INTRODUCTION
It has become almost universally accepted that government is an inherently inefficient producer of wealth. The past decade has witnessed in many economies around the world a pendulum swing away from socialism toward market-oriented solutions to economic development. "Privatization" has become fashionable. However, for all its promises of greater efficiency, freedom, and prosperity, privatization as currently practiced is meeting with increasing resistance.
The principal opposition to privatization comes from public sector workers, their unions and public sector officials with a stake in the status quo. This is hardly surprising. But if a healthy and growing private sector is indeed a desirable goal, several questions confront today's political and economic leadership.
From a political standpoint, the key questions are: How can the opposition to free enterprise policies be overcome, or at least neutralized? How can economic policy-makers avoid turning their nation's farms and industries over to domestic and foreign "moneybags"?
From a practical standpoint: How can people without savings become full participants (i.e. owners as well as workers) in developing and transforming economies, without reducing their already inadequate household incomes?
Creating the Legal and Institutional Environment for Expanded Ownership Privatizations
One part of the answer lies in the Employee Stock Ownership Plan (ESOP). This proven social technology enables employees to acquire shares of their company's stock and pay for those shares with future profits of the corporation that employs them. Over 11 million workers in more than 10,000 companies in the U.S. alone are now enjoying the benefits of ownership through ESOPs.
But the ESOP is a creature of the law. Experience in developing and transforming countries has taught us that, outside of the United States and the United Kingdom, most legal systems around the world make it difficult, if not impossible, to implement a "leveraged" ESOP. In successful cases, such as with the landmark ESOP developed for the Alexandria Tire Company in Egypt, the ESOP had already won support from the country's "prime movers"-just as in the United States when Senator Russell Long decided to champion the concept.
Creating new laws and new economic policies to foster expanded ownership is thus a necessary pre-condition to installing ESOPs in developing and transforming economies, as many ESOP professionals are beginning to discover.
Moving from the "Old Economy" to the "New Economy"
Another part of the answer is that the "old economy"-outdated and ineffective-must be abandoned as quickly and humanely as possible. With this albatross removed, the nation's wasted talent, resources and underutilized technologies can then be channeled into building a dynamic new economy, one capable of competing effectively in the emerging global marketplace. Thus, the potential victims of the economic transformation process would gain new opportunities within the growing new economy.
The best way to shed an "old economy" is to challenge those with a worker-for-hire's stake in their public sector jobs with a significant-not a token-opportunity to share in future ownership and profits, if the state-owned company can be successfully reorganized as a private sector company. Those who cannot meet the challenge of working together to restructure enterprises created in the old economy, can become absorbed by the new enterprises which should emerge from the more liberating environment of an unshackled new growth economy.
A More Efficient Way to Finance Privatization
Most privatization policy-makers assume that the only way to finance divestitures is to demand immediate cash payments for state-owned enterprises and assets. This demand for immediate cash, however, can become the biggest barrier to change.
The logic of ESOP finance and the incentives of expanded ownership opportunities provide a far more cost efficient and politically attractive alternative. Under this new approach, the "approved" buyer of the company to be privatized (in this case the employees and in some cases, other citizens) would agree to a firm "sunset date" after which all future subsidies, privileges and monopolies would be terminated. The buyer would also agree to whatever restructuring of the enterprise and joint ventures are necessary to allow it to compete in the global market.
In exchange for these concessions, the government would simply "take back paper" for the enterprise or assets to be privatized. (The seller, in this case the government, would hold a promissory note for the enterprise being purchased. The seller, as the creditor, would receive payment for the restructured enterprise out of the future earnings generated by the enterprise. The government could also discount the promissory notes for cash in the world's secondary financial markets.)
In dropping its demand for immediate cash payment, the government would obviously have to seek other means for reducing or eliminating its budget deficits. On the other hand, this approach of seller-financing through an ESOP would stem the tide of rising subsidies which have been bankrupting most developing and transforming economies. It would also allow the government to offer maximum ownership incentives in exchange for cooperation from groups normally opposed to market-oriented reforms.
By assuming the role of creditor, as well as seller, of state-owned assets, the government avoids the political hazards of being forced to sell state enterprises at bargain basement prices (as is advocated by some privatization consultants) or to wealthy foreign and domestic investors. Once relieved of the burden of sustaining the albatross economy, the government can focus its main initiatives on reforming its basic laws and economic infrastructure to create a more efficient and just private sector which can generate new wealth for avoiding future budget deficits.
Two-Pronged Program of Structural Reform
The following charts illustrate a two-pronged program of structural reform. The first prong is focused on creating a new and more just free enterprise economy. It would produce a ten-point, ten-year legislative package aimed at accelerating private sector growth, expanding exports and encouraging wider share ownership, so as to create new opportunities for those displaced by privatization.
The second prong would concurrently develop an eight-point, two-year legislative package focused on shedding the old economy and ending budget deficits as quickly as possible. It is designed to stimulate large-scale divestitures of state-owned enterprises through untapped sources of flexible credit.
Preparing for ESOP Privatizations
Stage 1
Government Launches Two-Pronged Economic Reconstruction Strategy
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1- Government appoints Economic Restructuring Planning
Commission (ERPC) to:
(a) Plan, approve and implement comprehensive plan of economic reconstruction.
(b) Set "sunset dates" for terminating subsidies, monopolies, special privileges, trade protections and other support for state-owned enterprises.
(c) Mobilize widespread public support for and participation in the economic restructuring process.
2- Government renegotiates with foreign creditors based on turn-around strategy to end budget deficits and repay renegotiated debts with future profits from private sector.
3- ERPC appoints a "New Economy Task Force (NETF) to develop details of 10-point, 10-year plan of macro-economic reforms aimed at accelerating non-inflationary growth in private sector and global exports to absorb workers displaced by privatization.
4- ERPC appoints an "Economic Transition Task Force" (ETTF) to develop 8-point plan for 2-year transition to new economy, with maximum ownership incentives for affected workers. |
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Stage 2
Government Announces 10-Point Program for Building a New Economy
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I. WIDER SHARE OWNERSHIP LINKED TO PRODUCTIVITY GROWTH
To decentralize future economic power and enable all citizens to earn future profits to meet their living needs and accumulate ownership.
II. MONETARY REFORM THROUGH DEMOCRATIZATION OF CREDIT
To create a stable, asset-backed currency by shifting future bank credit and money supply from monopolistic, inflationary and non-productive uses, and toward democratizing access to ownership opportunities for workers, consumers, entrepreneurs and others without savings.
III. FISCAL CONTROL
To reform tax system to encourage accelerated rates of private sector growth and future savings, to create wider share ownership and profit sharing opportunities, to balance the budget and to avoid monetizing budget deficits if they arise.
IV. CURRENCY CONVERTIBILITY
To permit easy convertibility into hard currency by linking domestic currency to real growth in national productivity and exports, and opening the domestic economy to competitive international markets for trade, finance and technology transfer.
V. PRICE AND WAGE DEREGULATION
To link prices to costs set in open markets, and consumer incomes to productivity and profit sharing. |
VI. LEGAL REFORMS
To facilitate low-cost formation by entrepreneurs and workers of new corporations, partnerships, joint ventures, cooperatives, commercial banks, investment banks, security dealers, investment companies, trading companies, and stock and commodity exchanges, as well as new credit democratization vehicles such as ESOPs.
VII. TRADE REFORMS
To encourage foreign joint ventures and profit sharing arrangements with foreign suppliers of credit, management services, technology transfer, training, and global marketing access.
VIII. NEW SOCIAL CONTRACT FOR WORKERS
To enable workers to capitalize on low market wage rates as a comparative advantage in global trade by offering them significant opportunities to gain equity and share profits from economic growth, instead of inflationary fixed entitlement increases.
IX. LIMITED ECONOMIC POWER OF THE STATE
To create a positive environment for private sector investment and entrepreneurship, to link workers and entrepreneurs to incentives set by competitive market forces, to protect property rights, to end state monopolies, special privileges and trade barriers, to police fraud, to protect the environment, to promote broad participation in long-range planning, and to lift barriers for full economic participation and empowerment among all citizens.
X. A "SOCIAL SAFETY NET"
To protect the most helpless poor and those who may become unemployed during the privatization and economic restructuring process, derived principally from the "dividends" from growth and greater efficiencies expected from economic transformation. |
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Stage 3
Government Announces 8-Point Program for Transforming Existing Economy
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I. ESTABLISH ECONOMIC RESTRUCTURING PLANNING COMMISSION (ERPC)
To plan and coordinate strategy for economic reconstruction, for ending budget deficits and to broker (directly or by contract) the sale of state-owned enterprises.
II. RENEGOTIATE FOREIGN DEBT
To negotiate with foreign creditors on debt reduction, new credit, and repayment stretch-outs to reduce social unrest and hardships from the sudden shift from mistaken economic policies of the past, many of which were reinforced by foreign creditors and development agencies.
III. APPOINTMENT OF A "NEW ECONOMY TASK FORCE"
To develop detailed 10-year, 10-point macro-economic reforms to encourage accelerated rates of private sector growth linked to wider share ownership and profit sharing opportunities.
IV. APPOINTMENT OF "ECONOMIC TRANSITION TASK FORCE"
To develop details of, coordinate, and mobilize widespread public support for a 2-year plan to expedite the divestiture of state-owned enterprises, thus cutting future public sector waste and concentrating future resources on building a more efficient, competitive and just future private
sector economy.
V. TERMINATE ALL PROTECTIONS
To establish reasonable cut-off dates, conditions, priorities and procedures for the elimination of artificial props to the old economy, in order to challenge workers, labor unions and entrepreneurs to work together and make whatever concessions are needed to transform state-owned enterprises into broadly owned and competitive firms. |
VI. PROVIDE TECHNICAL ASSISTANCE TO WORKERS AND CONSUMERS FOR NEGOTIATING THE BUYOUTS
To provide workers and consumers with help in negotiating maximum ownership opportunities, corporate restructuring, new incentive and performance standards, joint ventures, management contracts, renegotiated labor contracts, and other concessions required to generate the profits needed for financing the leveraged buyouts of state-owned companies.
VII. ESTABLISH APPRAISED FAIR MARKET VALUE OF EACH PRIVATIZED COMPANY
To conduct a process for hiring professional appraisers to establish an unbiased appraised fair market value for assets or shares to be sold to employees and other citizens.
VIII. BUYOUT CREDIT REPAID BY FUTURE PROFITS
To maximize support from those making concessions required to generate the profits needed for financing leveraged buyouts of state-owned companies and as tradeoffs for eliminating subsidies, government offers flexible credit arrangements to workers and consumers, agreeing to postpone government's demand for immediate cash to meet fiscal deficits or foreign debts and agreeing to receive appraised full value from future profits, collateralized by the assets being sold. Such credit is the key to immediate wide-scale transfer of legal title and control of companies, while gradually shifting risks of investment to workers and management. |
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Stage 4
Government Approves ERPC Strategies and Designates Broker for Negotiating Divestitures
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1- New Economy Task Force presents detailed
10-point, 10-year program for stimulating private
sector growth and wider share ownership.
2- Economic Transition Task Force presents
detailed 8-point, 2-year program for requiring
old economy enterprises to compete in the
global marketplace without protections, while
maximizing ownership incentives for workers.
3- Economic Restructuring Planning Commission
presents legislative package to implement
2-year and 10-year proposals. Government
enacts legislation.
4- Government establishes Asset Democratization
Agency (ADA) or contracts with independent
broker to negotiate and approve credit for
worker/management buyouts.
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Implementing ESOP Privatizations
Stage 1
Government Agrees to Sell Assets or Shares to Workers of State-Owned Enterprises
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1 - Government authorizes Asset Democratization Agency (ADA), or broker, to negotiate sale of enterprise being privatized, with firm date set for ending State support.
2 - Employees and unions accept phase-out of State support and agree to collaborate on transformation in exchange for significant immediate ownership stake to be paid for with future profits and severance entitlements.
3 - Ministry controlling State-Owned Enterprise (SOE) transfers legal title to assets or shares to ADA.
4 - Employees promise to ADA to form Employee Shareholders' Association (ESA) for negotiating details of Employee Share Ownership Plan (ESOP) joint ventures, management contracts, market arrangements, new labor deals, voting rights, etc.
5 - ADA agrees to cooperate in restructuring enterprise into a viable business; to transfer a portion of SOE assets or shares to ESA in exchange for severance and retirement pay obligations; and to sell a sizeable portion of the balance to the ESA on credit repayable with future profits and secured with assets of the enterprise. |
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Stage 2
ESA and ESOP Formed to Purchase Existing Shares
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1 - Employees form Employee Shareholders'
Association (ESA) to negotiate with ADA and
buyout partners and to administer ESOP.
2 - Asset Democratization Agency (ADA) specifies
terms and conditions of sale on credit to ESA.
3 - ESA approves ESOP as its bylaws.
4 - ESA appoints employee representatives to
corporate board.
5 - ADA exercises veto power over non-employee
board selections during credit payout period.
6 - New Corporation board ratifies ESOP.
7 - ESA approves purchase at appraised price for
company shares being sold by ADA.
8 - Corporation (and other shareholders) also
approves purchase of shares by ESA. |
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Stage 3
Existing Shares Sold on Credit to ESA/ESOP
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1 - Central Bank approves sale price and ADA credit repayment arrangements with ESA.
2 - ESA signs note to Central Bank.
3 - Corporation guarantees to make contributions to ESA/ESOP to repay buyout credit, secured by corporate assets.
4 - ESA/ESOP signs purchase agreement, supported by Central Bank approval of buyout credit arrangement.
5 - ADA transfers legal title to shares to ESA/ESOP.
6 - Shares pledged as collateral or held in ESA suspense account.
7 - ESOP accounts set up for each employee.
8 - Credit purchase requires no cash or guaranty by employees. |
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Stage 4
Company Pays Out Profits For Repaying Buyout Loan,
Bonuses, And Dividends As New Employee Benefits
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1 - Company makes annual contributions and
dividends to ESA/ESOP for loan repayment
(tax-deductible).
2 - ESA/ESOP pays annual principal and interest
due to Central Bank on stock purchase loans.
3 - Shares released for annual allocations.
4 - Released shares allocated and held in ESOP
accounts of participants (non-taxable).
5 - Distribution of monthly and annual cash
bonuses and dividends, if available. |
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Stage 5
Distribution Of Vested Shares Upon Retirement Or Termination
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1 - Distribution of cash and
ESA/ESOP shares (taxable).
2 - Sale of distributed shares at appraised fair market value. |
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