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make the transition
Making the Transition to an Area- or Route-Contract System /
Privatization Arrangements
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Changes in industry structure
Forming operators’ associations
Privatization arrangements
Creating a level playing  field
Negotiating a purchase price
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Privatization Arrangements
There are a number of ways that publicly owned systems may be privatized, including:

  • Management or employee buy-outs
  • Sale of shares
  • Joint ventures between government and the private sector
  • Privatization of an industry by attrition (for example where competition from informal operators results in the eventual demise of the public sector operator)

Management or employee buy-outs
The sale of a transport company to its management, and sometimes also to its employees, through a management buy-out is often the most appropriate option. It conserves the local knowledge and expertise essential to the business, while the inclusion of the employees in its ownership helps to overcome some of the problems of control.

An alternative to a management/employee buy-out, which may be appropriate in a situation where services are operated on an informal basis, is to sell the vehicles to their drivers. This is usually done under some form of hire purchase arrangement. Other assets, such as properties, are sold on the open market.

Sale of shares
Gradual sale of shares to management and employees through deductions from salary over a period of time is often a practical means of implementing this option. It also overcomes the problem of limited financial resources on the part of the purchasers.

Sale of shares in a transport company to outside investors depends on the availability of funds at the disposal of individual investors or venture capital institutions. In many developing countries availability of funds for such investment is low. The absence of a stock exchange may also preclude this as an option.

Joint ventures between government and the private sector
Some governments prefer to retain partial ownership, through the establishment of joint ventures between government and private sector. The government usually wants to hold a majority share. However, this is not always a practical option, since private sector investors will require a degree of control.

Where the government retains only a minority interest this will not be a problem. But the government will then have little control of the organization. Nevertheless, there may still be advantages, since the government may be represented on the board of the undertaking, providing a useful means of communication.

When nationalized undertakings are privatized, the sale proceeds are often very low. In some cases they are less than total asset value, because poor performance under state ownership makes them unattractive to potential investors.

Often the share value of a privatized company has increased in value many times over within a relatively short period following its sale, when the new owners are able to demonstrate the potential of the business. There have been cases of asset-stripping where the sale price has been below the asset value.

It’s desirable to provide for such contingencies, so that the government is at least able to realize the market value of the physical assets of the undertaking. The sale agreement may include the provision that excessive proceeds from property sales within a specified period after sale may be shared with the vendor on a predetermined basis.

Where a nationalized transport undertaking has degenerated irretrievably to a point where it is making substantial losses, the only realistic option may be to dispose of it for its asset value and to allow it to cease trading as a transport operator.

In some circumstances it may be appropriate for a nationalized transport company to be restructured before privatization if this will improve its viability and increase its sale value.

Other key issues to consider
Changes in industry structure
Increasing the number of operators
Consolidating small operators
Forming operators’ associations
Creating a level playing field


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