Privatization: Administrative Process

Privatization, to be successful and sustained, needs to be recognized as a legitimate action that will bring wide-spread benefits.  There are many examples of privatizations that have been delayed for years, or simply abandoned, because they lacked political support or were considered to be proceeding in an unfair manner.  In addition, around the world there are many examples of firms that have been privatized and then subsequently re-nationalized.  Particularly in a regulated industry, such as infrastructure industries, there are also many ways, short of complete re-nationalization, to re-appropriate some of the value of a privatized company.  The security of property rights and the credibility of regulatory contracts depends significantly on public notions of justice and fairness.  Privatizations that involve selling assets at unreasonably low prices, to favored investors, for secret forms of side payments, undermine the legitimacy of the property rights that privatization attempts to create.  Moreover, privatization often can play a key role in building private capital markets, which depend crucially on formal and informal rules, promises, trust, and investor confidence in shared understandings.  Corrupt privatizations raise the cost of capital and hinder the development of capital markets.

Privatization is most likely to be successful with active political leadership and initiative.  These factors are apparent in the privatization of Kenya Airways.  The Kenyan government issued a policy statement that outlined the importance attached to privatization.  Philip Ndegwa, the newly appointed Chairman of Kenya Airways, clearly and publicly stated his support for privatization of Kenya Airways.  A special committee, made up of key government and airline officials, was dedicated solely to the task of ensuring that the privatization was carried out effectively and in the best interests of the Kenyan public.  Relevant facts and objective, independent analyses of the policy issues relating to the privatization were presented to the highest levels of authority.  These actions made clear the government's commitment to privatizing Kenya Airways and to carrying out the privatization in a way consistent with the general public interest.

Providing accurate and detailed information about the enterprise and the privatization process lessens opportunities for corruption, builds investor confidence, and helps to build clear, shared understandings about the nature of the transaction.  As part of the effort to attract a strategic investor, the IFC prepared, on behalf of Kenya Airways, a detailed Information Memorandum.  A strategic industry investor is, by definition, an investor expected to play an active role in providing operating expertise and technology to its partner.  Providing detailed information about the enterprise's operation provides a clear signal that the enterprise is prepared to work closely with a strategic investor.  Bids from potential strategic investors were scored according to an explicitly stated, quantitative method.  This method helped to focus policy makers attention on the characteristics sought in a strategic investor and provided a disciplined way to evaluate bids.  When shares were offered to the general public, a detailed Prospectus, readable and understandable to the average citizen, was made widely and publicly available.  The Prospectus included detailed balance sheet and income statements, as well as an independent accountant's report.  Providing such information emphasizes the importance attached to potential shareholders making an informed investment choice and subsequently bearing the risks and potential rewards of that choice.

Questions for Discussion
  1. Did investors have sufficient information to make an information choice about whether to buy shares in Kenya Airways?  What kinds of information are most important to investors?

  3. Did publicly releasing information hurt Kenya Airways' competitive business position?  What are the costs and the benefits of keeping different kinds of business information secret?

  5. What factors contribute to public recognition of the privatization of Kenya Airways as being fair and legitimate?

Go to Kenya Airways: Case Study in Privatization

Go to Topics in Economic Policy