Privatization Process

1.1 Selection of State Owned Enterprises (SOEs) to Privatise

The first step in the privatisation process is the preparation of the Divestiture Sequence plan. The Divestiture Sequence Plan is prepared in accordance with Section 8 (2) (e) of the Act. It is approved by the Cabinet upon the recommendation of the Agency. The first Divestiture Sequence Plan comprised 144 parastatal companies. The list is regularly revised by identifying additional companies by ZPA and Government Ministries. The factors considered in sequencing divestiture are the SOEs' size in respect of sales volume and number of employees (small, medium or large), their type of business (trading, agricultural, manufacturing, mining, etc), whether wholly - or partially owned (i.e presence of minority shareholders), the perceived ease or difficulty of divestiture (presence of or lack of complicating factors), anticipated mode of privatisation. The Divestiture Sequence is flexible to allow SOEs to be moved from one Tranche to another. The Agency recommends the SOEs for commencement of the divestiture.

1.2 Selection of Mode of Privatisation

The selection of the mode of privatisation is in pursuance of Section 8 (2)(f) of the Act which provides that the Agency shall recommend to the Cabinet the most appropriate method of sale of each State owned enterprise to be privatised. The modes of privatisation that can be used is in accordance with Section 22 of the Act. The modes of privatisation specified in the Act are public offering of shares, private sales of shares through negotiated or competitive bids, offer of additional shares to dilute the State's shareholding, sale of selected assets, reorganisation or breakup of the SOE, management or employees of the SOEs offering to buy out the Government's interest, lease and management contracts, and any other method ZPA might consider appropriate.

Once the Secretariat of ZPA has selected the various SOEs for divestiture and defined the mode of privatisation, these recommendations are made to Members of the Agency and finally to the Cabinet.

1.3 Gazette Notice and Invitation to Participate

After approval of SOEs to be divested is received from Cabinet, the names of SOEs are published in the Government Gazette pursuant to Section 38 (1) (a) of the Act. The Gazette notice, in addition, pursuant to Section 30 of the Act, requests any party with an interest (minority shareholding, pre-emptive right, creditor right, or any other legal right) in a SOE to register their claim with ZPA. These claims are taken into account in the sale process.

1.4 Prequalification

Pursuant to Section 8 (2) (h) of the Act, potential investors are required to submit an application to ZPA to prequalify as bidders for each SOE they might wish to consider acquiring. They are provided a statement of the prequalification procedures and criteria, an application and questionnaire appropriate to their legal status (corporation, partnership or individual), a summary company profile on the SOEs in which they have expressed interest and a confidentiality agreement.

The intent of the application/questionnaire is to make an assessment of the investor's financial resources, management resources, and industrial and business experience, in order to eliminate obviously inappropriate contenders and to make the process reasonably manageable from an administrative perspective. Also requested is information regarding the proposed investor and any relevant information, such as names, addresses, ownership, curriculum vitae of top executives, etc. However, ZPA undertakes prequalification of potential investors only for selected SOEs. In most cases, the above details are required at the time of submitting the tender and instead of prequalification, a bid bond fee is charged so that only serious investors make submissions. The fee is refundable to unsuccessful bidder but considered part of the purchase consideration for successful bidders.

The potential investor is also required to execute a confidentially agreement, which is intended to preserve the secrecy of information released to the proposed investor, or that he might acquire from ZPA or the relevant SOE during his due diligence investigations.

1.5 Tender Package

Information on the SOEs is compiled and provided to prequalified potential investors in a "tender package". The package for each SOE consists of a set of tender instructions, a Confidential Information Memorandum (CIM) and appendices, which are sold for a fee.

1.6 Tender Instructions

The tender instructions describes the CIM and appendices, explains the procedures and schedule for the submission and opening of bids, explains how bids are to be evaluated and summarises the contents of sale agreements. In addition, guidelines are supplied on conducting due diligence investigations, including visits to the sites of the SOEs. Site visits are allowed only if arrangements are made with ZPA. The instructions states that "ZPA is not bound to accept the highest priced bid and may reject any or all bids."

According to Section 29 and 31 of the Privatisation Act, which is communicated to all bidders in the tender instructions, deferred payment terms are only permitted for Zambian individual citizens and management/employee buyout teams.

1.7 Confidential Information Memorandum

The CIM, which could also be called an offering memorandum or prospectus, is prepared by ZPA to provide potential investors with information about the SOE which they could use to undertake their due diligence investigations. The CIM provides information on the SOE's Background, Legal Status and Ownership; Nature of Business; Markets and Market Shares;Main Services and Suppliers; Foreign Exchange;Organisation and Management;Fixed Assets; Historical Financial Summary;Budget and Future Plans.

The appendices to the CIM are Certificate of Incorporation, Memorandum and Articles of Incorporation, Biographies of Management, Employees' Conditions of Service, Schedule of Fixed Assets, Fixed Asset Valuation Reports, Financial Statements for the last three years, Budget for the current year, Financial definitions, Organisation Chart,

Privatisation Act, 1992, and Investment Act, 1993.

1.8 Receipt and Opening of Bids

Upon advertising the sale of a SOE, four to 12 weeks is allowed for the bidders to undertake their due diligence investigations and to prepare their bids. The bidders place sealed envelopes containing their bids in padlocked, metal tender boxes located at the ZPA offices.

The bids are opened publicly and the press and bidders are invited to attend. When the bid envelopes are unsealed, the names and addresses of the bidders are announced, and the documents are stamped with the date.

1.9 Valuation by Independent Valuers

Section 22 (2) of the Act states that "the agency shall ensure that each State owned enterprise is sold for its market value". To assist ZPA in determining whether prices offered meet this standard, Section 23 (1) of the Act requires that the valuation of SOEs "shall be performed by independent valuers who shall issue a certificate of valuation". Section 23 (2) provides that "the valuation of a State owned enterprise shall be done in accordance with the following: (a) the valuation shall be based on the current value of the State owned enterprise; (b) where the enterprise is not operational or assets do not form part of a core of the business, the valuation shall be based on the net value of the State owned enterprise or; (c) any other prudent and acceptable valuation method". Section 23 (3) further states that "the net asset value shall be based on the (a) valuation certificate of the market value of the real property valued by a real estate valuer; (b) valuation certificate of the depreciated replacement value of tangible assets other than a real property or; (c) a fair value of other assets and liabilities valued by a consultant". The objective is to ensure a fair and transparent process.

Where the mode of privatisation selected is in accordance to Section 22 (1) (b) of the Act, namely "private sale of shares through negotiated or competitive bids", the technique ensures that "market forces" determine the prices offered in public tenders, and that they are subsequently freely negotiated between ZPA (the seller) and the shortlisted bidder (the buyer). The Tender process results in wide variations of prices being offered depending on the different needs and perceptions of value of bidders. The valuations provides bench marks against which to compare both bid and negotiated prices.

2.0 Company Valuations

ZPA contracts independent accounting firms to provide certificates of valuation on each SOE as a whole, i.e. for its total ownership of shares. The SOEs are valued either as going concerns or as non-operating entities.

For going concerns, Section 23 (2) (a) of the Act requires that valuation should be based on "current value," which is taken to mean "present value". The going-concern concept entails that value arises from the ability to generate future earnings or cash flows rather than from the accumulation of assets in the past. To estimate the company's business enterprises' value, several approaches are considered and selected that best fit the circumstances

The principal company valuation method normally used is to calculate the net present value of projected cash flows discounted at a rate considered appropriate for the risks involved in the pertinent economic, business and technical contexts. Another way of expressing this is the payback period, which calculates the company's worth as the amount an investor would pay assuming he could get his investment back, in real terms, in a certain number of years depending on how long he is willing to put his funds at risk. There are many other methods for estimating value that might be employed.

For non-going concerns, Section 23 (2) (b) of the Act requires that the net asset value be the guideline used in assessing the divestiture sales price. This valuation method is discussed under asset valuations below.

2.1 Asset Valuation

ZPA contracts specialised firms to provide certificates of valuation on the fixed assets of each SOE. This method is used by ZPA for assets sales. It is also used for residential properties (which are negotiated separately) even when an SOE is sold on a going concern basis.

The categories of assets valued are real estate property (land & buildings), plant (machinery and equipment) and movables vehicles and furniture). In Section 23 (3) (a) the Act stipulates that real estate property is to be appraised by real estate valuers, who generally use the open market or comparison method, that is recent transactions involving properties of comparable nature, size and location.

In Section 23 (3) (b) the Act also requires that tangible assets be valued in accordance with the depreciated replacement cost method, which entails making an estimate of what it would cost to replace a comparable piece of equipment or machine at current prices and depreciating that amount for its age.

2.2 Other Methods of Valuation

In Section 23 (2) (c) the Act permits ZPA to value SOEs by "any other prudent and acceptable valuation method".

2.3 Bid Evaluation Process

2.4 Members of ZPA Decisions to Shortlist

The members of ZPA reviews the Secretariat's bid evaluation reports and approves which bidders to shortlist. Shortlisted bidders are invited to enter negotiations. The remaining bidders are either informed that their bids are unsuccessful or have been placed on a reserve list. The bidders who are placed on reserve list would be invited to negotiations only in the event that discussions with all shortlisted bidders fails.

2.5 Negotiating Teams

ZPA forms special teams to negotiate the sale of each SOE as set forth in Section 32 of the Act which provides that the Agency shall appoint an independent negotiating team for each sale. The negotiating team comprises the following:

• Negotiating Team Chairman
• Negotiating Team lawyer

The independent negotiating teams are assisted by the ZPA Secretariat. In accordance with Section 32 (2) the person appointed to the negotiating team shall have proper professional qualifications, experience and good business standing, take an oath of secrecy and discloses any personal or professional interest before accepting the appointment. The person appointed as team chairman is neither a staff or consultant of ZPA. The team lawyer is a practising lawyer normally appointed from a law firm.

2.6 Negotiation Strategies

The ZPA Secretariat prepares a paper on negotiation strategies in respect of each SOE, as well as a checklist of items relative to negotiations in general. These are circulated to each negotiating team member.

2.7 Sales Agreement

The purpose of negotiations is to arrive at a mutually acceptable and legally binding agreement between vendor (seller) and purchaser (buyer). The sales agreement documentation contains clauses setting forth the terms and conditions under which the seller agrees to sell the SOE's shares or assets and the buyer agrees to purchase them for a given amount or consideration.

The clauses generally contained in the agreements include:

• Definitions of terms
• Definition of what is being sold
• Identity of the purchaser, vendor and shareholder(s)
• Representations and warranties required of the seller
• Representations and warranties required of the buyer
• Definition of the consideration (price)
• Terms of payment of the price
• Adjustment to price as at completion date, if required
• Seller's preconditions before closing the agreement
• Arrangements during interim period until completion
• Conditions of default
• Applicable law and arbitration of disputes

2.8 Conclusion of Negotiations

Once negotiations are concluded, the sales agreement is reviewed by ZPA and submitted to the Attorney General for final review.

2.9 Signature of Agreement

Section 36 of the Act requires the Minister responsible for finance to sign the final sales agreement to transfer shares to the selected bid. Once the Attorney General reviews the sales agreement, it is sent back to ZPA for amendments, if any, and then submitted to the Minister of Finance for the signature.

At completion the Board of Directors of the SOE will meet and approve the transfer of shares, the secretary of the SOE will enter the name(s) of the purchasers in the register of members of the company, and an extraordinary general meeting of the company's members will receive the resignations of the existing directors and appoint new directors.

During the time up to and at completion of the transaction, some or all of the following may be delivered to the buyer:

• Share certificates
• Certificate of incorporation
• Memorandum and Articles of Association
• Record books of the company
• Seal of the company
• Permits and Licences
• Deeds to properties
• Schedule of fixed assets
• Fixed asset valuation reports
• Financial statements
• Annual reports
• Organisation Charts
• Employee's condition of service
• Any other material contracts or disclosures

3.0 Gazette Notice on Privatisation

In pursuance of Section 38 (c) (d) (e) and (f), once a SOE is privatised, ZPA publishes in the Gazette, the names of bidders and bid prices, the successful bidders and reasons for selecting such bidders, the price of shares and any other special conditions of the sale of shares and any other matters deemed appropriate.