The Growth, Equity and Redistribution (GEAR) Privatisation Project (GEAR-PP) was sponsored and funded by the U.S. Agency for International Development (USAID) to assist the Government of South Africa, through the Ministry of Public Enterprises, in transferring ownership of appropriate state-owned enterprises to private hands, while encouraging an equitable distribution of privatised assets among the majority of South Africans.
Specifically, GEAR-PP was designed to assist black people (Africans, Coloureds and Indians), women and people with disabilities to advance their bids for ownership of state-owned assets and public enterprises, and to assist in the acquisition of capital and other resources necessary for a sustainable business enterprise in the private sector.
The GEAR-PP project was managed by Deloitte & Touche from November 1997 through May 2001, during which time over 20 transactions were completed. These transactions were in a broad range of sectors, and included divestitures initiated by municipal and provincial governments, as well as the national government. This web site is intended to provide prospective investors with the information and a 'toolkit' to enable those who wish to acquire state-owned enterprises and assets to prepare high quality bids and proposals. There is also a list of resources to obtain professional services. Bidders should understand that the cost of these services can be substantial.
In order to provide better services from this web site, and to provide interested parties with updated and time-critical information, it is strongly suggested that you register with us. Registration is limited to qualified bidders (as described above), foreign companies who are tracking the divestiture process in South Africa, and South African companies which are seeking 'empowerment' participation to advance their bids.
Qualified bidders may wish to follow the following six steps to undertake the process of bidding on assets the Government is 'restructuring' or selling outright. As the various levels Government have not determined the schedule for this process, it is crucial that bidders monitor the process, through this web site as well as through any other means that can generate significant lead time. The experience gained through the project over the last three years has helped us to develop guidelines, which will help to enhance your chances of success.
The best advice is to start early! ! ! The evaluation and solicitation process is frequently lengthy, but the bid and proposal process is a sprint at the finish, and compressed into a matter of weeks.
Before thinking about bidding for or acquiring state-owned assets or enterprises (the acronym SOE will be used as a term to describe both) you will need to form a company. There are several options:
• Close
Corporation (limited to 10 members)
• Private Company
(limited liability, maximum 50 shareholders)
• Shelf company
You will need to seek professional advice to establish the company. Expect to pay a minimum of R3, 000 to R5, 000 for this service. It is possible to eliminate much of this expense by including a chartered accountant (CA) or attorney among the company's shareholders or members.
Close Corporations, while less expensive and easier to establish, have limitations and restrictions, which can have an effect on many business options in the future. Eventually, many CC's convert to limited liability companies.
Shareholders Agreement
It is important that shareholders (or members, in the case of a CC) decide very early the relationship among themselves, including their respective rights and obligations. Business relationships should be well understood from the outset to eliminate any future problems to the extent possible. It is useful to seek professional advice. A shareholders agreement (in the case of CC's an association agreement) is not a part of our toolkit; however, generic examples are available on the Internet. Be aware of all disclaimers.
Capital Base
The company must have a financial base, no matter how small. Each and every shareholder or member should contribute to the initial capital and make a pledge to subscribe for additional shares on a regular basis. These funds can be used to pay for start-up costs.
Your company will be expected to make a substantial investment in the project, proportional to your financial capacity. Financial institutions are no longer willing to finance 100% of projects. Shareholders and members will almost certainly be asked to provide personal surety for any financing granted. For this, a 'personal financial statement' (PFS) will be required. You may obtain a PFS from any bank, or use the form provided in our toolkit.
Tax Compliance
Very wisely, the Government is restricting the right to participate in this process to South African citizens (including companies) who are in good standing with the Receiver of Revenue. In several bids, documentation was requested as part of the prequalification process. Failure to demonstrate compliance is reason for disqualification.
Pay your taxes! Consult a tax professional to ensure that you pay only the taxes that you owe. A properly structured salary package is essential.
After your company is properly organized, it is necessary to develop a business plan -- a "road map" for your company's growth and development. Initially, this does not need to be a lengthy document, but it should clearly and concisely state your vision, and how you plan to establish the company's objectives.
Do not out-source this business plan to consultants. Consultants can be used as facilitators, but the plan itself must come from the company's owners and managers. This process is very useful in understanding the business and formulating key decisions.
A business plan outline is provided in the toolkit. The toolkit also provides links to web sites where business planning tools and courses are available on-line.
FOCUS! Do not bid on something just because the Government is making it available for sale. Stick with what you know and do best. Be an active investor, and plan to participate in the management of your new business.
The search for SOE acquisition targets will not be an easy or overnight process. First, there are three levels of Government involved: local, provincial and national. Second, there is no 'clearinghouse' or database of such information. Finally, the divestiture and sale process will be different at each level of Government. For asset or property sales (e.g., land and buildings), the tender board process may be utilized.
We collect as much information as possible and post it at a web site sponsored by the World Bank. The web site address is www.privatizationlink.com. [hyperlink]. Go to this site and navigate to the database and choose South Africa. Please be aware that the information presented here is not comprehensive and should be complemented with your own research.
Position Your Company
If you are fortunate to find a SOE acquisition that is six months or more in the future, take the opportunity to prepare your company for the acquisition. At a minimum, your company should:
• Obtain
as much information on the target SOE as possible
• Understand the
market and the industry
• Study the competition
• Identify and
develop an understanding of stakeholders, particularly labour
• Talk to staff
and management of the SOE, if possible
• Introduce your
company and the target SOE to banks and financiers
• Discuss your
ideas and plans for the acquisition with prospective strategic partners
Before entering substantive discussions with a local or foreign strategic partner, protect your company's interests with a non-disclosure agreement (see toolkit) or memorandum of understanding.
It is probable that in most divestitures of SOE's, especially at the national level, previously disadvantaged companies and individuals will not be able to go it alone. That is to say, it will be extremely difficult to raise the required capital and obtain the necessary management team. This is a direct result of the apartheid era, where most South Africans were not able to accumulate capital or learn how to manage large organizations.
Since this is a very new process for the South African economy, there are few established rules. The bid documents will almost always refer to 'empowerment' as a criteria for winning the bid. Typically, this carries about 20% of the weight in the award process. Empowerment, however, is frequently loosely defined.
It is best to be proactive, and try to find a strategic partner who shares your vision and values. In the later stages of the bid process, it is the 'strategic' company who is seeking an empowerment company to participate on its bid. In this scenario, the empowerment company generally has less negotiating leverage.
Locating a strategic partner can be facilitated by personal relationships or consultants. The partner should be a direct competitor of the target SOE to be acquired, or operating in a related field. There must be a valid business case for both your involvement with the strategic partner, as well as the strategic partner's interest in the acquisition of the SOE.
If there are no apparent firms to be considered for the role as strategic partner, you should undertake a research project to identify potential firms. Research resources include:
• Johannesburg
Stock Exchange
• Trade
Associations
• Investment
South Africa
• Department
of Trade & Industry
• South
African Chamber of Business (SACOB)
• Mbendi
(web site link)
The financing for your company's SOE acquisition, whether or not in cooperation with a strategic partner, needs to be arranged long before the bid is due. Banks and providers of private equity require many weeks or months to evaluate the transaction and to feel comfortable with your company as a borrower. It is typically not possible to obtain a binding commitment from a financier in the last few weeks of a bid proposal. Consider financing of the acquisition the formation of a long-term relationship with the financier, not just a once-off request/approval process.
South Africa is fortunate to have a deep and relatively sophisticated capital market, with a wide range of bank and non-bank financial institutions. There are also many foreign financial institutions represented in South Africa, some of which are affiliated with foreign governments' donor assistance programmes. These institutions 'tie' their investment by making it conditional to utilize companies or citizens of their country as the strategic partner.
The amount of capital required will be established in your business plan. The following sources should be approached first:
• Your
company's bank
• The strategic
partner
• Family,
friends and associates
A well written and convincing business and financing plan is essential to secure financing.
Raising capital is not an overnight process. Expect rejections. Understand the reason for each rejection, and correct the problem or deficiency in your strategy before approaching the next financier.
No two Invitations to Bid will be exactly the same, although there are some general characteristics that will be found in each bid document.
• Advertisement
By law, the process of selling SOE's must be an open, competitive and transparent process. Notices are usually published in all of the major newspapers.
FOLLOW INSTRUCTIONS CAREFULLY! The easiest way to lose a bid is to fail to comply with the rules. Be exact in your compliance with instructions. Don't guess. If you have questions, ask the responsible official, and be sure to get the response in writing.
• Prequalification
The first step in the process is to get on the 'short list' of bidders. In the prequalification phase, a statement of interest must be submitted which usually includes the following:
• Composition of the bid consortium, including 'empowerment'
• Experience of consortium members
• Financial viability of the bid consortium
• Future plans for the SOE
• Ability to raise required capital
If your bid consortium is short-listed, you will receive a written communication to that effect. In addition you will be issued with an 'Information Memorandum' which spells out in detail the operational and financial status of the SOE. The quality and comprehensiveness of these memoranda vary widely.
Find out which other firms are short-listed. It is important to know who you are bidding against, in order to assess their strengths and weaknesses, and to adjust your bid proposal accordingly.
From the date of the announcement, typically four weeks is allowed for submission of the prequalification proposal. The announcement of the short list should come within one to two months, but has been known to take far longer.
After notification of the short list, generally a period of four to eight weeks is allowed for preparation and submission of the bid proposal. Follow instructions precisely. Do not make any assumptions. Some useful guidelines:
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Develop a strategy to grow the business. The plan should protect as many jobs as feasible. The bid proposal usually will require a comprehensive business plan.
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Conduct a thorough due diligence of the SOE (see toolkit). The department conducting the process will make available a data room where documents can be reviewed. Make full use of this opportunity. Schedule this data room access as early as possible to allow time to incorporate the information in your proposal.
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Obtain assistance to value the SOE. There are many methodologies to do this, but require the assistance of an expert.
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Structure your bid proposal to win the maximum points as detailed in the evaluation criteria.
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Ensure that your selected financier is satisfied with the business plan and valuation, and commits to the project in writing.
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The bid proposal should look professionally prepared, properly bound and organized according to the specifications set out in the tender document.