Employee buy‐outs and privatization: Issues and implications for LDCs and post‐communist countries of UK experience
| Published date | 01 August 1992 |
| Date | 01 August 1992 |
| DOI | http://doi.org/10.1002/pad.4230120306 |
PUBLIC ADMINISTRATION AND DEVELOPMENT, VOL. 12,279-296 (1992)
Employee buy-outs and privatization: issues and implications
for
LDCs
and post-communist countries
of
UK
experience
MIKE
WRIGHT
and TREVOR BUCK
University
of
Nottingham,
UK
SUMMARY
Privatization has become an international phenomenon. Most attention has been devoted
to privatization by stock market flotation
or
by sales to third parties. Management and
employee buy-outs present a third main possibility for transferring assets from the public
to the private sector. This paper discusses the scope for privatization buy-outs in
LDCs
and
‘post-communist’ economies in the light
of
conceptual issues and
UK
experience. The positive
aspects
of
privatization by management and employee buy-outs concern: ownership incentives;
the introduction of control mechanisms by institutional investors and various types of financing
instruments; indigenous ownership, decentralized privatization; greater incentives in firms
where specific skills are involved; the ability to improve trading relationships between a priva-
tized supplier (the buy-out) and its former parent, which remains in the public sector where
the supplier is heavily dependent on its former parent; and the general contribution of buy-outs
to a redrawing of a state firm’s spread of activities to create a more viable entity. The potential
problems with buy-outs concern such issues as: absence of entrepreneurial skills; the scope
of their applicability; the potentially restrictive effects of debt and debt-like finance; the need
to deal with investment requirements of firms; the lack of personal wealth; the use of inside
information by managers to purchase a firm at a price which is to the detriment of the public
interest; and the possibility
of
social and political problems if individuals are perceived to
enhance their personal wealth significantly as an accident
of
where they work. There are
means by which many of these potential problems can be dealt with and the paper addresses
these.
INTRODUCTION
Although the UK has experienced privatization for over a decade, the wave of similar
activity sweeping the world is generally a more recent phenomenon (Veljanovski,
1989). The extension of privatization to the post-Communist countries of Europe
and to LDCs emphasizes the importance of this aspect of industrial policy and the
need to analyse objectively the economic issues involved, rather than merely accepting
the slogan that private ownership
of
assets is
per
se
better than ownership by the
state. Although there are major differences between countries within these two cate-
gories, the main issues to be dealt with generally concern: the need to increase
efficiency and competitiveness; the need for new investment; the need to remove
loss-making state
firms;
high debt levels; an absence of managerial and entrepreneurial
skills; weak capital markets; and a concentration
of
wealth.
~~
The authors are members
of
the Centre
for
Management Buy-out Research (CMBOR) in the Institute
of
Financial Studies at the University
of
Nottingham, University Park, Nottingham NG7 2RD.
027
1-2075/92/030279-18$09.00
0
1992 by John Wiley
&
Sons, Ltd.
280
M.
Wright
and
T.
Buck
Most attention has focused on privatization through stock market flotation of
natural monopolies, since it is this form of ownership transfer which has tended
to involve the largest enterprises. However, flotation is not the only means of transfer-
ring publicly owned assets to the private sector, neither are natural monopolies
the only type of publicly owned
firms.
As Heald
(1990)
has observed in respect
of LDCs:
‘The relevance of privatization lies in the promotion of competition and
divestiture of enterprises in industrial sectors which can be made competi-
tive, not in the invitation of large scale privatization which raise complex
monopoly and regulatory problems’.
Sale to management or other groups of whole or parts of publicly owned firms
are possible options to flotation and may be more appropriate in certain circum-
stances-specially where stock markets are weak and major state
firms
require res-
tructuring before privatization is possible. This paper aims to contribute to the debate
concerning the restructuring
of
LDCs and post-communist economies through an
examination
of
the role of management and employee buy-outs in the privatization
process. Whilst focusing primarily on buy-outs it is important to be clear at the
outset that we are NOT arguing that buy-outs should be
the
form of privatization.
Rather, the analysis addresses buy-outs within a framework of the forms of organiza-
tion that privatization might take and the methods for effecting them. The conduct
and effects of the UK privatization policy may also have lessons and implications
for more recent programmes elsewhere, but there may also be a need to use alternative
approaches.
The next section briefly reviews the international trends in privatization buy-outs.
This is followed by an analysis of the role of buy-outs in privatization and draws
on UK experience. The paper then considers the application of buy-outs to the
privatization of activities in LDCs and post-communist countries, respectively.
PRIVATIZATION BUY-OUTS INTERNATIONALLY
Whilst privatization by flotation is well documented, the extent of sales to third
parties and management buy-outs has been considerably understated, both in the
UK (Wright and Thompson,
1991)
and elsewhere (Vuylsteke,
1988).
Unlike flotations,
less publicity tends to surround these other forms of privatization and what follows
represents an attempt at best estimates rather than
a
comprehensive survey.
For Western Europe, the UK has experienced the greatest number of buy-outs.
Indeed buy-outs have been considerably more common than stock market flotation.
Counting each individual flotation separately, there had been
45
privatizations by
this method in the UK up to the end of
1991.
By
contrast, there had been
156
management and employee buy-outs from the UK public sector (Table
1).
Privatiza-
tion buy-outs have been used to transfer assets from the public sector in the cases
of whole enterprises (National Freight), horizontal separation and break-up (Natio-
nal
Bus),
vertical separation (RFS Industries from British Rail, Llanelli Radiators
from Austin Rover, etc.), the sale of unrelated activities, the sale of local government
services (e.g. City of Westminster leisure centres and refuse collection), the sale of
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