The IPO-Plus: A New Approach to Privatization

Abstract

Every approach to privatization entails tradeoffs. The chief advantage of case-by-case privatization -including sales for cash or initial public offerings (IPOs)- is efficiency. Case-by-case privatization generates revenues, gives shareholders control over managers, and provides access to capital and skills. But it is slow and does not promote widespread public participation. Voucher-based mass privatization programs, by contrast, are designed to promote equity in the distribution of wealth, through widespread participation. But they do not ensure efficiency because they may not generate revenues, bring in new capital or skills, or give shareholders control over managers. To promote equity and efficiency, the authors propose a new form of privatization -IPO-Plus- that incorporates key features of both case-by-case privatization and mass privatization. IPO-Plus promotes equity through widespread (but not mass) participation in privatization. It promotes efficiency by making privatization transparent, by fostering capital market development, and by creating independent financial institutions that would press companies to improve their financial performance. It relies not on vouchers but on the sale of low-priced public shares. It allows deferred payment for company shares as an incentive to purchase them as well as downwardly flexible share prices. Because the quality of the enterprises chosen for privatization is essential to the success of the IPO-Plus program, it is important that few enterprises targeted for IPO-Plus be published before the program is launched. This will motivate potential investors to join the program by setting up management companies, establishing public investment funds, and buying shares in them. IPO-Plus is more likely than mass privatization to create real owners. Investors in IPO-Plus are given a subsidy, but only in proportion to what they themselves choose to pay. The individual determines (up to a ceiling) how much to invest in the program. IPO-Plus is particularly appropriate where the objective is to encourage outside ownership rather than significant employee ownership. It encourages the emergence of market intermediaries and ensures the concentration of enterprise shares in investment funds. Outside ownership and concentration of share voting rights provide the basis for enterprise restructuring and economic growth.