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PRIVATIZATION 79: Own your own bank Privatization stocks for poorer people The problem: who has enough money? You want to privatize a state industry, but how can you attract private investors in a privatization offer when most people in your country have very low incomes? The idea: encourage small shareholders Many countries now shape privatizaton offers to makes it particularly easy for small shareholders to get involved. Results: a tale of two countries Jamaica began to privatize its economy in 1983. Since then a wide range of enterprises have been transferred to the private sector using a variety of techniques. A good example of how to get small investors involved in privatization is the sale of the country's largest clearing bank - a sale structured with the clear goal of attracting small investors and all employees. The National Commercial Bank of Jamaica was privatized in a public share offering. Great pains were taken to offer shares to a wide spectrum of investors. Those in charge of the sale were surprised by the amount of money that 'came out of the mattresses' of even the lowest-income families: they perceived the Bank as a good investment and were prepared to commit to it. When applications came in, the allocation procedure once again favoured small investors and all employees rather than the large institutions, so that smaller investors could be certain of getting the number of shares they applied for, while larger investors might receive only a proportion of what they wanted. A rigorous system of auditing was established to ensure that multiple applications were detected and aggregated for the allocation exercise: so large investors could not disguise their applications as coming from a large number of the small, more favoured, investors. A complex scheme of incentives and protections was devised, by which thirteen per cent of the shares offered were reserved for employees. Nearly all of employees participated in the offer. A nominal amount of shares, equivalent to $40 per employee, was made available at no cost to the employees of the bank: further shares were available at a discount. The maximum total of shares offered under this scheme was equivalent in value to about one month's average salary per employee. Shares not taken up out of those available were offered again in a second round of applications. Under the same scheme, investors were allowed to trade their shares on an internal market for two years. The technique of structuring privatization issues to attract small shareholders has been applied in developed countries too. Pioneered in the United Kingdom in the 1980s as part of the privatization programme of Margaret Thatcher, many different strategies have been employed. The UK government believed it was essential to spread share ownership as widely as possible, not only because this gave everyone a stake in the progress of the economy, but because it created a constituency of potentially millions of small shareholders who would be keen to see privatized companies flourish, and would not vote for them to be returned to state control by a subsequent government. One route is to reserve a portion of the shares for the workers in the enterprise themselves. Typically, the UK allocated shares free to workers, and allowed them to buy more at a significant discount (see the chapter Every Worker an Owner). Since most workers in state enterprises are on average or below-average earnings, this is a good way to spread economic power to the less wealthy. Another strategy was to allow investors to pay in stages, so that they did not have to find up-front the whole amount needed to buy shares. Thus people could buy £500 worth of shares by paying just £100 or so at the time of application, for example, with the remaining money being due at intervals over the following year. Alongside the normal share market, there would arise a parallel market in part-paid shares, so people could still see what their £100 investment was worth, and could sell on their part-paid shares if they so chose. Another method was to offer public-service users some discount on their bills if they bought the privatization stock. Thus users of water or electricity could look forward to lower bills if they applied for shares. Another way of involving small investors was to skew the marketing effort specifically towards unsophisticated potential investors. Television and other mass-media advertisements would explain in very basic detail what the company was about, and how to buy and sell shares. Prior to the privatization of British Telecom, the telephone utility, the government arranged for a brochure, explaining what shares were and how to buy them, to be printed and delivered to every household in the land. If the privatization offer is oversubscribed, there is another opportunity to make sure that smaller investors are catered for. The typical allocation system in the UK saw the applications of the smallest investors and employees being served first, then the larger private investors, and only then the financial institutions. Under a 'clawback' mechanism, shares that had originally been reserved for the institutions could be allocated instead to the smaller individual investors if the offer were oversubscribed. If the institutions then wanted the shares, they had to buy them in the market, so small investors enjoyed a pleasant premium on what they had bought. As in Jamaica, experts in London doubted that there was enough money around for a successful floatation of Britain's first big privatization issue, British Telecom. In the event, the government's bravery proved justified: the issue was oversubscribed more than four times. Assessment: yes, it can be done Many experts will say that state enterprises in poorer countries cannot be privatized because nobody has enough money to invest in them; and that if left to the market, the enterprises would be bought up by a few rich investors (probably on the back of corrupt earnings) or sold overseas. Sometimes this is indeed what happens, but it need not happen. Privatization succeeds only if a large measure of public acceptance is created by the sale process itself, and that means involving as many people as possible, even those whom one would not normally expect to have any spare cash to invest. If the sale is well structured, the experts are often proved wrong, and a surprising amount of money comes out of the mattresses for investment in the future economy. There are many techniques that have already been tried and tested. These include directing the marketing effort directly to lower-income groups, giving free shares to the workers, giving discounts to service users, allowing people to pay for their investments by instalments, and giving the smallest applications priority when the shares in an oversubscribed offer are allocated. For further information:
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