While not every state service or enterprise should be privatized, where privatization is inevitable, capital-less employees should have a fair opportunity to create an employee-owned company that allows them to broaden their ownership of capital and gain a greater voice in shaping the destiny of their workplace.

What determines the feasibility of employee succeeding at privatizing their enterprise as a viable business? The state must be willing to sell, the employees must be interested in buying, the managers must be competent, there must be a market for its products or services, the operation must be competitive, labor-management cooperation must be achievable, and financing should be available.

The success of such an undertaking rests on overcoming a multitude of challenges. International donor and lending institutions, national governments, regional credit institutions, regional technical assistance organizations, labor organizations and employees themselves, all can make a difference.

When the Privatization Agency Won't Consider an Employee Bid
Strange as it may seem, not all agencies charged with privatization are truly committed to selling state enterprises. In some cases, privatization agents, or the transnational actors who hold leverage over them, may simply see employee ownership as inconsistent with the development of a working market economy. Some agencies view their task as simply transferring assets out of the state's hands, without any concern for how those assets will be used. Some unrealistically expect buyers to transform the enterprise into an entity that contributes to the economic well-being of their community. They may ignore the economic, social and political costs of throwing the fate of thousands of employees into the hands of a profit-seeking investor. Where the decision makers are trying to do the right thing, two possible strategies are education and helping to remove external pressures on their actions. Political pressure and education are needed to heighten awareness of the full process and impact of privatizing an enterprise. Well-targeted study tours to visit successful employee-owned companies, both abroad and in their own country, can help to dispel unwarranted prejudices.

Privatization agency decision makers can oppose employee ownership because they are using their position for personal gain. This requires a different approach. The options are to (1) remove them, (2) force them to act appropriately, or (3) collaborate with them.

A free press can expose, an independent judicial system can prosecute and democratically elected officials can fire corrupt bureaucrats. But entrenched bureaucrats can be hard to remove. The next option is create rules which put constraints on their ability to misbehave. Forcing transparency and lengthening the time frame of the privatization bidding process can allow proponents of an employee bid to get organized rather than accepting a fait accompli. Organized labor can form coalitions that prepare to deal with privatization opportunities before specific situations emerge. A final possibility is to identify ways in which employee ownership can be in the self-interest of a corrupt but entrenched bureaucrat.

Building Employee Interest
Many workers are resistant to the idea of seeing their company move from state ownership to employee ownership. They fear loss of state protection and do not value private ownership. Tools and resources must be available to make a successful outcome realistic.

Workers who are comfortable with a socialist way of thinking may be persuaded to accept employee ownership by appealing to feelings that the means of production should be controlled by the community, not distant investors. And they may sense that outside buyers may plan to strip a community economic asset, while employee ownership anchors a national industrial jewel locally.

Organized labor may object to privatization when it weakens protection or worker rights. Requiring ownership successors to honor past promises of job security and benefits can help. Identifying models of how labor unions can play an important role is important too. Labor leaders need to broaden their understanding of possible outcomes beyond the simple status quo or sale to an outsider. Building a contingency plan around an employee bid can help prevent a worse outcome if the fight to stop the privatization fails.

Proponents of employee ownership in privatization need to listen to workers express their fears early on before pushing the privatization process forward and then include strategies for dealing with them in the plan. Educating employees about where employee ownership has worked in privatization can go a long way. Awareness of assistance and structures available to help them succeed will reduce some concerns.

Technical assistance programs should organize employees as proactive agents in the buyout process and funding must be available for prefeasibility studies which explore legitimate concerns and explain how their private employee-owned firm will succeed.

A gradual transition from reliance on the state's deep pockets can be achieved with a fund that guarantees a secure level of income in case of first- year layoffs, and state procurement contracts can guarantee a minimal level of production. A national credit agency targeted to enterprises which were previously on the state budget can also be established. Employees must sense that the government is sincerely willing to see that they have long-term income security.

Developing Competent Management
One rationale for privatization is the conviction that the state does not manage as well as private owners. Privatization is intended to create up-close owners (as Jeff Gates calls them) who, if not managers themselves, can keep an eye on their managers. State and publicly held companies (i.e., traded on the stock market) often share the same problem - the owners are too far removed from the business. If not held accountable, some managers will get away with wasteful practices for personal gain.

Incompetent management can be replaced. While existing managers should not be dismissed without review, permanence in their positions should not be taken as a priori either. In addition to the standard set of management skills (sales, finance, operations), values consistent with the ownership culture of an employee-owned company should be identified and used to screen candidates. Trustworthiness is essential. Attracting good managers to employee-owned companies requires a financially rewarding opportunity. Managers should have a stake in adding value to the shares of all the shareholders. Stock-based incentives are superior to high salaries which drain much needed working capital and do not hold top management accountable.
Replacing leadership may be unrealistic in transition economies with very limited pools of ready-made managers. One way to address this is to create a matrix of all relevant skill sets which can not only be used to assist in the selection process, but also as a diagnostic tool to assess management developmental needs. Training resources can be systematically focused on each skill set. New company leaders will benefit from the assistance of short term experienced managers. The privatization agency could establish a management intervention team which supports several companies at a time, or it could subcontract this task out to a network of employee ownership and turnaround managers. The cost for this could be rolled into the overall long-term acquisition financing.

The role of the board of directors is an important check on management. Employee owners are not normally equipped with the skills needed to review management's operation of their company. Over time, this can change with the proper training. A transition board can serve as a guardian of the employee owners' interests until they are ready to play a more active role responsibly. Outside board members who have managed in the commercial environment can help a newly privatized employee-owned company get off to a good start by initially assessing and monitoring performance of senior managers. The natural divisions of opinion between management and labor can be more successfully resolved with the assistance of a mutually selected outside board member with the power to intervene.

A lower cost alternative would be to bring networks of newly privatized enterprises together on a regular basis for in-depth roundtable discussions. The group could share experiences and concerns with each other and also benefit from the input of a few experienced managers. The Internet can also serve as a networking tool; for example, a closed listserv that allows a select group of managers to query each other about periodic challenges.

Creating A Viable Market
Enterprises facing privatization sometimes find themselves without sufficient demand to support their operations at full capacity. Prior to moving forward with the privatization process, a prefeasibility study should be conducted which includes a realistic forecast to measure the problem's size, exploring alternative services and markets which can fill the gap.

Where a reduction in demand is due to the inability of former consumers to continue their consumption at the market price, demand can be shored up through the distribution of vouchers to the consumers or subsidies to the enterprise. Vouchers allow the enterprise to charge market prices and a subsidy allows the enterprise to lower its price to attract more consumption. A third way to maintain the market is for the government to guarantee a minimum level of procurement for a transitional period.
If the enterprise is expected to lose customers to new competition, one possible method of building customer loyalty is to provide consumers with equity in the new enterprise through a Consumer Stock Ownership Plan (CSOP). At a minimum, local retailers should be required to make local production available to consumers.

For the long term, the company's products or services are going to have to compete in the market. This will require that they be made attractive to the consumer. Where management has not had to make products marketable before, some investment in quality control, process development and marketing training is warranted.

Building A Competitive Operation And Ensuring Labor-Management Cooperation
No business can be a source of wealth creation for its employee owners if revenues do not exceed costs. The new company may not be able to enter the international market immediately. It also may have a difficult time competing against imports if no government protections are in place.

The privatization agency should only accept bidders with business plans that include a realistic three- to five-year plan of operational improvements and capital expenditures which will allow the enterprise to become competitive. During the transition period, government subsidies or protective tariffs are key.

Research shows employee ownership combined with employee involvement improves productivity, profitability, and turnover rates. Building labor-management cooperation helps make a newly privatized enterprise competitive by improving quality and reducing costs. Training centers for teaching the basics of employee involvement can help employee-owned enterprises climb the learning curve much faster. Networks of enterprises that have been successful with employee involvement can be very powerful. Managers can witness first hand the impact of such programs and discuss their concerns with their peers.

Financing Successful Employee-Owned Companies
Financing for acquisition, working capital and modernization can come from the seller (the government); traditional private lenders; regional, national and international development banks; equity partners and the employees themselves.

If an enterprise was a drain on the state budget, seller financing does not worsen the state's position. If the enterprise was a revenue-generating state enterprise, the combination of debt service and income taxes paid can offset the state's loss from privatization. If a private buyer intends to strip the assets, the state could find itself holding a note with nothing to back it. Where the workers control the enterprise, operations and effective oversight of management is in place, and asset stripping is less likely to occur.

Sharing control with an outside investor may be preferable to taking on personal liability and could bring needed expertise. At the same time, the pure interests of the workers will be subject to compromise. Side agreements to define the future disposition of the outsider's shares can enhance the workers' control over long-term ownership.

Cash raised from selling a portion of the ownership to an outside investor can be lent back to the employee-owned enterprise for working capital or capital investments. Alternatively, the state could accept a note from the employees for the acquisition, and the outside investor could provide the funds for working capital and capital investments in exchange for new shares. Where there are no reasonable methods for financing worker acquisition of a controlling ownership share, non-monetary shares with defined voting rights may also give the workers a level of protection where an outside investor acquires the controlling interest. At a minimum, the workers should have the right to veto negative practices such as asset stripping.

Workers should be required to contribute something to the financing of their company. Such a contribution can establish a sense of commitment to the endeavor and be a major step in the transition to a culture of ownership. While the ability to contribute is an asset, the lack of such ability should not be used as a barrier. Just as 30-year mortgages have made home ownership a reality for millions in the United States, extended loan terms could help privatizing employees as well. Where state assistance is provided, the state could be given stock options at a reasonable future target price.

In some countries, workers have accumulated retirement assets which can be used. Risking diversified retirement assets to purchase shares in a newly privatized company is a serious matter and is justifiably seen as a means of last resort; however, dedicating 20% is not unreasonable. Where wages and benefits are sufficient to support a reasonable standard of living, a wage reduction offset by additional equity for employees could service additional debt. Workers may take on personal liability to borrow a portion of the necessary funds, and apply future profits to debt repayment. This personal liability should only cover funding which cannot be collateralized with the enterprise's own assets.

An enterprise can be operated more efficiently by people who clearly understand that their own personal well being depends on efficiency. Where the bureaucratic structures of the state have proven ineffective in operating a state-owned enterprise, creating up-close employee owners can be the best solution. It is also an effective tool for strengthening broad-based democracy through the broadening of capital ownership.