TUNISIA -- Enters a New Phase

©1997 Pangaea Partners, Ltd.

Tunisia's privatisation programme, having progressed at an uneven pace in the past, is now entering a new phase, with the Government poised to tackle a number of larger, more complex companies. In addition, 1996 saw the Government already increasing the pace of privatisation.

Past Performance (1989-1994)

Tunisia first embarked on privatisation in 1986, as part of a structural adjustment programme. The privatisation programme was launched in earnest, however, in 1989, with the promulgation of Law #899, which set the general framework for public enterprise restructuring and privatisation. Approximately 45 companies, with an estimated total worth of about $90 million, were privatised in the early phase of the programme. Roughly half of these companies were hotels; others were in the textile, construction material and agri-business sectors. Most of the enterprises privatised in these early phases of the programme had been unprofitable and/or relatively small and they were sold directly to private parties rather than to the public via the Tunis Bourse. Some were simply liquidated and their assets sold to private buyers.

The Government of Tunisia (the "Government") then launched a second phase of privatisation, targeting for the first time public enterprises that were typically larger and profitable. The first significant profitable state-owned company sold was Industries Chimiques du Fluor (ICF) in February, 1993. Forty percent of the shares were sold in a block to a major shareholder who took over management of the company, and the remaining shares were offered to the public with no more than 500 shares sold to any single shareholder (to prevent a blocking minority). After the sale of ICF, the privatisation of companies basically stalled until late 1994. Then 20 percent of Ateliers Mécaniques du Sahel (AMS), Tunisia's leading producer of stainless steel kitchen utensils and flatware, was sold through an Initial Public Offering (IPO) on the Bourse for a value of $1.5 million.

Also in 1994, Law #94-102 was passed. It allows the government to sell blocks of shares through a tender process on the Bourse, and to create a "golden share" (action spécifique) for particularly sensitive privatisation operations. Other achievements in 1994 were limited mainly to a number of preparatory studies of several privatisation candidate companies and of specific sectors of the economy (e.g., cement, mineral water, and energy generation).

The objectives of the privatisation programme include: i) improving the efficiency of the privatised companies; ii) mobilising capital for enterprises; iii) developing financial markets; and iv) supplementing government efforts in the provision of public services, particularly for infrastructure. Government also has overriding concerns about fairness and transparency, plus the social and employment impacts of privatisation.

The public and parastatal enterprise portfolio in Tunisia is quite large in terms of the number of companies and is estimated to be between 200 and 300 enterprises (depending on the definition of "public enterprise" used). In addition, the Government indirectly owns small minority positions in several hundred more companies.

Achievements in 1995-1996

The AMS offering in late 1994 injected new energy into the privatisation programme. The surge lasted throughout 1995 and 1996. According to Mr. Ahmed Benghazi, a Director of the Technical Committee for Privatization (Comité Technique de Privatisation), in Tunisia's Ministry of Economic Development, "1995 was an important turning point."

The Government established a list of companies that were candidates for privatisation during the 1995-96 period. There were 47 companies on the list. For 29 of these, the transactions had been completed by the Fall of 1996. The transactions for the remaining 18 public enterprises are said to be Ain-progress@; nine were expected to be completed by year-end 1996. The method and mode of privatisation has been decided for all 47 companies. Three were privatised through IPOs, seven are candidates for liquidation, eighteen have been designated for sale through block share offerings, and 19 for sale of their assets.

Of the 29 companies already sold, almost all of them were sold to Tunisian purchasers. While foreign investment is not legally excluded, a number of prospective foreign investors have cited some difficulties in practice.

A wide range of sectors is represented in the list of 47 companies, including tourism, transportation services, manufacturing, trading, fishing, and food and beverage sectors. There are some large companies on the list valued at over $50 million, and some small ones valued at less than $1 million. In a few cases it is a specific subsidiary or set of assets of the company which is subject to sale, while the parent public enterprise will remain a legal entity after the sale of some of its component parts.

A number of transactions carried out in 1995-6 are worthy of particular comment:

i. In 1995, the Government, with investment banking advice from Pangaea Partners, Ltd., sold a controlling interest (51 percent of the capital) in the country's best known mineral water bottler and distributor, Société des Stations Thermales et des Eaux Minérales (SOSTEM). The sale, to a private group, was for $8.5 million; the remaining shares will be placed on the Bourse.

ii. Private sales also took place for eight regional freight transport companies (for a total value of $9 million) and for two golf courses ($7 million).

iii. In addition, 20 percent of the leading brewer and soft drink producer and distributor, Société Frigorifique des Brasseries de Tunisie (SFBT), was offered on the Bourse for $13 million.

iv. Perhaps most significantly, the Government, with advice from the TransAnalysis Group, floated 20 percent of the national airline, TunisAir, through an IPO on the Bourse. The issue raised $32 million, after an enthusiastic response from investors.

TunisAir, SOSTEM and SFBT are all profitable companies and highly visible to investors and the public at large. This emphasis on the privatisation of larger, profitable companies has added momentum to the second phase of the programme. In addition, these transactions indicate that key sectors, such as civil aviation, once considered "strategic" and restricted to Government ownership, are now candidates for some form of privatisation, albeit partial and through an IPO. Mr. Benghazi of the Ministry of Economic Development states that "strategic no longer means exclusively state-owned and closed to foreign investment".

The Government has also been exploring options for allowing private investment in infrastructure, most particularly the power generation and road sectors. For example, the Government is in the midst of awarding a 300Mw electricity project which will sell its output to the state-owned electric company.

Organisational Changes

The Ministry of Economic Development ("MED") (formerly the Ministry of Planning) has day-to-day responsibility for managing the privatisation programme. In accordance with the July 1996 Decrees 96-1225 and -1226 the MED and its responsibilities have been expanded. In addition to the previously mentioned duties, the MED is now also responsible for controlling the management of Public Enterprises ("PE") and the state portfolio of investments, local public collectives and other public establishments. The MED proposes restructuring, reform and privatisation programmes for these enterprises and establishments, where appropriate.

Within the MED there are now two general directorates to handle these responsibilities:

(1) the General Directorate of Participations and Public Enterprises ("DGPEP"), charged with oversight of the management and performance of PEs and other State share holdings. The DGPEP is in charge of management and control of the on-going public investments and PEs. This work was previously done by the Ministry of Finance and the Prime Minister=s office. Selected staff, who have been involved in handling state participations in enterprises, will be transferred to the DGPEP to continue their work.

(2) the General Directorate of Privatisation ("DGP") which continues the work of privatising companies previously done by the MED's Privatisation Unit. The DGP is responsible for restructuring, reform and eventual privatisation of PEs and public services.

Both the DGPEP and DGP are under the responsibility of a newly created and appointed Secretary of State (the equivalent of a vice minister) reporting to the Minister of Economic Development. A number of participants in the Tunisian business community are encouraged by these institutional reforms.

The objective of this structure is to streamline and strengthen even further the technical and administrative tasks related to preparing and executing privatisations by consolidating under the Secretary of State the new General Direction of Privatisation (building upon the current Privatisation Unit ("PU")) and the General Direction of Public Enterprises. This will provide the Government additional human resources with which to move forward on its privatisation programme as it enters a new phase of more complicated and larger divestitures.

The Bourse

In late 1994, legislation was passed to modernise and reorganise the Tunis Stock Exchange by separating its operating and regulatory functions, changing its status to a private enterprise, and transferring its ownership to the registered brokers. These measures took much of 1995 to implement, culminating with the institution of new oversight agency in November 1995.

The Government, through the privatisation programme, is seeking to broaden ownership. The Tunis Bourse, however, in its efforts to protect small investors, has imposed extremely demanding performance standards for the companies to be listed. Many of the candidates for privatisation may not be able to meet these standards, and thus the privatisation programme will contribute less to the development of Tunisia's capital markets than might otherwise have been the case. The programme also places greater emphasis on "show case" public offerings for companies such as TunisAir, which are large and sophisticated enterprises and meet the Bourse's standards. An offering of shares in such a company, however, contributes little in terms of improving the management of the company or the firm's competitive performance.

Lastly the Bourse's rules which had limited the maximum amount prices may change each day caused market stalemates at several junctures. After the market "overheated" with P/E's rising to 35, the desired correction was difficult to accomplish because buyers wanted to pay prices far below the previous highs and yet there was no way for the prices to reach those levels without some parties, against their better instincts, buying at all the intermediate prices required by the limit rules.

Prospects for 1997

The stage seems set for an active programme in 1997, based on advances made in 1995 and 1996. The privatisation programme will now include more complex transactions, which will be more actively promoted and of more interest to perspective international investors.

As always, the Government has made the choice not to publish a list of enterprises for privatisation, but rather to announce them case by case, after the method of privatisation for each case has been decided. This, in part, reflects negative experiences in the early phase of the programme during which some enterprises were announced as privatisation candidates, but then experienced a delay in actual privatisation. This led to complacent management, labour unrest and the resulting deterioration in enterprise value.

As one example, however, of the privatisations to come, a select group of investment banks, including Pangaea Partners, has just been invited to tender to serve as advisors on the sale of two large Tunisian cement companies.

The privatisation programme is also set to continue its momentum and evolution through the support to be provided by a new EC-financed programme. This will be multi-year. It will place particular emphasis on consolidating recent institutional reforms and on assisting with specific transactions.

Success in 1997 will depend on:

i) Government commitment to the privatisation programme,
ii) a continued strong Tunisian economy,
iii) improved measures to attract and accommodate foreign investment both on the Bourse and directly in companies and
iv) streamlining of the institutional management of the privatisation programme.


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