 50,000 shareholders of BMCE Bank, and finally 130,000 shareholders registered for Maroc Telecom.
Most definitely, privatization has brought significant growth in certain key sectors, as it reinforced sectors such as telecoms, industry(steel, cement), finance (banks, insurances), energy, and services especially in the tourism sector. While these complex transactions are carried in such a way to guarantee a smooth transition for the company, some small industrial firms, which often have severe financial difficulties, need a presale restructuring to give them a fighting chance for success after privatization. Officials boast that no company had yet been closed because of privatization.(MABC) Privatization through financial markets is also a strategic approach to provide flexibility and security in a company’s ownership and investments as the market will always provide investors.
Morocco initiated a privatization program in 1989 which constituted of a list of 114 companies to be privatized. Like any privatization program in any other economy, the initial incentive is to alleviate the economic and financial burden of the government and to encourage a real competitive market through privately owned companies. As we have seen, out of the 114 companies to be privatized 73 have already been privatized and together generated a revenue of .... The privatization process in Morocco has allowed for several key reforms of the Moroccan economy. Firstly, it has allowed the integration of international companies and expertise into several sectors of the Moroccan economy. Secondly, it expanded the labor force by generating new employment as a result of these acquisitions, and gave employees incentives like convertible bonds and other forms of ownership. This led to a growth of individual ownership, one that served to increase purchasing power and overall financial situation of the Moroccan middle class. In addition, it has been observed that the rise in subscriptions to the Casablanca Stock Exchange have been a real indicator of increase of ownership, as opposed to speculative reasons.
Finally, considering Morocco’s plan on open market and opening borders in 2012, this privatization program and its great success puts the country in a better position to face international competition. This program has proved its potential worldwide as one can obverse the sizeable FDI and particular interest from the World Bank. Such interest is a key indicator of strong economic growth and even greater privatization operations in the future.
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